GLOBAL TELESYSTEMS GROUP INC
S-1, 1997-09-26
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<PAGE>   1
 
  AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
 
                                                 REGISTRATION NO. 333-
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
                                    FORM S-1
 
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                             ---------------------
                         GLOBAL TELESYSTEMS GROUP, INC.
               (Exact name of registrant as specified in charter)
 
<TABLE>
<C>                              <C>                              <C>
            DELAWARE                           4813                          94-3068423
  (State or other jurisdiction     (Primary Standard Industrial           (I.R.S. Employer            
      of incorporation or          Classification Code Number)         Identification Number)
          organization)            
</TABLE>
 
                             ---------------------
                              1751 PINNACLE DRIVE
                           NORTH TOWER -- 12TH FLOOR
                                MCLEAN, VA 22102
                                 (703) 918-4500
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)
                             ---------------------
                               WILLIAM H. SEIPPEL
                              1751 PINNACLE DRIVE
                           NORTH TOWER -- 12TH FLOOR
                                MCLEAN, VA 22102
                                 (703) 918-4558
           (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)
                             ---------------------
                                   Copies to:
 
<TABLE>
<C>                                              <C>
            DAVID J. BEVERIDGE, ESQ.                           JAMES J. CLARK, ESQ.
              SHEARMAN & STERLING                            CAHILL GORDON & REINDEL
              599 LEXINGTON AVENUE                                80 PINE STREET
            NEW YORK, NEW YORK 10022                         NEW YORK, NEW YORK 10005
</TABLE>
 
                             ---------------------
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [ ]
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]
- ---------------------.
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering.  [ ]
- ---------------------.
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box.  [ ]
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<CAPTION>
============================================================================================================
                                                               PROPOSED MAXIMUM
                  TITLE OF EACH CLASS OF                          AGGREGATE                AMOUNT OF
               SECURITIES TO BE REGISTERED                      OFFERING PRICE        REGISTRATION FEE(1)
- ------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                      <C>
Common Stock, $.0001 par value............................       $230,000,000               $69,697
============================================================================================================
</TABLE>
 
(1) Estimated solely for the purpose of calculating the registration fee
    pursuant to Rule 457 under the Securities Act.
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>   2
 
                                EXPLANATORY NOTE
 
     This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten public offering in the United States and
Canada of           shares (the "U.S. Prospectus"), and one to be used in a
concurrent underwritten public offering outside the United States and Canada of
          shares (the "International Prospectus"). The two prospectuses are
identical except for the front and back cover pages and the section entitled
"Underwriting." The form of U.S. Prospectus is included herein and is followed
by the alternate pages to be used in the International Prospectus. Each of the
alternate pages for the International Prospectus included herein is labeled
"International Prospectus -- Alternate Page." Final forms of each Prospectus
will be filed with the Securities and Exchange Commission under Rule 424(b)
under the Securities Act of 1933.
<PAGE>   3
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
                             SUBJECT TO COMPLETION
                PRELIMINARY PROSPECTUS DATED             , 1997
PROSPECTUS
                                             SHARES
                         GLOBAL TELESYSTEMS GROUP, INC.
                                  COMMON STOCK
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
                             ---------------------
 
     All of the shares of Common Stock, par value $.0001 per share (the "Common
Stock"), offered hereby are being offered by Global TeleSystems Group, Inc. (the
"Company"). Of the           shares of Common Stock offered hereby,
shares are being offered in the United States and Canada (the "U.S. Offering")
and        shares are being offered outside the United States and Canada (the
"International Offering" and, together with the U.S. Offering, the "Offerings").
The initial offering price per share and the underwriting discount per share
will be identical for both Offerings. See "Underwriting."
 
     Prior to the Offerings, there has been no public market for the Common
Stock. Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "GTSG" and for listing on the
Stock Exchange.
 
     SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 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>
=============================================================================================================
                                           PRICE TO               UNDERWRITING             PROCEEDS TO
                                            PUBLIC                DISCOUNT(1)               COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S>                                <C>                      <C>                      <C>
Per Share.........................            $                        $                        $
- -------------------------------------------------------------------------------------------------------------
Total(3)..........................            $                        $                        $
=============================================================================================================
</TABLE>
 
(1) The Company has agreed to indemnify the several Underwriters (as defined
    herein) against certain liabilities, including liabilities under the
    Securities Act of 1933, as amended (the "Securities Act"). See
    "Underwriting."
 
(2) Before deducting expenses payable by the Company estimated to be
    $          .
 
(3) The Company has granted to the U.S. Underwriters and the International
    Managers options, exercisable within 30 days of the date hereof, to purchase
    up to an additional        and        additional shares of Common Stock,
    respectively, solely to cover over-allotments, if any. See "Underwriting."
    If such options are exercised in full, the total Price to Public,
    Underwriting Discount and Proceeds to the Company will be $          ,
    $          and $          , respectively.
                             ---------------------
 
            MERRILL LYNCH & CO. IS THE BOOKRUNNER OF THE OFFERINGS.
                             ---------------------
 
<TABLE>
<S>                                        <C>
            GLOBAL COORDINATOR                       CO-GLOBAL COORDINATOR
           MERRILL LYNCH & CO.                           UBS SECURITIES
</TABLE>
 
                             ---------------------
 
     The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about             , 1997.
                             ---------------------
 
MERRILL LYNCH & CO.  DONALDSON, LUFKIN & JENRETTE
                                                   SECURITIES CORPORATION
 
UBS SECURITIES
                                LEHMAN BROTHERS
                                                                     FURMAN SELZ
                             ---------------------
 
               The date of this Prospectus is             , 1997.
<PAGE>   4
 
                              [INSIDE FRONT COVER]
 
                                 [PHOTOGRAPHS]
 
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
 
                                       ii
<PAGE>   5
 
                             AVAILABLE INFORMATION
 
     The Company has filed with the Commission in Washington, D.C. a
Registration Statement on Form S-1 (as amended, the "Registration Statement") of
which this Prospectus is a part under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are summaries of the material terms of
such contract, agreement or other document. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit. The Registration Statement (including the
exhibits and schedules thereto) may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission (the
"Commission") at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 500 West Madison Street (Suite
1400), Chicago, Illinois 60661. Copies of such material may also be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of such site is http://www.sec.gov.
 
     Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Commission. Such reports,
proxy and information statements and other information can be inspected and
copied at the addresses set forth above. The Company intends to furnish its
stockholders with annual reports containing consolidated financial statements
audited by its independent accountants and with quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
 
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
     Any statements that express, or involve discussions as to, expectations,
beliefs, plans, objectives, assumptions or future events or performance (often,
but not always, through the use of words or phrases such as "will likely
result," "are expected to," "will continue," "is anticipated," "estimated,"
"intends," "plans," "projection" and "outlook") are not historical facts and may
be forward-looking and, accordingly, such statements involve estimates,
assumptions and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Accordingly,
any such statements are qualified in their entirety by reference to, and are
accompanied by, the factors discussed throughout this Prospectus, and
particularly in the risk factors set forth herein under "Risk Factors." Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
business plan; the political, economic and legal aspects of the markets in which
the Company operates; competition and the Company's need for additional
substantial financing. These and other factors are discussed herein under "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus.
 
     The risk factors described herein could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company, and investors, therefore, should
not place undue reliance on any such forward-looking statements. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
 
                             ---------------------
 
     Russia On Line(TM) is a trademark of the Company.
 
                                       iii
<PAGE>   6
 
                                    SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus
(this "Prospectus"). Unless otherwise indicated, (i) the term "GTS" or the
"Company" refers to Global TeleSystems Group, Inc. (and, when appropriate, to
its predecessor) and its subsidiaries and (ii) references to the number of
shares of common stock outstanding after the Offerings assume the Underwriters'
over-allotment option has not been exercised. See "Exhibit A -- Glossary of
Telecommunications Industry Terms" for definitions of acronyms and technical
telecommunications terms used in this Prospectus.
 
                                  THE COMPANY
 
     GTS is a provider of a broad range of telecommunications services to
businesses, other telecommunications service providers and consumers in Russia
and the Commonwealth of Independent States ("CIS"), Central Europe and Asia.
Through its subsidiary Hermes Europe Railtel B.V. ("Hermes Railtel"), GTS is
developing, and operating the initial segment of, a pan-European high capacity
fiber optic network that is designed to interconnect a majority of the largest
Western and Central European cities and to transport international voice, data
and multimedia/image traffic for other carriers throughout Western and Central
Europe. GTS's strategy to develop its businesses generally has been to establish
joint ventures with a strong local partner or partners while maintaining a
significant degree of operational control. The Company's business activities
consist of the ownership and operation of (i) international long distance
businesses, which operate through international gateways that provide
international switching services and transmission capacity, (ii) local access
networks, which provide local telephone service, (iii) cellular networks, which
provide wireless telecommunications services, (iv) a domestic long distance
business, (v) data networks and (vi) carriers' carrier networks, which provide
high volume transmission capacity to other carriers. For the year ended December
31, 1996, and the six months ended June 30, 1997, ventures operated by GTS
generated approximately $152.2 million and $109.2 million, respectively, in
combined revenue and as of June 30, 1997 were serving over 32,800 customers.
 
     In Russia and the CIS, GTS's objective is to become the premier alternative
telecommunications operator. To attain its objective, the Company has partnered
with regional telephone companies and with Rostelecom, the national long
distance carrier in Russia. The Company currently operates in 23 oblasts
(regions) and the city of Moscow in Russia, as well as in 11 additional cities
in the CIS, and believes it is well-positioned to become the leading independent
telecommunications service provider in Russia. GTS operates five lines of
business in Russia and the CIS which in the aggregate accounted for
approximately 85.6% and 88.4% of the Company's combined revenue for the year
ended December 31, 1996 and the six months ended June 30, 1997, respectively.
These businesses include: (i) EDN Sovintel ("Sovintel"), which provides Moscow,
and recently St. Petersburg, with international long distance and local
telephone services and access to the major domestic long distance carriers; (ii)
TeleCommunications of Moscow ("TCM"), which provides local access services in
Moscow; (iii) TeleRoss (as defined herein), which provides domestic long
distance services in fourteen cities in Russia, including Moscow, as well as
VSAT service to customers outside its primary long distance satellite network;
(iv) Sovam Teleport ("Sovam"), which provides data services, including
high-speed data transmission, electronic mail, Internet access services, as well
as Russia On Line, the first Russian language internet service; and (v) the
Company's cellular operations ("GTS Cellular"), which operate cellular networks
in twelve regions in Russia and also in Kiev, Ukraine, with licenses covering
regions with an aggregate population of approximately 25 million people at the
end of 1996. Whenever practical, GTS's businesses integrate and co-market their
service offerings in Russia and the CIS, utilizing TeleRoss as the domestic long
distance provider, Sovintel as the international gateway, TCM and GTS Cellular
for local access, and Sovam as the data communications and Internet access
network for business applications and on-line services. Together, GTS's Russian
and CIS ventures carried 202.5 million and 179.3 million minutes of traffic for
the year ended December 31, 1996 and the six months ended June 30, 1997,
respectively, and had approximately 27,600 customers, including approximately
13,500 cellular subscribers, as of June 30, 1997. See "Business -- Russia and
the CIS."
                                        1
<PAGE>   7
 
     In Western Europe, GTS seeks to position itself as the leading independent
carriers' carrier through the development of two ventures, Hermes Railtel and
GTS-Monaco Access S.A.M. ("GTS-Monaco Access"). Hermes Railtel is developing an
approximately 17,000 kilometer pan-European high capacity fiber optic network
designed to interconnect a majority of the largest Western and Central European
cities. Hermes Railtel is currently operating over an approximately
240-kilometer portion of the network linking Brussels and Amsterdam. Hermes
Railtel expects to roll out full telecommunications transport service over
approximately 2,600 kilometers of fiber optic cable linking the cities of
London, Rotterdam, Amsterdam, Antwerp, Brussels, Paris, Dusseldorf, and
Frankfurt (the "initial five country network") in the second quarter of 1998 and
the 17,000 kilometer network to be operational during the year 2000. Hermes
Railtel objective is to become the leading pan-European carriers' carrier by
providing centrally managed cross-border telecommunications transmission
capacity to telecommunications companies including traditional Public
Telecommunications Operators ("PTOs") and new entrants, such as alternative
carriers, global consortia of telecommunications operators, international
carriers, Internet backbone networks, resellers, value added networks and other
service providers ("New Entrants"). GTS-Monaco Access operates an international
gateway in Monaco in partnership with, and utilizing the existing gateway
infrastructure of, the Principality of Monaco and provides advanced transit and
routing of international calls to other telecommunications operators. Through
its Hermes Railtel and GTS-Monaco Access ventures, GTS is building a new network
for transporting voice, data and multimedia/image traffic for other carriers
throughout Western Europe and for worldwide international voice, data and
multimedia/image traffic that either originates or terminates in, or transits
through, Western Europe. See "Business -- Western Europe."
 
     In Central Europe, GTS's objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to governmental and commercial customers in
Hungary and the Czech Republic. In the Czech Republic, the Company also provides
outgoing international voice services. Through its subsidiary GTS-Hungary Ltd.
("GTS-Hungary"), GTS operates a VSAT network in Hungary, which GTS believes is
the largest VSAT network in Central Europe as measured by number of VSAT sites.
In addition, through its subsidiary, Magyarorszag Szemlyhivo Koncesszios
Reszvenytarsasig ("Eurohivo") GTS operates a national paging network in Hungary
and, through its subsidiary GTS CzechNet spol. s r.o. ("CzechNet"), operates an
international gateway and a data services network in Prague and the Czech
Republic. During 1996, GTS's ventures in the Czech Republic carried
approximately 1.6 million minutes of international long distance voice and data
traffic. GTS's strategy is to expand its service offerings as the regulatory
environment permits, leveraging its existing VSAT and international gateway
infrastructure where possible and providing a broad range of services to its
target markets. For the year ended December 31, 1996 and the six months ended
June 30, 1997, the Company's Central Europe ventures generated approximately
$9.7 million and $6.7 million, respectively, in combined revenue and as of June
30, 1997 were serving over 5,200 customers. See "Business -- Central Europe."
 
     In Asia, GTS's objective is to become an established and diversified
telecommunications provider in China and India. In China, GTS participates in
ventures which provide technical, operational, financial, engineering and other
services to two VSAT networks and a planned cellular network. In India, the
Company's venture carries international traffic for certain multinational
corporations. Although GTS does not currently own or operate significant
telecommunications assets in Asia, GTS seeks to leverage its position in these
countries to capitalize on opportunities that arise as the Chinese and Indian
telecommunications markets develop. To date, the Company's Asian operations have
not had a significant impact on the Company's combined results of operations,
representing $8.6 million and $1.0 million, or 5.7% and 0.9% of the Company's
combined revenue for the year ended December 31, 1996 and for the six months
ended June 30, 1997, respectively. See "Business -- Asia."
                                        2
<PAGE>   8
 
     The following table sets forth certain information for the principal
ventures through which the Company conducts its business:
 
<TABLE>
<CAPTION>
                                     COUNTRY/REGION       GTS                                  PRINCIPAL
           COMPANY NAME              OF OPERATIONS     OWNERSHIP           PARTNERS             BUSINESS
           ------------              --------------   ------------    -------------------  ------------------
<S>                                  <C>              <C>             <C>                  <C>
CIS
  Sovintel.........................  Russia                 50%       Rostelecom           International Long
                                                                                             Distance; Local
                                                                                             Access
  TCM..............................  Russia                 50%(1)    MTU Inform and       Local Access Lines
                                                                        others
  TeleRoss.........................  Russia                 50%(2)    Various local PTOs   Domestic Long
                                                                                             Distance
  Sovam............................  Russia                 67%       Institute for        Data and Internet
                                                                        Automated Systems
  GTS Cellular.....................  CIS                 25-70%(3)    Primarily various    Basic Cellular
                                                                        local PTOs
WESTERN EUROPE
  Hermes Railtel...................  Western Europe         79%(4)    Various              Carriers' Carrier
  GTS -- Monaco Access.............  Monaco                 50%       Principality of      Carriers' Carrier;
                                                                        Monaco               International
                                                                                             Gateway
CENTRAL EUROPE
  GTS-Hungary......................  Hungary                99%       --                   VSAT Network
  EuroHivo.........................  Hungary                70%       Microsystems         Paging Services
                                                                        Telecom Rt.;
                                                                      Gerard Aircraft
                                                                        Sales and Leasing
                                                                        Company
  CzechNet.........................  Czech Republic        100%       --                   International Long
                                                                                             Distance
ASIA
  V-Tech...........................  China                  75%       Shanghai Science     VSAT Network
                                                                        and Technology
                                                                        Investment
                                                                        Corporation
  Beijing Tianmu...................  China                  47%       China International  VSAT Network
                                                                        Travel Service
                                                                      Telecom Co.,
                                                                        Ltd.(5)
  Shanghai Global Intelligent        China                  80%       Shanghai             Basic Cellular
    TeleSystems....................                                   Intelligent
                                                                        Engineering(6)
  CDI..............................  India                 100%       --                   Voice, Data and
                                                                                             Internet
</TABLE>
 
- ---------------
 
(1) GTS's interest in TCM is represented by its approximately 52% interest in a
    holding company, which owns 95% of TCM, giving GTS a beneficial ownership
    interest of 50%.
 
(2) TeleRoss consists of (i) two wholly-owned holding companies and a 99% owned
    subsidiary that operates a domestic long distance network (collectively,
    "TeleRoss Operating Company") and (ii) thirteen joint ventures that are 50%
    beneficially-owned by GTS (the "TeleRoss Ventures"). See "Business -- Russia
    and the CIS -- TeleRoss."
 
(3) GTS conducts its cellular operations through (i) Vostok Mobile B.V. ("Vostok
    Mobile"), a GTS venture which owns between 50% and 70% of a series of 11
    cellular joint ventures in various regions in Russia, (ii) PrimTelefone, a
    50% owned venture in Vladivostok, Russia and (iii) Bancomsvyaz, an
    approximately 25% beneficially-owned venture in Kiev, Ukraine. GTS currently
    holds a 62% beneficial interest in Vostok Mobile. The Company expects to
    purchase, pending execution of definitive documentation, the minority
    interest in Vostok Mobile. After the purchase, Vostok Mobile will be a
    wholly owned venture of GTS. In addition, GTS intends to enter into the
    cellular markets of additional Russian regions through its Vostok Mobile
    venture. See "Business -- Russia and the CIS -- GTS Cellular."
 
(4) GTS currently owns approximately 79% of Hermes Railtel after giving full
    effect to a recapitalization of Hermes Railtel, which is substantially
    complete. The Company's interest is also expected to decrease due to the
    issuance of shares to certain Hermes Railtel executives under the proposed
    Hermes Railtel stock option plan. See "Business -- Western Europe -- Hermes
    Railtel -- Hermes Railtel Recapitalization and "Executive Compensation and
    Other Information -- Hermes Railtel 1994 Stock Option Plan."
 
(5) GTS owns 75% of GTS China Investments LLC ("GCI"), which owns 90% of
    American China Investment Corporation ("ACIC"). ACIC owns 70% of Beijing
    Tianmu China joint venture company.
 
(6) Shanghai Intelligent Engineering is an operating unit of the Shanghai
    municipal government.
                                        3
<PAGE>   9
 
                               BUSINESS STRATEGY
 
     GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS's goal in emerging markets is to establish
itself as the leading alternative to the incumbent telecommunications service
providers and as a premier provider of value-added services. In addition, the
Company seeks to position itself as the leading independent carriers' carrier
within Western Europe through the development of a pan-European fiber optic
network in partnership with Western European railways and other infrastructure
providers, and an international gateway in partnership with, and utilizing the
gateway infrastructure of, the Principality of Monaco.
 
     GTS believes that it will be able to successfully operate its businesses
and develop business opportunities by pursuing the following strategies:
 
     - Identify and Seize Early Market Opportunities. GTS's primary strategy is
      to identify less developed markets in which the incumbent operator offers
      inadequate service and where liberalization of telecommunications
      regulations may be pending. The Company believes that entering these less
      developed markets quickly is a key competitive advantage in the global
      telecommunications market. GTS leverages its management's knowledge of the
      markets in which the Company operates to assess and react quickly when
      attractive business opportunities arise.
 
     - Establish Joint Ventures with Experienced Local Partners. GTS seeks to
      establish and maintain strategic partnerships and relationships with key
      telecommunications operators and service providers in the countries in
      which it operates. The Company believes that these relationships increase
      its ability to anticipate and respond to changes in the regulatory and
      legal environment and assist with license renewal and expansion of its
      operating companies.
 
     - Retain Significant Operational Control. In general, GTS actively
      participates in the management of its ventures by (i) providing most of
      the funding for the ventures' operations, (ii) selecting key members of
      the local management team, (iii) developing business plans and marketing
      strategies together with local management, (iv) monitoring operating
      functions, (v) maintaining close working relationships with local partners
      and (vi) integrating its networks and businesses in a manner which is
      consistent with the Company's overall strategic objectives.
 
     - Build Infrastructure to Provide High Quality Services. GTS continues to
      develop and expand its network infrastructure. The Company believes that
      its networks offer service, quality and cost advantages over incumbent
      providers as a result of the Company's customer support, network
      monitoring, management systems and its ability to integrate and co-market
      its service offerings.
 
     - Leverage Management Depth and Experience. GTS's management has
      significant experience in the development and operation of
      telecommunications businesses outside the United States. The Company
      believes that this experience, together with the Company's extensive
      operations, has provided its management with the ability to identify,
      evaluate and pursue international telecommunications business
      opportunities. Additionally, GTS has assembled a management team comprised
      of executives with extensive experience managing telecommunications
      companies in the respective local markets. GTS believes that its
      management team possesses a broad knowledge of relevant political and
      regulatory structures, as well as the cultural awareness and fluency with
      international and local business practices necessary to implement the
      Company's objectives.
 
     - Ability to Access Capital. In general, the Company's financing strategy
       is to establish parent level funding to meet general corporate needs and
       the costs of start-ups and acquisitions and, when it is possible and
       cost-effective, to finance ongoing operations at the venture level. Since
       1993, the Company has raised approximately $269 million in equity and
       approximately $215 million of debt (of which approximately $74 million
       was raised through shareholders). In addition, Hermes completed a $265
       million private placement of senior notes (of which $56.5 million was
       placed into escrow for the first two years' interest payments) in 1997.
       The Company's principal investors include affiliates of George Soros and
       Alan B. Slifka.
                                        4
<PAGE>   10
 
     In addition to its overall business strategy, GTS has developed specific
market strategies to achieve its goals in emerging markets and Western Europe.
 
     Emerging Markets. The Company pursues its goals in emerging markets through
a three-stage approach of market entry, market expansion and market integration.
 
     - Market Entry. GTS identifies a market as a suitable target for entry
       based upon: (i) superior growth prospects for such market, demonstrated
       by growing demand for high quality telecommunications services; (ii) the
       provision of inadequate services by incumbent providers, typically
       resulting from the incumbents' unwillingness to offer high quality
       services with reliable customer support at attractive prices; and (iii)
       attractive regulatory environments in which emerging alternative
       telecommunications providers such as GTS have, or expect to have over a
       clearly defined time horizon, the ability to compete on a substantially
       equal basis with the incumbent providers in terms of certain services and
       the cost of providing those services. Once GTS has identified a market as
       suitable for entry, the Company seeks to establish its presence in that
       market by establishing a venture with a strong local partner or partners.
       In general, GTS maintains a significant degree of operational control in
       such ventures. Through such ventures, the Company benefits from its
       partners' ability to provide infrastructure, regulatory expertise and
       personnel that will provide GTS with a competitive advantage in entering
       that market. When entering a new market, GTS's strategy is to provide its
       customers with higher quality service as compared to the services offered
       by incumbent providers.
 
     - Market Expansion. Having entered a market successfully and established a
       limited service offering to its targeted customer base, GTS then seeks to
       expand the range of services it offers to existing and potential
       customers and to further develop its relationships with local partners.
       By broadening its service offerings, GTS anticipates achieving increased
       economies of scale through the common use of administrative and operating
       functions already in place, increasing the Company's share of its
       customers' telecommunications spending and expanding GTS's base of
       potential customers through the provision of a bundled service offering.
       The Company also seeks to expand its targeted geographic market by
       forming new partnerships, installing infrastructure and offering services
       in additional geographic regions, allowing the Company to further enhance
       its operating leverage and ability to service its customers'
       telecommunications needs.
 
     - Market Integration. GTS ultimately intends to integrate and co-market its
       service offerings in each of the markets in which it operates. The
       Company believes such integration enables it to enhance its operating
       efficiency by leveraging its distribution channels, infrastructure and
       networks, and management information systems. As customers develop a need
       for a broader variety of telecommunications services, the Company
       believes GTS's integrated operations will represent an attractive service
       alternative for customers seeking a single provider with the ability to
       meet all their telecommunications needs.
 
     Western Europe. The Company seeks to position itself as the leading
independent carriers' carrier within Western Europe through the development of
Hermes Railtel's pan-European fiber optic network and the operation of
GTS-Monaco Access's international gateway in partnership with, and utilizing the
gateway infrastructure of, the Principality of Monaco. The overall strategy of
GTS in Western Europe is to complement and enhance the services provided by PTOs
and New Entrants in a way that helps them to more successfully meet the needs of
their end-user customers. Hermes Railtel seeks to enter the market ahead of
competition and encourage a wide variety of carriers to use its network with
service offerings that meet their needs. To establish itself as the leading
carriers' carrier for international telecommunications within Europe, Hermes
Railtel intends to provide its customers with significantly higher quality
transmission and advanced network capabilities at a competitive price by
utilizing advanced, uniform technology across the region and providing redundant
routing for higher levels of reliability.
                                        5
<PAGE>   11
 
                                 FINANCING PLAN
 
     In general, the Company's strategy is to finance general corporate cash
needs, the development of start-up ventures and acquisitions through the parent
company and, when possible and cost effective, to finance ongoing operations at
the venture level. Since 1993, the Company has raised approximately $269 million
in equity and approximately $215 million of debt (of which approximately $74
million was raised through shareholders). In addition, Hermes Railtel completed
a $265 million private placement of senior notes (of which $56.5 million was
placed into escrow for the first two years' interest payments) in 1997.
 
     The Company believes that the net proceeds from the Offerings, together
with existing cash and cash flow from operations, will be sufficient to fund its
expected capital needs until at least June 1999. GTS expects that it may require
additional capital to execute its current business plan and to fund expected
operating losses, as well as to consummate future acquisitions and exploit
opportunities to expand and develop its businesses. Management expects that GTS
and its ventures will incur over $475 million of capital expenditures during the
next three years, of which approximately $200 million will be incurred in 1997.
Of these amounts, approximately $335 million will be used to fund construction
of the Hermes Railtel network, with approximately $100 million required for the
roll out of the initial five country network that is expected to be completed in
the second quarter of 1998. The Company also will need to fund operating losses
of its ventures for at least the next 12 months. In addition, as part of its
business strategy, the Company regularly evaluates potential acquisitions and
joint ventures. The Company has no definitive agreement with respect to any
acquisition or joint venture, although from time to time it has discussions with
other companies and assesses opportunities on an on-going basis. The Company may
fund these acquisitions or joint ventures with a portion of the net proceeds
from the Offerings. See "Risk Factors -- Additional Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
 
     After giving effect to the Offerings, certain affiliates of George Soros
and Alan B. Slifka and certain affiliates are expected to own      % and      %
of the Common Stock on a fully-diluted basis, respectively. See "Principal
Stockholders."
 
                             *          *          *
 
     The Company was founded in 1983 as a not-for-profit company under the name
San Francisco/Moscow Teleport, Inc. The Company was incorporated as a California
for-profit corporation on September 25, 1986, and by way of a reincorporation
merger, merged with and into SFMT, Inc., a Delaware corporation formed for that
purpose on September 13, 1993. The Company was renamed Global TeleSystems Group,
Inc., on February 22, 1995. The Company's principal business office is located
at 1751 Pinnacle Drive, McLean, Virginia 22102, United States, and its telephone
number is (703) 918-4500.
                                        6
<PAGE>   12
 
                                 THE OFFERINGS
 
<TABLE>
<CAPTION>
<S>                                                    <C>
Common Stock offered by the Company
  U.S. Offering......................................  shares
  International Offering.............................  shares
          Total......................................  shares
Common Stock to be outstanding after the
  Offerings(1).......................................  shares
Use of Proceeds......................................  The Company intends to use the net proceeds
                                                       from the Offerings to provide working capital
                                                       for existing telecommunications ventures,
                                                       particularly in Russia and the CIS, to expand
                                                       the Company's operations, and for general
                                                       corporate purposes. The Company is also
                                                       considering using approximately $84 million of
                                                       the net proceeds to repay shareholder loans.
                                                       In addition, a portion of the net proceeds may
                                                       be used by the Company in connection with one
                                                       or more acquisitions. See "Use of Proceeds."
Listing..............................................  Application will be made for quotation of the
                                                       Common Stock on the Nasdaq National Market
                                                       under the symbol "GTSG" and to list the Common
                                                       Stock on the              Stock Exchange."
</TABLE>
 
- ---------------
 
(1) Excludes (i) 5,185,184 shares of Common Stock reserved for issuance upon
    exercise of outstanding warrants at an exercise price of $14.00 per share,
    (ii) 475,540 shares of Common Stock reserved for issuance upon exercise of a
    put right associated with a 1996 financing agreement, as amended, (iii)
    3,766,663 shares of Common Stock reserved for issuance upon exercise of
    outstanding stock options at exercise prices ranging from $0.80 per share to
    $20.00 per share, (iv)        shares issuable upon conversion of the
    Company's Senior Subordinated Convertible Bonds due 2000 (the "Convertible
    Bonds") (assuming a public offering price in the Offerings of $       per
    share) and (v) 411,360 shares of Common Stock reserved for issuance pursuant
    to the TCM business partnership agreement as deferred consideration to TCM's
    partners, see "Certain Related Party Transactions."
 
                                  RISK FACTORS
 
     See "Risk Factors" beginning on page 10 for a discussion of certain factors
that should be considered by prospective investors in evaluating an investment
in the Common Stock.
                                        7
<PAGE>   13
 
                 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
 
     The following summary historical consolidated financial data as of December
31, 1996 and for the years ended December 31, 1994, 1995 and 1996 are derived
from the Company's audited Consolidated Financial Statements. The following
unaudited summary historical consolidated financial data as of June 30, 1997 and
for the six months ended June 30, 1996 and 1997 are derived from the Company's
unaudited Consolidated Financial Statements. The summary historical consolidated
financial data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the audited Consolidated Financial Statements and related notes thereto
appearing elsewhere in this Prospectus.
 
     Under generally accepted accounting principles, a majority of the Company's
ventures are accounted for by the equity method of accounting. Under this
method, the operating results of the ventures are included in the Company's
Statement of Operations as a single line item, "Equity in losses of ventures."
Also, the assets, liabilities and equity of the ventures are included in the
Company's balance sheet data as a single line item, "Investments in and advances
to ventures." The Company recognizes 100% of the losses in ventures where the
Company bears all of the financial risk (which includes all of the Company's
significant ventures except for Sovintel and, historically, Hermes Railtel ).
See Note 2 to the Company's audited Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." Financial information about the Company and its
ventures shown using the combined method of accounting is included below under
"Summary Historical Financial Data -- Combined Operations."
 
<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED
                                               YEAR ENDED DECEMBER 31,               JUNE 30,
                                            ------------------------------    ----------------------
                                              1994       1995       1996        1996          1997
                                            --------   --------   --------    --------      --------
                                                                 (IN THOUSANDS)
<S>                                         <C>        <C>        <C>         <C>           <C>
STATEMENT OF OPERATIONS DATA:
  Revenues, net...........................  $  2,468   $  8,412   $ 24,117    $  8,715      $ 17,295
  Gross margin............................        23         16      5,176         875         4,332
  Selling, general and administrative
     expenses.............................    12,863     41,014     52,928      23,190        27,075
  Equity in losses of ventures............      (135)    (7,871)   (10,150)     (5,433)      (10,167)
  Other income (expense)..................       990     11,034     (8,729)     (3,789)       (5,960)
  Net loss................................   (11,985)   (40,400)   (67,991)    (32,199)      (39,687)
  Loss per share..........................
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   JUNE 30,
                                                                  1996         1997     AS ADJUSTED(1)
                                                              ------------   --------   --------------
                                                                           (IN THOUSANDS)
<S>                                                           <C>            <C>        <C>
BALANCE SHEET DATA (AT END OF PERIOD):
  Cash and cash equivalents.................................    $ 57,874     $ 14,587       $189,084
  Property and equipment, net...............................      35,463       35,415         35,415
  Investments in and advances to ventures...................     104,459      117,123        117,123
  Total assets..............................................     237,378      198,340        380,077
  Total debt................................................      85,547       84,090        228,885
  Minority interest and stock subject to repurchase.........       6,248        6,477          6,477
  Shareholders' equity......................................     113,668       76,278        113,220
</TABLE>
 
- ---------------
 
(1) The June 30, 1997 balances are adjusted to reflect (i) the issuance in
    August and September 1997 of approximately $144.8 million of Convertible
    Bonds which are convertible into Common Stock and (ii) the sale in August
    and September 1997 of 1,668,457 shares of Common Stock for an aggregate
    $39.2 million (of which $8 million remains to be funded). In addition,
    Hermes Railtel issued $265 million of senior notes, of which approximately
    $56.5 million was placed into escrow for the first two years' interest
    payments on the notes. Hermes Railtel did not become a consolidated
    subsidiary of the Company until the third quarter of 1997 and was accounted
    for under the equity method as of June 30, 1997. See "Management's
    Discussion and Analysis of Financial Condition and Results of Operations --
    Liquidity and Capital Resources," "Capitalization," and "Description of
    Certain Indebtedness."
                                        8
<PAGE>   14
 
       UNAUDITED SUMMARY HISTORICAL FINANCIAL DATA -- COMBINED OPERATIONS
 
     The following unaudited summary historical financial data -- combined
operations as of December 31, 1996 and June 30, 1997 and for the years ended
December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and
1997, are derived from the Company's financial records. It is intended to
supplement the aforementioned summary historical consolidated financial data
which were derived from the Company's audited Consolidated Financial Statements
(see Note 13, "Segment Information and Certain Geographical Data," to the
Company's audited Consolidated Financial Statements).
 
     The Company has a significant degree of operational and management control
over many of its ventures. In this regard, the Company has presented combined
financial information for such ventures. The following unaudited summary
historical financial data -- combined operations includes selected statement of
operations and balance sheet data of the Company and its subsidiaries and
ventures on a combined basis. Under this method, the total revenues and expenses
of the Company and its subsidiaries and ventures are combined, as are the
assets, liabilities and equity. This method of presentation is intended to
supplement the above summary historical consolidated financial data by combining
financial data for all entities under the common ownership or control of the
Company. More detailed financial information about the Company and its ventures
is included under "Selected Historical Financial Data -- Combined Operations"
and "Selected Historical Financial Data -- Combining Operations: Detail Review."
 
<TABLE>
<CAPTION>
                                                                                 SIX MONTHS ENDED
                                               YEAR ENDED DECEMBER 31,               JUNE 30,
                                            ------------------------------    ----------------------
                                              1994       1995       1996        1996          1997
                                            --------   --------   --------    --------      --------
                                                                 (IN THOUSANDS)
<S>                                         <C>        <C>        <C>         <C>           <C>
STATEMENT OF OPERATIONS DATA:
  Revenues, net...........................  $ 26,454   $ 60,193   $152,205    $ 59,901      $109,178
  Operating loss..........................   (11,209)   (43,877)   (43,642)    (21,423)      (14,130)
  Interest income (expense)...............       423        243     (9,710)     (5,335)       (7,065)
  Net loss before minority interest.......   (10,825)   (39,856)   (65,737)    (31,324)      (31,983)
  Minority interest.......................    (1,160)     3,191      2,968       1,120            75
  100% loss recognition...................        --     (3,735)    (5,222)     (2,095)       (7,779)
  Net loss after minority interest........   (11,985)   (40,400)   (67,991)    (32,199)      (39,687)
</TABLE>
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   JUNE 30,
                                                                  1996         1997     AS ADJUSTED(1)
                                                              ------------   --------   --------------
                                                                           (IN THOUSANDS)
<S>                                                           <C>            <C>        <C>
BALANCE SHEET DATA (AT END OF PERIOD):
  Cash and cash equivalents.................................    $ 72,870     $ 31,262       $400,759
  Current assets............................................     156,709      114,890        512,637
  Property and equipment, net...............................     125,672      143,028        143,028
  Total assets..............................................     329,389      314,071        760,808
  Total debt................................................      93,403       90,193        499,988
  Total liabilities.........................................     168,369      177,801        587,596
  Net assets:
     Minority interest, stock subject to repurchase and
       shareholder notes....................................      48,609       38,614         38,614
     Shareholders' equity...................................     112,411       97,656        134,598
</TABLE>
 
- ---------------
 
(1) Adjusted to reflect (i) the issuance in August and September 1997 of
    approximately $144.8 million of Convertible Bonds which are convertible into
    Common Stock, (ii) the sale in August and September 1997 of 1,668,457 shares
    of Common Stock for an aggregate $39.2 million (of which $8 million remains
    to be funded) and (iii) the issuance in August 1997 by Hermes Railtel of
    $265 million of senior notes, of which approximately $56.5 million was
    placed into escrow for the first two years' interest payments on the notes.
                                        9
<PAGE>   15
 
                                  RISK FACTORS
 
ADDITIONAL CAPITAL REQUIREMENTS
 
     GTS expects that it may require additional capital to execute its current
business plan and to fund expected operating losses, as well as to consummate
future acquisitions and exploit opportunities to expand and develop its
businesses. Management expects that GTS and its ventures will incur over $475
million of capital expenditures during the next three years, of which
approximately $200 million will be incurred in 1997. Of these amounts,
approximately $335 million will be used to fund construction of the Hermes
Railtel network, with approximately $100 million required for the roll out of
the initial five country network that is expected to be completed in the second
quarter of 1998. The Company also will need to fund operating losses of its
ventures for at least the next 12 months. In addition, as part of its business
strategy, the Company regularly evaluates potential acquisitions and joint
ventures. The Company has no definitive agreement with respect to any material
acquisition or joint venture, although from time to time it has discussions with
other companies and assesses opportunities on an on-going basis. The Company may
fund such acquisitions or joint ventures with a portion of the net proceeds from
the Offerings.
 
     The Company believes that the net proceeds from the Offerings, together
with existing cash and cash flow from operations, will be sufficient to fund its
expected capital needs until at least June 1999. The actual amount and timing of
the Company's future capital requirements, however, may differ materially from
management's estimates. In particular, the accuracy of management's estimates
are subject to changes and fluctuations in the Company's revenues, operating
costs and development expenses, which can be affected by the Company's ability
to (i) effectively and efficiently manage the expansion of the Hermes Railtel
network and operations, (ii) obtain infrastructure contracts, rights-of-way,
licenses and other regulatory approvals necessary to complete and operate the
Hermes Railtel network, (iii) negotiate favorable contracts with suppliers,
including large volume discounts on purchases of capital equipment and (iv)
access markets, attract sufficient numbers of customers and provide and develop
services for which customers will subscribe. The Company's revenues and costs
are also dependent upon factors that are not within the Company's control such
as regulatory changes, changes in technology, increased competition and various
factors such as strikes, weather, and performance by third-parties in connection
with the Company's operations. Due to the uncertainty of these factors, actual
revenues and costs may vary from expected amounts, possibly to a material
degree, and such variations are likely to affect the Company's future capital
requirements. Historically, GTS has experienced liquidity problems resulting in
part from the Company's need to meet the capital requirements of certain of its
joint ventures in excess of forecast amounts. In addition, certain of the
Company's joint ventures have not met management's financial performance
expectations or have not been able to secure local country financing and thus
have not been able to generate the expected cash inflows. In addition, if the
Company expands its operations at an accelerated rate or consummates
acquisitions, the Company's funding needs will increase, possible to a
significant degree, and it will expend its capital resources sooner than
currently expected. The Company may also be required to repay its Convertible
Bonds upon maturity in the year 2000 to the extent such bonds are not converted
into Common Stock. As a result of the foregoing, or if the Company's capital
resources otherwise prove to be insufficient, the Company may need to raise
additional capital. See "-- Government Regulation," "-- Competition,"
"-- Technology," "-- Hermes Railtel Network Roll-out," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and "Use of
Proceeds."
 
     If the Company decides to raise additional funds through the incurrence of
debt, it may become subject to additional or more restrictive financial
covenants and its interest obligations will increase. If the Company decides to
raise additional funds through the issuance of equity, the interests of holders
of the Common Stock, will be diluted. There can be no assurance that additional
financing will be available to GTS on favorable terms or at all, and failure to
generate sufficient funds in the future, whether from operations or by raising
additional debt or equity capital, may require the Company to delay or abandon
some or all of its anticipated expenditures, to sell assets, or both, and could
affect the Company's ability to compete, either of which could have a material
adverse effect on the operations of the Company, and could affect the value of
the Common
 
                                       10
<PAGE>   16
 
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Use of Proceeds."
 
HISTORY OF OPERATING LOSSES
 
     The Company has historically sustained substantial operating and net
losses. The Company had net losses of $0.4 million in 1992, $2.4 million in
1993, $12.0 million in 1994, $40.4 million in 1995, $68.0 million in 1996 and
$39.7 million for the six months ended June 30, 1997. The Company's cumulative
net losses totalled $165.6 million through June 30, 1997. Further development of
the Company's business will require significant additional expenditures and the
Company expects that it will have significant operating and net losses and will
record significant net cash outflow, before financing, in coming years. There
can be no assurance that the Company's operations will achieve or sustain
profitability or positive cash flow in the future. If the Company cannot achieve
and sustain operating profitability or positive cash flow from operations, it
may not be able to meet its debt service obligations or working capital
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
 
HERMES RAILTEL NETWORK ROLL-OUT
 
     Hermes Railtel's ability to achieve its strategic objective will depend in
large part on the successful, timely and cost-effective completion of the Hermes
Railtel network. Although Hermes Railtel currently operates commercially over
the Amsterdam-Brussels portion of the network, the development of the remainder
of the network may be delayed or adversely affected by a variety of factors,
uncertainties and contingencies. Many of these factors, such as strikes, natural
disasters and other casualties, are beyond Hermes Railtel control. In addition,
Hermes Railtel will need to negotiate and conclude additional agreements with
various parties regarding, among other things, rights-of-way and development and
maintenance of the network infrastructure and equipment. Historically, Hermes
Railtel has experienced substantial delays in concluding these agreements and
developing its network. There can be no assurance that Hermes Railtel will be
successful in concluding necessary agreements, or that delays in concluding such
agreements will not materially and adversely affect the speed or successful
completion of the network. The successful and timely completion of the network
will also depend on, among other things, (i) the availability to Hermes Railtel
of substantial amounts of additional capital and financing, (ii) timely
performance by various third parties of their contractual obligations to
engineer, design and construct portions of the network and (iii) Hermes
Railtel's ability to obtain and maintain applicable governmental approvals.
 
     Although Hermes Railtel believes that its cost estimates and the build-out
schedule are reasonable, there can be no assurance that the actual construction
costs or time required to complete the network build-out will not substantially
exceed current estimates.
 
     Any significant delay or increase in the costs associated with development
of the network could have a material adverse effect on Hermes Railtel and the
Company.
 
     Development of the Hermes Railtel network is capital intensive. The
buildout of the network is expected to require approximately $335 million of
capital expenditures, with approximately $100 million required for the initial
five country network. While Hermes Railtel raised approximately $265 million in
a private placement of its senior notes in August 1997 (of which $56.5 million
has been placed in escrow for the first two years' interest payments on the
notes), additional financing must be obtained to construct the Hermes Railtel
network and there can be no assurance that such additional financing will be
completed. Failure to obtain necessary financing may require Hermes Railtel to
delay or abandon its plans for deploying the remainder of the network and would
adversely affect the viability of Hermes Railtel, or may require the Company to
make additional capital contributions to Hermes Railtel at the expense of the
Company's other operations, either of which could have a material adverse effect
on the operations of the Company. Hermes Railtel's revenues and the cost of
deploying its network and operating its business will depend upon a variety of
factors including, among other things, Hermes Railtel ability to (i) effectively
and efficiently manage the expansion of its network and operations, (ii)
negotiate favorable contracts with suppliers, (iii) obtain additional licenses,
regulatory approvals, rights-of-way and infrastructure contracts to complete and
operate
 
                                       11
<PAGE>   17
 
the network, (iv) access markets and attract sufficient numbers of customers and
(v) provide and develop services for which customers will subscribe. Hermes
Railtel's revenues and costs are also dependent upon factors that are not within
Hermes Railtel's control such as regulatory changes, changes in technology,
increased competition and various factors such as strikes, weather, and
performance by third-parties in connection with the development of the network.
Due to the uncertainty of these factors, actual costs and revenues may vary from
expected amounts, possibly to a material degree, and such variations would
likely affect Hermes Railtel's future capital requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Hermes Railtel must obtain
additional infrastructure provider agreements for the long-term lease of dark
fiber, rights-of-way and other permits to install fiber optic cable from
railroads, utilities and governmental authorities to build out the network.
There can be no assurance that Hermes Railtel will be able to maintain all of
its existing agreements, rights and permits or to obtain and maintain the
additional agreements, rights and permits needed to implement its business plan
on acceptable terms. Loss of substantial agreements, rights and permits or the
failure to enter into and maintain required arrangements for the Hermes Railtel
network could have a material adverse effect to enter on Hermes Railtel's
business. In addition, Hermes Railtel depends on third parties for leases of
dark fiber for portions of its network. There can be no assurance that Hermes
Railtel will be able to enter into and maintain required arrangements for leased
portions of the Hermes Railtel network, which could have a material adverse
effect on Hermes Railtel's business.
 
     In order to operate and, in the case of some countries, even to construct
the network in accordance with current plans, Hermes Railtel must obtain the
necessary regulatory approvals. To date, Hermes Railtel has obtained licenses,
authorizations and/or registrations in the United Kingdom, the Netherlands,
Belgium and Germany. Hermes Railtel has filed an application for authorization
in France and is awaiting final approval thereof. Based on communications with
French regulatory authorities, Hermes Railtel expects to receive the necessary
regulatory approvals, although no assurance can be given that these approvals
will be obtained in a timely manner, or at all. In addition, Hermes Railtel
intends to file applications in other countries in anticipation of service
launch in accordance with the Hermes Railtel network roll-out plan. The terms
and conditions of these licenses, authorizations or registrations may limit or
otherwise affect Hermes Railtel scope of operations. There can be no assurance
that Hermes Railtel will be able to obtain, maintain or renew licenses,
authorizations or registrations to provide the services it currently provides
and plans to provide, that such licenses, authorizations or registrations will
be issued or renewed on terms or with fees that are commercially viable, or that
the licenses, authorizations or registrations required in the future can be
obtained by HermesRailtel . The loss of, or failure to obtain, these licenses,
authorizations or registrations or a substantial limitation upon the terms of
these licenses, authorizations or registrations could have a material adverse
effect on Hermes Railtel. See "Business -- Western Europe -- Hermes Railtel
 -- Licenses and Regulatory Issues."
 
RISKS RELATING TO REORGANIZATION OF RUSSIAN TELECOMMUNICATIONS INDUSTRY
 
     Svyazinvest was established by the Russian government in 1994 to hold the
government's interest in 88 regional telecommunication companies. In April 1997,
President Yeltsin approved the transfer of additional government-owned
telecommunications assets, including the government's 51% stake in Rostelecom
(the government controlled international and long distance operator), to
Svyazinvest. On July 30, 1997, Mustcom Ltd., a Cyprus-based company that
represents the interests of a consortium which includes ICFI Cyprus, Renaissance
International Ltd., Deutsche Morgan Grenfell, Morgan Stanley, and an affiliate
of George Soros, purchased a 25% stake in Svyazinvest for $1.87 billion. As of
June 30, 1997, George Soros and affiliates beneficially owned 26.6% of the
Company's Common Stock. The President has also authorized the sale of another
24% of Svyazinvest at a future date. The Russian government has announced that
it will retain a controlling 51% interest in Svyazinvest. As a result of the
government's actions, a single entity, Svyazinvest, now owns a majority interest
in most of the Company's principal venture partners and other telecommunication
service providers in Russia which together provide a range of international and
domestic long distance and local telecommunications services throughout Russia.
The consolidation of many of its partners under Svyazinvest and the possible
sale of a significant interest in Svyazinvest to foreign and/or Russian
investors will likely subject the Company to more coordinated competition from
Svyazinvest, and may lead to adverse
 
                                       12
<PAGE>   18
 
changes in the business relationships between the Company and such partners,
which business relationships represent a material component of the Company's
business strategy in Russia. There can be no assurance that the continuing
privatization of Svyazinvest, or the evolution of government policy regarding
Svyazinvest and Rostelecom, will not have a material adverse effect on the
Company or its ventures. See "-- Competition," "-- Dependence on Certain Local
Parties; Absence of Control" and "Business -- Russia and the CIS -- Overview"
and "Principal Stockholders."
 
MANAGING RAPID GROWTH
 
     As a result of the Company's past and expected continued growth and
expansion, significant demands have been placed on the Company's management,
operational and financial resources and on its systems and controls. The Company
continues to construct segments of the Hermes network, expand its operations
within Russia and the CIS, and expand into additional geographic and service
markets when business and regulatory conditions warrant. In order to manage its
growth effectively, the Company must continue to implement and improve its
operational and financial systems and controls, purchase and utilize additional
telecommunications facilities, and expand, train and manage its employee base.
Inaccuracies in the Company's forecasts of market demand could result in
insufficient or excessive telecommunications facilities and disproportionate
fixed expenses for certain of its operations. There can be no assurance that the
Company will be able to construct and operate the entire Hermes network as
currently planned, expand with the markets in which its ventures are currently
operating or expand into additional markets at the rate presently planned by the
Company, or that any existing regulatory barriers to such expansion will be
reduced or eliminated. As the Company proceeds with its development and
expansion, there will be additional demands on the Company's customer support,
sales and marketing and administrative resources and network infrastructure.
There can be no assurance that the operating and financial control systems and
infrastructure of the Company and its ventures will be adequate to maintain and
effectively manage future growth. The failure to continue to upgrade the
administrative, operating and financial control systems or the emergence of
unexpected expansion difficulties could materially and adversely affect the
Company's business, results of operations and financial condition.
 
RISKS RELATING TO EMERGING MARKETS
 
     Substantially all of the Company's revenue is derived from operations in
emerging markets, where the Company's businesses are subject to numerous risks
and uncertainties, including political, economic and legal risks, such as
unexpected changes in regulatory requirements, 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, which could
materially adversely impact the Company's business, results of operations and
financial condition.
 
     The political systems of many of the emerging market countries in which the
Company operates or plans to operate are slowly emerging from a legacy of
totalitarian rule. Political conflict and, in some cases, civil unrest and
ethnic strife may continue in some of these countries for a period of time. Many
of the economies of these countries are weak, volatile and reliant on
substantial foreign assistance. Expropriation of private businesses in such
jurisdictions remains a possibility, whether by an outright taking or by
confiscatory tax or other policies. There can be no assurance that GTS's
operations will not be materially and adversely affected by such factors or by
actions to expropriate or seize its operations. The success of free market
reforms undertaken in certain of the emerging market countries in which the
Company operates is also uncertain, and further economic instability may occur.
These factors may reduce and delay business activity, economic development and
foreign investment.
 
     Legal systems in emerging market countries frequently have little or no
experience with commercial transactions between private parties. The extent to
which contractual and other obligations will be honored and enforced in emerging
market countries is largely unknown. Accordingly, there can be no assurance that
 
                                       13
<PAGE>   19
 
difficulties in protecting and enforcing rights in emerging market countries
will not have a material adverse effect upon GTS and its operations.
Additionally, the Company's businesses operate in uncertain regulatory
environments. The laws and regulations applicable to GTS's activities in
emerging market countries are in general new and subject to change and, in some
cases, incomplete. There can be no assurance that local laws and regulations
will become stable in the future, or that changes thereto will not adversely
affect the operations of GTS. Additionally, telecommunications regulations in
the more developed Western European markets in which GTS participates are
currently undergoing changes initiated by the Commission of the European Union.
See "Business."
 
RISKS RELATING TO RUSSIA AND THE CIS
 
     Substantially all of the Company's revenue is derived from operations in
Russia and the CIS. Foreign companies conducting operations in the former Soviet
Union face significant political, economic, and legal risks.
 
     Political. The political systems of Russia and the other independent
countries of the CIS, which are in a stage of relative infancy, are vulnerable
to instability due to the populace's dissatisfaction with reform, social and
ethnic unrest and changes in government policies. Such instability could lead to
events that could have a material adverse effect on the Company's operations in
these countries. In recent years, Russia has been undergoing a substantial
political transformation. During this transformation, legislation has been
enacted to protect private property against expropriation and nationalization.
However, due to the lack of experience in enforcing these provisions in the
short time they have been in effect and due to potential political changes in
the future, there can be no assurance that such protections would be enforced in
the event of an attempted expropriation or nationalization. Expropriation or
nationalization of the Company, its assets or portions thereof, whether by an
outright taking or by confiscatory tax or other policies potentially without
adequate compensation, would have a material adverse effect on the Company.
 
     The various government institutions and the relations between them, as well
as the government's policies and the political leaders who formulate and
implement them, are subject to rapid and potentially violent change. For
example, the Constitution of the Russian Federation gives the President of the
Russian Federation substantial authority, and any major changes in, or rejection
of, current policies favoring political and economic reform by the President may
have a material adverse effect on the Company. Furthermore, the political and
economic changes in Russia have resulted in significant dislocations of
authority. The local press and international press have reported that
significant organized criminal activity has arisen and high levels of corruption
among government officials exist where the Company operates. While the Company
does not believe it has been adversely affected by these factors to date, no
assurance can be given that the depredations of organized or other crime will
not in the future have a material adverse effect on the Company.
 
     Economic. Over the past five years the Russian government has enacted
reforms to create the conditions for a more market-oriented economy. Despite
some progress in implementing its reforms, including progress in reducing
inflation and stabilizing the currency and industrial production, there remains
generally rising unemployment and underemployment, high government debt relative
to gross domestic product and high levels of corporate insolvency. No assurance
can be given that reform policies will continue to be implemented and, if
implemented, will be successful, that Russia will remain receptive to foreign
trade and investment or that the economy will improve.
 
     In addition, Russia, the CIS and other emerging countries in which the
Company operates currently receive substantial financial assistance from several
foreign governments and international organizations. To the extent any of this
financial assistance is reduced or eliminated, economic development in Russia,
the CIS and such other countries may be adversely affected.
 
     Russian and CIS businesses have a limited operating history in
market-oriented conditions. The relative infancy of the business culture is
reflected in the Russian banking system's under-capitalization and liquidity
crises. There have been concerns about rumors that many Russian banks continue
to have cash shortages. The Russian Central Bank has reduced banks' reserve
requirements in order to inject more liquidity into the Russian financial
system, but has stressed that it will not bail out the weaker banks. Many of
these banks are
 
                                       14
<PAGE>   20
 
expected to disappear over the next several years as a result of bank failure
and anticipated consolidation in the industry. A general Russian banking crisis
could have a material adverse effect on the Company's operations and financial
performance and on the viability of the Company's receivables.
 
     Regulation of Telecommunications Industry. The Russian telecommunications
system is currently regulated largely through the issuance of licenses. There is
currently no comprehensive legal framework with respect to the provision of
telecommunications services in Russia, although a number of laws, decrees and
regulations govern or affect the telecommunications sector. As a result,
ministry officials have a fairly high degree of discretion to regulate the
industry. Although telecommunication licenses may not be transferred under
Russian law, the Russian Ministry of Communications (the "MOC") has adopted the
position that licensees may enter into agreements with third parties in
connection with the provision of services under the licensee's license; however,
the MOC does not generally review agreements entered into by licensees. There
can be no assurances that the current or future regulation of the Russian
telecommunications systems will not have a material adverse effect on the
Company.
 
     Current Russian legislation governing foreign investment activities does
not prohibit or restrict foreign investment in the telecommunications industry.
However, on February 28, 1997, the State Duma, the lower house of parliament,
approved, on the first reading, draft foreign investment legislation which would
restrict any significant future foreign investment in numerous sectors of the
Russian economy, including telephone and radio communications. It is unlikely
that such restrictive legislation will be enacted, unless the political climate
changes dramatically. See "-- Political." More likely is the emergence of
restrictions on foreign investment in strategic industries, which could result
in foreign ownership limitations in industries such as telecommunications which
are not uncommon in many countries. The draft legislation has been referred to
the Russian government for comment. For such draft legislation to become Federal
law, it must be passed by a majority vote of the State Duma at another two
readings, then be approved by a majority of the Federation Council, the upper
house of parliament, and signed by the President of the Russian Federation.
Rejection of such legislation by the Federation Council can be overridden by a
two-thirds majority of the State Duma. Rejection of such legislation by the
President can be overridden by a two-thirds majority of each of the Federation
Council and the State Duma. There can be no assurance that future regulation of
foreign investment in the telecommunications industry will not have a material
adverse effect on the Company.
 
     In addition, a lack of consensus exists over the manner and scope of
government control over the telecommunications industry. Because the
telecommunications industry is widely viewed as strategically important to
Russia, there can be no assurance that recent government policies liberalizing
control over the telecommunications industry will continue. Any change in or
reversal of such governmental policies could have a material adverse effect on
the Company. See "Business -- Russia and CIS -- Licenses and Regulatory Issues."
 
     Legal Risks. As part of the effort to transform their economies into more
market-oriented economies, the Russian and other CIS governments have rapidly
introduced laws, regulations and legal structures intended to give participants
in the economy a greater degree of confidence in the legal validity and
enforceability of their obligations. Risks associated with the legal systems of
Russia and the other independent republics of the CIS include (i) the untested
nature of the independence of the judiciary and its immunity from economic,
political or nationalistic influence; (ii) the relative inexperience of judges
and courts in commercial dispute resolutions and generally in interpreting legal
norms; (iii) inconsistencies among laws, presidential decrees, government
resolutions and ministerial orders; (iv) frequently conflicting local, regional
and national laws, rules and regulations; (v) the lack of legislative, judicial
or administrative guidance on interpreting the applicable rules; and (vi) a high
degree of discretion on the part of government authorities and arbitrary
decision making which increases, among other things, the risk of property
expropriation. The result has been considerable legal confusion, particularly in
areas such as company law, commercial and contract law, securities and antitrust
law, foreign trade and investment law and tax law. Accordingly, there can be no
assurance that the Company will be able to enforce its rights in any disputes
with its joint venture partners or other parties in Russia or the CIS or that
its ventures will be able to enforce their respective rights in any disputes
with partners, customers, suppliers, regulatory agencies or other parties in
Russia or that the Company can be certain that it will be found to be in
compliance with all applicable laws, rules and regulations.
 
                                       15
<PAGE>   21
 
     Russia has adopted currency and capital transfer regulations designed to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital, which includes the incurrence and
repayment of indebtedness and the payment of capital contributions in foreign
exchange to Russian entities. The Company is resolving licensing issues with
respect to certain intercompany loans and capital contributions with the
applicable government agencies and believes that any licensing irregularities
that may arise will not have a material adverse effect on its financial
condition or results of operations. There can be no assurance, however, that
Russian government authorities will not take an unexpected adverse position
which could materially adversely affect the Company's business.
 
     Taxes. Generally, taxes payable by Russian companies are substantial. In
addition, taxes payable by Russian companies are numerous and include taxes on
profits, revenue, assets and payroll as well as value-added tax ("VAT").
Moreover, statutory tax returns of Russian companies are not consolidated and
therefore, each company must pay its own Russian taxes. Because there is no
consolidation provision, dividends are subject to Russian taxes at each level.
Currently, dividends are taxed at 15% and the payor is required to withhold the
tax when paying the dividend, except with respect to dividends to foreign
entities that qualify for an exemption under treaties on the avoidance of double
taxation. To date, the system of tax collection has been relatively ineffective,
resulting in the continual imposition of new taxes in an attempt to raise
government revenues. This history, plus the existence of large government budget
deficits, raises the risk of a sudden imposition of arbitrary or onerous taxes,
which could adversely affect the Company.
 
     Because of uncertainties associated with the laws and regulations of the
Russian tax system and the increasingly aggressive interpretation, enforcement
and collection activities of the Russian tax authorities, the Company's Russian
taxes may be in excess of the estimated amount expensed to date and accrued at
December 31, 1995 and 1996. It is the opinion of management that the ultimate
resolution of the Company's Russian tax liability, to the extent not previously
provided for, will not have a material adverse effect on the financial condition
of the Company. However, depending on the amount and timing of an unfavorable
resolution of this contingency, it is possible that the Company's future results
of operations or cash flows could be materially affected in a particular period.
 
     In various foreign jurisdictions, the Company is obligated to pay VAT on
the purchase or importation of assets, and for certain other transactions. In
many instances, VAT can be offset against VAT which the Company collects and
otherwise would remit to the tax authorities, or may be refundable. Because the
law in some jurisdictions is unclear, the local tax authorities could assert
that the Company is obligated to pay additional amounts of VAT. In the opinion
of management, any additional VAT which the Company may be obligated to pay
would not be material.
 
ADEQUACY OF MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN EMERGING MARKETS
 
     Many of the emerging market countries in which the Company operates,
particularly in Russia and the CIS where the Company has to date derived most of
its revenues, are deficient in management and financial reporting concepts and
practices, as well as in modern banking, computer and other control systems. The
Company historically has had difficulty in hiring and retaining a sufficient
number of qualified employees to work in these markets. As a result of these
factors, the Company has experienced difficulty in establishing management,
legal and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
 
     The Company has a policy worldwide of complying with all applicable laws
and seeks to ensure that all persons in its employ comprehend and comply with
such laws. The application of the laws of any particular country, however, is
not always clear, particularly in emerging market countries where commercial
practices differ significantly from practices in the United States and other
Western countries and the legal and regulatory frameworks are less developed. In
addition, some practices, such as the payment of fees for the purpose of
obtaining expedited customs clearance and other commercial benefits, that may be
common methods of doing business in these markets might be unlawful under the
laws of the United States. As a result of the difficulty the Company
historically has experienced in emerging markets in instituting business
practices that meet Western reporting and control standards, it historically has
been unable to ascertain whether certain
 
                                       16
<PAGE>   22
 
practices by its ventures, which were not in accordance with Company policy,
were in compliance with applicable U.S. and foreign laws. If it were to be
determined that the Company or any of its ventures were involved in unlawful
practices and were the factual and legal issues relating thereto to be resolved
adversely, the Company or its ventures could be exposed, among other things, to
significant fines, risk of prosecution and loss of its licenses. See "-- Risks
Relating to Emerging Markets" and "-- Government Regulation."
 
     In light of these circumstances, in the second half of 1996 the Company
increased its efforts to improve its management and financial controls and
business practices. The Company recruited a more experienced financial and legal
team, including a new Chief Financial Officer of the Company, a senior finance
officer overseeing all of the regions in which the Company operates, a senior
finance officer for the CIS region, and a senior legal officer for the CIS
region. The Company also established a Treasury group and adopted a more
rigorous Foreign Corrupt Practices Act ("FCPA") compliance program. The Company
has developed and implemented a training program for employees regarding U.S.
legal and foreign local law compliance. The Company also appointed a Compliance
Officer responsible for monitoring compliance with such laws and training
Company personnel around the world. In connection with these developments, the
Company expanded its corporate business practices policy to include, in addition
to compliance with U.S. laws such as the FCPA, compliance with applicable local
laws such as the conflict of interest rules under the 1996 Russian Joint Stock
Company Law, currency regulations and applicable tax laws.
 
     In early 1997, the Company retained special outside counsel to conduct a
thorough review of certain business practices of the Company in the emerging
markets in which the Company operates in order to determine whether additional
deficiencies existed that needed to be remedied. In the course of this review,
the Company replaced certain senior employees in Russia and instituted
additional and more stringent management and financial controls. As a result of
the review, the Company has not identified any violations of law that management
believes would have a material adverse effect on the Company's financial
condition. There can be no assurances, however, that if the Company or any of
its ventures were found by government authorities to have committed violations
of law that, depending on the penalties assessed and the timing of any
unfavorable resolution, the Company's future results of operations and cash
flows would not be materially adversely affected in a particular period.
 
     Although the Company believes that this review was properly conducted and
was sufficient in scope, there can be no assurance that all potential
deficiencies have been identified or that the control procedures and compliance
programs initiated by the Company will be effective. If the Company or any of
its ventures are ever found to have committed violations of law, depending on
the penalties assessed and the timing of any unfavorable resolution, the
Company's future results of operations and cash flows could be materially
adversely affected in a particular period. Management believes, however, that
the actions taken during the past twelve months to strengthen the Company's
management, financial controls and legal compliance, coupled with the
implementation of the recent recommendations from the review and the oversight
provided through the Audit Committee of the Board of Directors of the Company to
ensure compliance, will be adequate to address the recurrence of any past
possible deficiencies.
 
DEPENDENCE ON CERTAIN LOCAL PARTIES; ABSENCE OF CONTROL
 
     Many GTS operations including Sovintel, TeleRoss and GTS Cellular have been
developed in cooperation or partnership with key local parties, such as regional
PTOs. The Company is substantially dependent on its local partners to provide
marketing expertise and knowledge of the local regulatory environment in order
to facilitate the acquisition of necessary licenses and permits. Any failure by
the Company to form or maintain alliances with local partners, or the preemption
or disruption of such alliances by the Company's competitors or otherwise, could
adversely affect the Company's ability to penetrate and compete successfully in
the emerging markets it operates in or enters. In addition, in the uncertain
legal environments in which GTS operates, certain GTS businesses may be
vulnerable to local government agencies or other parties who wish to renegotiate
the terms and conditions of, or terminate, their agreements or other
understandings with GTS. See "Business."
 
                                       17
<PAGE>   23
 
     While the Company may have the right to nominate key employees, direct the
operations and determine the strategies of such joint ventures, under the terms
of their respective constituent documents, the Company's partners in some of the
ventures have the ability to frustrate the exercise of such rights. Significant
actions by most of GTS's ventures, such as approving budgets and business plans,
declaring and paying dividends, and entering into significant corporate
transactions effectively require the approval of GTS's local partners. Further,
the Company would be unlikely as a practical matter to want to take significant
initiatives without the approval of its joint venture partners. Accordingly, the
absence of unilateral control by the Company over the operations of its joint
ventures could have a material adverse effect on the Company.
 
     In addition, the Company and its venture partners frequently compete in the
same markets. For example, Rostelecom, GTS's partner in Sovintel, is the
dominant international and domestic long distance carrier in Russia. In
addition, many of the regional telephone companies partnered with GTS in the
TeleRoss Ventures offer cellular services in direct competition with certain of
the operations of GTS Cellular. Such competition with its partners may lead to
conflicts of interest for GTS and its partners in the operations of their
ventures. There can be no assurance that any such conflicts will be resolved in
favor of GTS. In addition, the combination under Svyazinvest of the Russian
government's majority interest in Rostelecom and 85 of the regional telephone
companies gives Svyazinvest a majority interest in entities that provide
international and domestic long distance and local telecommunications services
throughout Russia and may expose the Company to more coordinated competition
from its partners in the Russian telecommunications market. See "-- Risks
Relating to Reorganization of Russian Telecommunications Industry."
 
GOVERNMENT REGULATION
 
     As a multinational telecommunications company, GTS through its ventures is
subject to varying degrees of regulation in each of the jurisdictions in which
its ventures provide services. Local laws and regulations, and the
interpretation of such laws and regulations, differ significantly among the
jurisdictions in which the Company and its ventures operate. There can be no
assurance that future regulatory, judicial and legislative changes will not have
a material adverse effect on the Company, that regulators or third parties will
not raise material issues with regard to the Company's or its ventures'
compliance or noncompliance with applicable regulations or that any changes in
applicable laws or regulations will not have a material adverse effect on the
Company or any of its ventures.
 
     Many of GTS's ventures require telecommunications licenses, most of which
have been granted for periods of three to ten years. The terms and conditions of
these licenses may limit or otherwise affect the ventures' scope of operations.
The Company has had favorable experience obtaining, maintaining and renewing
licenses in the past. However, there can be no assurance that it will be able to
obtain, maintain or renew licenses to provide the services it currently provides
and plans to provide, that such licenses will be issued or renewed on terms or
with fees that are commercially viable, or that licenses required by future
ventures can be obtained by the Company or its partners. The loss of or a
substantial limitation upon the terms of these telecommunications licenses could
have a material adverse effect on the Company. See each section under "Business"
entitled "Licenses and Regulatory Issues."
 
     A substantial portion of Hermes Railtel's strategy is based upon the timely
implementation of regulatory liberalization of the European Union ("EU")
telecommunications market on January 1, 1998 under existing European Community
("EC") directives. Although EU member states have a legal obligation to
liberalize their markets in accordance with their requirements, certain more
detailed aspects of the EU regulatory framework to apply in the liberalized
environment after January 1, 1998 still remain to be adopted. In addition,
Ireland, Portugal, Spain, Luxembourg and Greece have been granted extensions
from the January 1, 1998 deadline. There can be no assurance that each EU member
state will proceed with the expected liberalization on schedule, or at all, or
that the trend toward liberalization will not be stopped or reversed in any of
the countries. Accordingly, Hermes Railtel faces the risk that it will establish
the Hermes Railtel network and make capital expenditures in a given country in
anticipation of regulatory liberalization which does not subsequently occur.
 
     In order to give effect to EC directives in each member state, national
governments must pass legislation liberalizing their respective markets. This
applies not only to the liberalization requirements set out in existing
 
                                       18
<PAGE>   24
 
EC directives, but also to requirements set out in directives which have yet to
be adopted. The implementation of EC directives in the telecommunications sector
has been inconsistent or ambiguous in some EU member states. Such implementation
could limit, constrain or otherwise adversely affect Hermes Railtel's ability to
provide certain services. Furthermore, national governments may not necessarily
pass legislation implementing an EC directive in the form required, or at all,
or may pass such legislation only after a significant delay. Even if a national
legislature enacts appropriate regulation within the time frame established by
the EU, there may be significant resistance to the implementation of such
legislation from PTOs, regulators, trade unions and other sources. Further,
Hermes Railtel's provision of services in Europe may be materially adversely
affected if any EU member state imposes greater restrictions on non-EU
international services than on international services within the EU. These and
other potential obstacles to liberalization could have a material adverse effect
on Hermes Railtel's operations by preventing Hermes Railtel from establishing
its network as currently intended, as well as a material adverse effect on the
Company.
 
COMPETITION
 
     GTS faces significant competition in all of its existing telecommunications
businesses and for the types of acquisition and development opportunities it
seeks in both emerging and Western European markets. GTS's competition in these
markets includes national PTOs, multinational telecommunications carriers, other
telecommunications developers and certain niche telecommunications providers. In
addition, certain of the Company's joint venture partners, including Rostelecom
and the regional telephone companies in Russia, certain of Hermes Railtel's
rail-based shareholders and other entities in the emerging markets in which the
Company operates, are also competitors of the Company. As a result of the recent
combination under Svyazinvest of the government's majority interest in
Rostelecom and 85 of the regional telephone companies, the Company may in the
future be subject to more coordinated competition from its partners in the
Russian telecommunications market. Although the Company believes it has a
favorable and cooperative relationship with its joint venture partners, there
can be no assurance that these partners will continue to cooperate with the
Company in the future or that they will not increase competitive pressures on
the Company. Any measures taken by the partners that reduce the level of
cooperation with the Company could jeopardize the Company's ability to
participate in the management and operation of its joint ventures and could have
a material adverse effect on the Company.
 
     WorldCom, Inc. recently announced plans to construct a pan-European fiber
network, the first phase of which is expected to connect London, Amsterdam,
Brussels and Paris by early 1998. Although the Company believes that the
proposed WorldCom pan-European network is primarily intended to carry WorldCom
traffic, WorldCom has stated that any excess capacity on such network will be
used to provide a competitive "carriers' carrier" service.
 
     Hermes Railtel also competes with respect to its "point-to-point"
transborder service offering against circuits currently provided by PTOs through
International Private Leased Circuits. In addition, the liberalization of the
European telecommunications market is likely to attract additional entrants to
both the "point-to-point" and other telecommunications markets. There can be no
assurance that Hermes Railtel will compete effectively against its current or
future competitors.
 
     Many of the Company's competitors have technical, financial, marketing and
other resources substantially greater than those of GTS. There can be no
assurance that the Company will be able to overcome successfully the competitive
pressures to which it is subject, both in the markets in which it currently
operates and in markets into which it might expand. See each section under
"Business" entitled "Competition." In addition, many of the Company's current
and potential competitors are not subject to, or constrained by the prohibitions
of, the FCPA, including the prohibition against making payments to government
officials in order to obtain commercial benefits. The Company is subject to and
seeks to comply with the limitations and prohibitions of such law, and
accordingly may be subject to competitive disadvantages to the extent that its
competitors are able to secure business, licenses or other preferential
treatment through the making of such payments. Accordingly, there can be no
assurances that the Company will be able to compete effectively against
companies free from such limitations in the emerging markets where such
commercial practices are commonplace. See "-- Adequacy of Management, Legal and
Financial Controls in Emerging Markets."
 
                                       19
<PAGE>   25
 
CONTROL BY CERTAIN STOCKHOLDERS
 
     Certain persons control substantial portions of the Company's voting stock.
After giving effect to the Offerings, Soros Foundation-Hungary and certain of
its affiliates (collectively the "Soros Foundations"), affiliates of Capital
International, Inc., and Alan B. Slifka and certain of his affiliates, are
expected to beneficially own, or have rights to acquire, approximately      %,
     % and      %, respectively, of the Common Stock on a fully diluted basis.
See "Principal Stockholders." In addition, three persons affiliated with the
Soros Foundation currently serve on the Company's Board of Directors (the "Board
of Directors"). Consequently, these entities are in a position to exercise
control over the outcome of matters submitted for stockholder actions, including
the election of members to the Board of Directors, and are able to influence the
management and affairs of the Company. Additionally, affiliates of the Soros
Foundations and of Capital International, Inc. have purchased debt securities of
the Company that include covenants that restrict the operating and financing
activities of the Company. In certain situations, the interests of holders of
the Company's equity securities may diverge from the interests of the holders of
the Company's debt securities, and holders of both equity and debt securities of
the Company may be in a position to require GTS to act in a way that is not
consistent with the general interests of the holders of the Common Stock. See
"-- Substantial Additional Capital Requirements," "Management," "Principal
Stockholders" and "Certain Related Party Transactions."
 
CURRENCY AND EXCHANGE RISKS
 
     All of GTS's operations are conducted outside the United States. A
substantial portion of the Company's anticipated revenues (as well as the
majority of its operating expenses) will be in foreign currency. As a result,
the Company will be subject to significant foreign exchange risks. In
particular, GTS's ventures in countries whose currencies are considered "soft
currencies" subject the Company to the risk that it will accumulate currencies
which may not be readily convertible into hard currency and which may be subject
to significant limitations on repatriation. The Company does not enter into
hedging transactions to limit its foreign currency risk exposure, although the
Company may implement such practices in the future. There can be no assurance
that GTS's operations will not be adversely affected by such factors. In
addition, these factors may limit the ability of the Company to reinvest
earnings from ventures in one country to fund the capital requirements of
ventures in other countries.
 
     In Russia, where the Company derives most of its revenue, the ruble has
generally experienced a steady depreciation relative to the U.S. Dollar over the
past three years, although there has been some instability in the ruble exchange
rate over this period of time. The Company's tariffs are denominated in U.S.
Dollars but charges are invoiced and collected in rubles, while the Company's
major capital expenditures are generally denominated and payable in various
foreign currencies. To the extent such major capital expenditures involve
importation of equipment and the like, current law permits the Company to
convert its ruble revenues into foreign currency to make such payments. The
ruble is generally not convertible outside Russia. A market exists within Russia
for the conversion of rubles into other currencies, but it is limited in size
and is subject to rules limiting the purposes for which conversion and payment
may be effected. The limited availability of other currencies may tend to
inflate their values relative to the ruble and there can be no assurance that
such a market will continue to exist indefinitely. Moreover, the banking system
in Russia is not yet as developed as its Western counterparts and considerable
delays may occur in the transfer of funds within, and the remittance of funds
out of, Russia. Any delay in converting rubles into a foreign currency in order
to make a payment or delay in the transfer of such foreign currency could have a
material adverse effect on the Company.
 
EXCHANGE CONTROLS AND REPATRIATION RISKS RELATING TO RUSSIAN SECURITIES
 
     Russia has adopted currency and capital transfer regulations designed to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital, which includes the incurrence and
repayment of indebtedness and the payment of capital contributions in foreign
exchange to Russian entities. The Company is resolving licensing issues with
respect to certain intercompany loans and capital contributions with the
applicable government agencies and believes that any licensing irregularities
that may arise will not have a material adverse effect on its financial
condition or results of operations. There can
 
                                       20
<PAGE>   26
 
be no assurance, however, that Russian government authorities will not take an
unexpected adverse position which could materially affect the Company's
business.
 
     No assurance can be given that Russian foreign investment and currency
legislation will continue to permit repatriation of the proceeds from
investments. Furthermore, no assurance can be given that further restrictions
will not be imposed on the conversion of ruble earnings into foreign currency
for purposes of making dividend payments or on the repatriation of profits. If
any such further restrictions were imposed, they would have a material adverse
effect on the Company's interests in Russia.
 
TRANSACTIONS WITH AFFILIATES
 
     The Company has entered into financing agreements with certain of its
affiliates. It is the Company's view that each such transaction has been on
terms no less favorable to the Company than other similar transactions available
to the Company with unaffiliated parties, if available at all. Generally, such
transactions have been the Company's only recourse to meet financing needs
and/or business goals. Despite the foregoing, prospective purchasers may wish to
consider the circumstances in which such transactions were made, the terms of
such transactions and the Company's possible alternative courses of action. The
Company may enter into transactions in the future with affiliates in order to
meet its financing needs and/or business goals. See "Description of Certain
Indebtedness."
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company believes that its growth and future success will depend in
large part upon the efforts of a small number of key executive officers, as well
as on its ability to attract and retain highly skilled and qualified personnel
to work in the emerging markets in which it operates. The Company has replaced
or reassigned several executive officers and other senior personnel, including
Henry Radzikowski who served as Chief Executive Officer -- CIS and Eastern
Europe Operations from February 1994 until January 1997 and who has extensive
experience in the telecommunications industry in Russia. Stewart Reich became
Senior Vice President-Russia effective September 1, 1997. The competition for
qualified personnel in the telecommunications industry is intense, particularly
in emerging markets where the Company operates and, accordingly, there can be no
assurance that the Company will be able to hire and retain qualified personnel.
Although the Company believes it has recently strengthened its management team
in Russia and the CIS, there can be no assurance as to what effect such
personnel changes will have on the Company's operations in Russia and the CIS.
 
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
 
     To complete its billing, the Company must record and process massive
amounts of data quickly and accurately. While the Company believes its ventures'
management information systems are currently adequate, certain of such systems
will have to grow as the ventures' businesses expand. The Company believes that
the successful expansion of its information systems and administrative support
will be important to its continued growth, its ability to monitor and control
costs, to bill customers accurately and in a timely fashion and to achieve
operating efficiencies. There can be no assurance that the Company will not
encounter delays or cost-overruns or suffer adverse consequences in implementing
these systems. Any such delay or other malfunction of the Company's management
information systems could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
TAXES; AVAILABILITY OF NET OPERATING LOSS CARRY FORWARDS
 
     The tax rules and regimes prevailing in certain emerging market countries
in which the Company operates or plans to operate are, in many cases, new and
rapidly changing. Repatriation of profits may result in additional taxes. In
addition, other forms of taxation, including VAT, excise taxes and import
duties, change at an unpredictable pace and may have an adverse effect on the
Company's operations.
 
     Availability of tax holidays and provisions of tax treaties with the United
States are subject to changes which may affect GTS's utilization of certain tax
benefits in the countries in which it operates as well as in the United States.
Certain ventures in the CIS and Hungary are operating under tax holidays granted
by local governments. Tax holidays are for periods ranging from up to five to
several years after achieving profitability
 
                                       21
<PAGE>   27
 
under local tax regulations. In addition to these holidays, certain of the
Company's foreign ventures have foreign tax loss carryforwards in excess of
$25.0 million.
 
     As of December 31, 1996, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $60.9 million expiring in
fiscal years 2003 through 2011. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carryforwards will be subject to an annual limitation as a result of the
consummation of the Offerings.
 
     The Company's financial statements do not reflect any provision for
benefits that might be associated with the U.S. and non-U.S. loss carryforwards.
There can be no assurance that such loss carryforwards will be allowed, in part
or full, by local tax authorities against future income.
 
TECHNOLOGY
 
     The telecommunications industry is subject to rapid and significant changes
in technology and such technological advances may reduce the relative
effectiveness of existing technology and equipment. The Company obtains
telecommunications equipment from a number of vendors, upon whom it is dependent
for the adaptation of such equipment to meet varying local telecommunications
standards. The cost of implementation of emerging and future technologies could
be significant. There can be no assurance that the Company will maintain
competitive services or that the Company will obtain appropriate new technology
on a timely basis or on satisfactory terms. Any failure by the Company to
maintain competitive services or obtain new technologies could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
     Development and operation of the Hermes network are also subject to certain
technological risks. The network has been designed to utilize SDH technology.
While SDH represents an advanced, new transmission technology, Hermes Railtel's
ability to upgrade technology from this platform may be important in
establishing and/or maintaining a cost advantage over competitive carriers.
There can be no assurance that the Hermes Railtel network will achieve the
technical specifications for which it was designed or that Hermes Railtel will
be able to upgrade the network as technological improvements in
telecommunications equipment are introduced. Failure to achieve current
specifications for, or future upgrades of, the network may materially and
adversely affect the viability of the Hermes network and could have a material
adverse effect on the business and prospects of GTS.
 
DIFFICULTY IN OBTAINING RELIABLE MARKET INFORMATION
 
     The Company operates in markets in which it is difficult to obtain reliable
market information. The Company's business planning has been based on certain
assumptions concerning subscriber base, usage levels, pricing and operating
expenses based on the Company's experience and the Company's own investigation
of market conditions in the emerging market countries in which it operates. No
assurances can be given as to the accuracy of such assumptions, and such
assumptions may not be indicative of the actual performance of the Company's
operations.
 
DILUTION
 
     The initial public offering price per share of Common Stock exceeds the net
tangible book value per share of the Common Stock. In addition, the net tangible
book value per share of the Common Stock will decrease upon the exercise of
outstanding options and warrants. Accordingly, purchasers of the Common Stock
offered hereby will incur an immediate and substantial dilution. See "Dilution."
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE IMPACT
ON MARKET PRICE FROM SALES OF COMMON STOCK
 
     Sales of substantial amounts of Common Stock in the public market following
the Offerings could adversely affect the market price of the Common Stock and
adversely affect the Company's ability to raise capital at a time and on terms
favorable to the Company. Upon completion of the Offerings, there will be
 
                                       22
<PAGE>   28
 
shares of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and excluding 6,597,346 shares covered by vested options
and warrants outstanding at June 30, 1997. Of the outstanding shares, the
          shares registered in the Offerings and 9,055,176 additional shares
will be freely tradeable without restriction under the Securities Act, except
that any shares purchased in the Offerings by "affiliates" of the Company may
generally only be resold in compliance with the applicable provisions of Rule
144. Beginning 90 days after the date of this Prospectus, an additional
15,574,496 shares will be eligible for sale in the public market, subject to
compliance with applicable provisions of Rule 144. In addition, the holders of
approximately 20,816,527 shares of Common Stock, warrants to purchase 5,185,184
shares of Common Stock and shares of Common Stock received by holders of
Convertible Bonds upon conversion are entitled to certain demand and piggy-back
registration rights in respect of their shares. If such holders exercise their
exercise registration rights and cause a large number of shares to be registered
and sold in the public market, such sales could have an adverse effect on the
market price for the Common Stock. See "Shares Eligible for Future Sale" and
"Description of Capital Stock -- Prior Purchase Agreements -- Registration
Rights."
 
ABSENCE OF DIVIDENDS
 
     The Company has not paid any dividend on its Common Stock and does not
intend to pay dividends in the foreseeable future. Moreover, the Company is
prohibited under certain of its debt instruments from paying cash dividends
until 2001. In the event that the Company and/or certain operating companies of
the Company enter into future financings, the terms of such financings may
include dividend restrictions. See "Dividend Policy."
 
ANTI-TAKEOVER PROVISIONS
 
     The Company is subject to Section 203 of the Delaware General Corporation
Law which contains certain anti-takeover provisions that prohibit a "business
combination" between a corporation and an "interested stockholder" within three
years of the stockholder becoming an "interested stockholder" except in certain
limited circumstances. The business combination provisions of Section 203 of the
Delaware General Corporation Law may have the effect of deterring merger
proposals, tender offers or other attempts to effect changes in control of the
Company that are not negotiated and approved by the Company's Board of
Directors. Accordingly, stockholders of the Company could be prevented from
realizing a premium on their shares in a transaction not approved by the
Company's Board of Directors. See "Description of Capital Stock."
 
ENFORCEABILITY OF JUDGMENTS
 
     Substantially all of the assets of the Company (including all of the assets
of the Company's operating ventures) are located outside the United States. As a
result, it will be necessary for investors to comply with foreign laws in order
to enforce judgments obtained in a United States court against the assets of the
operating ventures, including foreclosure upon such assets, and there can be no
assurance that any U.S. judgments would be enforced under any such foreign laws.
 
NO PRIOR PUBLIC MARKET: VOLATILITY OF STOCK PRICE
 
     Prior to the Offerings, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or be sustained after the Offerings. The initial public offering price of the
Common Stock will be determined through negotiations between the Company and the
Representatives of the Underwriters (as defined herein) and may not be
indicative of the market prices for the Common Stock after consummation of the
Offerings. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The market price for the Common
Stock could be subject to significant fluctuations in response to various other
factors such as announcements of new contracts, technological innovations or new
products by the Company or its competitors, other announcements concerning the
Company or its competitors, changes in government regulations, fluctuations in
the Company's quarterly and annual operating results and general market
conditions. In addition, the stock markets have in recent years experienced
significant price fluctuations. Those fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded.
Market fluctuations, as well as economic conditions, may adversely affect the
market price of the Common Stock.
 
                                       23
<PAGE>   29
 
                                USE OF PROCEEDS
 
     The aggregate net proceeds of the Offerings are estimated to be
approximately $  million after deducting estimated expenses of the Offerings
payable by the Company. The Company intends to use the net proceeds from the
Offerings to provide working capital for existing telecommunications ventures,
particularly in Russia and the CIS, to expand the Company's operations, and for
general corporate purposes. In addition, as part of its business strategy, the
Company regularly evaluates potential acquisitions and joint ventures. The
Company has no definitive agreement with respect to any material acquisition or
joint venture, although from time to time it has discussions with other
companies and assesses opportunities on an on-going basis. A portion of the net
proceeds from the Offerings may be used to fund such acquisitions. The Company
is also considering using approximately $84 million of the net proceeds to repay
loans from shareholders which bear interest at 10% per annum and mature on March
31, 2001. Pending any use of its net proceeds from the Offerings in the manner
described above, the Company intends to invest the proceeds in short-term
investment grade obligations, bank deposits or similar instruments.
 
                                DIVIDEND POLICY
 
     GTS has not paid any dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future. Moreover, the Company is prohibited
under certain of its debt instruments from paying cash dividends until 2001. In
the event that the Company and/or certain operating companies of the Company
enter into future financings, the terms of such financings may include dividend
restrictions.
 
                                       24
<PAGE>   30
 
                                    DILUTION
 
     At June 30, 1997, after giving pro forma effect to the sale of 1,668,457
shares of Common Stock for an aggregate $39.2 million (of which $8 million
remains to be funded), the net tangible book value of the Common Stock was
$103.7 million in the aggregate, or $4.11 per share of Common Stock. "Net
tangible book value per share" represents the amount of total tangible assets of
the Company reduced by the amount of total liabilities and divided by the number
of shares of Common Stock outstanding. After giving effect to the sale of
shares of Common Stock offered by the Company hereby (at an assumed public
offering price of $          per share and after deduction of the estimated
offering expenses), the pro forma net tangible book value of the Common Stock
would have been $     million in the aggregate, or $     per share. This
represents an immediate increase in net tangible book value of $     per share
of Common Stock to existing shareholders and an immediate dilution per share of
$          to new investors purchasing shares of Common Stock in the Offering.
"Dilution per share" represents the difference between the price per share to be
paid by new investors and the pro forma net tangible book value per share after
the Offerings. The following table illustrates the dilution per share as
described above:
 
<TABLE>
<S>                                                           <C>
Assumed initial public offering price per share.............  $
Net tangible book value per share at June 30, 1997..........  $4.11
Increase in net tangible book value per share attributable
  to the Offerings..........................................  $
                                                              -----
                                                                 --
Pro forma net tangible book value per share after the
  Offerings.................................................  $
                                                              =====
Dilution per share to new investors in the Offerings........  $  --
</TABLE>
 
<TABLE>
<CAPTION>
                                               SHARES OF            TOTAL
                                              COMMON STOCK      CONSIDERATION     AVERAGE PRICE
                                            ----------------   ----------------   PER SHARE OF
                                            NUMBER   PERCENT   AMOUNT   PERCENT   COMMON STOCK
                                            ------   -------   ------   -------   -------------
<S>                                         <C>      <C>       <C>      <C>       <C>
Current Stockholders......................
New Investors.............................
                                            -----     -----    -----     -----
          Total...........................
                                            =====     =====    =====     =====
</TABLE>
 
     The above computations assume no exercise of any outstanding options or
warrants. At June 30, 1997, there were outstanding options to purchase 3,221,241
shares of Common Stock at a weighted average exercise price of $10.94 per share
and warrants to purchase 5,185,184 shares of Common Stock at an exercise price
of $14.00 per share. To the extent outstanding options are exercised, there will
be further dilution to new investors. See "Certain Related Party Transactions,"
"Management" and Note 7 to the audited Consolidated Financial Statements of the
Company.
 
                                       25
<PAGE>   31
 
                                 CAPITALIZATION
 
     The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997 and as adjusted to give effect to (i) the Offerings,
(ii) the issuance of approximately $144.8 million of Convertible Bonds which are
convertible into Common Stock in August and September 1997 and (iii) the sale in
August and September 1997 of 1,668,457 shares of Common Stock for an aggregate
$39.2 million (of which $8 million remains to be funded). In addition, Hermes
Railtel issued $265 million of senior notes, of which approximately $56.5
million was placed into escrow for the first two years' interest payments on the
notes, in August 1997. Hermes Railtel did not become a consolidated subsidiary
of the Company until the third quarter of 1997 and was accounted for under the
equity method as of June 30, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," and "Description of Certain Indebtedness."
 
<TABLE>
<CAPTION>
                                                              ACTUAL            AS ADJUSTED
                                                            -----------        --------------
                                                            (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                         <C>                <C>
Debt maturing within one year...........................       $ 19,665
Long-term debt, less current portion....................         64,425
                                                               --------            --------
          Total debt....................................         84,090
                                                               --------            --------
 
Minority interest.......................................          1,894
Common stock subject to repurchase......................          4,583
Shareholders' equity(1):
  Common stock, $0.0001 par value (60,000,000 shares
     authorized; 23,546,348 shares issued and
     outstanding as of June 30, 1997)...................              2
Additional paid-in capital..............................        246,720
Accumulated deficit.....................................       (165,585)
Other...................................................         (4,859)
                                                               --------            --------
          Total shareholders' equity....................         76,278
                                                               --------            --------
          Total capitalization..........................       $166,845            $
                                                               ========            ========
</TABLE>
 
- ---------------
 
(1) Excludes (i) 5,185,184 shares of Common Stock reserved for issuance upon
    exercise of outstanding Common Stock Warrants of the Company at an exercise
    price of $14.00 per share, (ii) 475,540 shares of Common Stock reserved for
    issuance upon exercise of a put right associated with a 1996 financing
    agreement, as amended, (iii) 3,766,663 shares of Common Stock reserved for
    issuance upon exercise of stock options at exercise prices ranging from
    $0.80 per share to $20.00 per share, (iv)           shares issuable upon
    conversion of the Convertible Bonds (assuming a public offering price in
    this Offering of $     per share) and (v) 411,360 shares of Common Stock
    reserved for issuance pursuant to the TCM business partnership agreement as
    deferred consideration to TCM's partners. See "Certain Related Party
    Transactions."
 
                                       26
<PAGE>   32
 
                SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
     The following selected historical consolidated financial data as of and for
the years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from
the Company's audited Consolidated Financial Statements. The following unaudited
selected historical consolidated financial data as of and for the six months
ended June 30, 1996 and 1997 are derived from the Company's unaudited
Consolidated Financial Statements. The selected financial data presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the audited Consolidated
Financial Statements and related notes thereto appearing elsewhere in this
Prospectus. Under generally accepted accounting principles, most of the
Company's ventures are accounted for by the equity method of accounting.
 
     Under this method, the operating results of the ventures are included in
the Company's Statement of Operations as a single line item, "Equity in (losses)
earnings of ventures." The Company recognizes 100% of the losses in ventures
where the Company bears all of the financial risk (which includes all of the
Company's significant ventures except for Sovintel and, historically, Hermes
Railtel.) Also, the assets, liabilities and equity of the ventures are included
in the Company's balance sheet data as a single line item "Investments in and
advances to ventures." Detailed financial information about the Company and its
ventures shown using the combined method of accounting is included below under
"Selected Historical Financial Data -- Combined Operations."
 
<TABLE>
<CAPTION>
                                                                                           SIX MONTHS ENDED
                                                    YEARS ENDED DECEMBER 31,                   JUNE 30,
                                          ---------------------------------------------   -------------------
                                           1992     1993     1994      1995      1996       1996       1997
                                          ------   ------   -------   -------   -------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                       <C>      <C>      <C>       <C>       <C>       <C>        <C>
STATEMENT OF OPERATIONS DATA:
  Revenues, net.........................  $1,690   $  328   $ 2,468   $ 8,412   $24,117   $  8,775   $ 17,295
  Gross margin..........................   1,690      328        23        16     5,176        875      4,332
  Selling, general and administrative
     expenses...........................   1,992    3,340    12,863    41,014    52,928     23,190     27,075
  Equity in (losses) earnings of
     ventures...........................    (134)     472      (135)   (7,871)  (10,150)    (5,433)   (10,167)
  Other (expense) income................      (2)     100       990    11,034    (8,729)    (5,789)    (5,960)
  Net loss..............................    (437)  (2,440)  (11,985)  (40,400)  (67,991)   (32,199)   (39,687)
BALANCE SHEET DATA (AT END OF PERIOD):
  Cash and cash equivalents.............  $1,597   $3,641   $29,635   $ 9,044   $57,874   $ 16,987   $ 14,587
  Property and equipment,
     net................................      41      829     8,393    29,523    35,463     33,567     35,415
  Investments in and advances to
     ventures...........................     270      794    13,841    56,153   104,459     67,935    117,123
  Total assets..........................   2,051    5,968    61,957   115,621   237,378    147,158    198,340
  Total debt............................      --      725     2,152    27,454    85,547     72,940     84,090
  Minority interest and stock subject to
     repurchase.........................      --       --         8     5,273     6,248      5,553      6,477
  Shareholders' equity..................   1,659    4,685    54,684    55,322   113,668     43,364     76,278
</TABLE>
 
                                       27
<PAGE>   33
 
      UNAUDITED SELECTED HISTORICAL FINANCIAL DATA -- COMBINED OPERATIONS
 
     The following unaudited selected historical financial data -- combined
operations, as of and for the years ended December 31, 1994, 1995 and 1996 and
as of and for the six months ended June 30, 1996 and 1997 are derived from the
Company's financial records. It is intended to supplement the aforementioned
selected historical consolidated financial data.
 
     The Company has a significant degree of operational and management control
over many of its ventures. In this regard, the Company has presented combined
financial information for such ventures. The following selected historical
financial data -- combined operations includes selected operating and balance
sheet data of the Company and its subsidiaries and ventures on a combined basis.
Under this method, the total revenues and expenses of the Company and its
subsidiaries and ventures are combined, as are their assets, liabilities and
equity. This method of presentation is intended to supplement the above selected
historical consolidated financial data by combining financial data for all
entities under the common ownership or control of the Company.
 
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                          YEAR ENDED DECEMBER 31,               JUNE 30,
                                      --------------------------------    --------------------
                                        1994        1995        1996        1996        1997
                                      --------    --------    --------    --------    --------
                                                           (IN THOUSANDS)
<S>                                   <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Revenues, net.....................  $ 26,454    $ 60,193    $152,205    $ 59,901    $109,178
  Operating loss....................   (11,209)    (43,877)    (43,642)    (21,423)    (14,130)
  Interest income (expense).........       423         243      (9,710)     (5,335)     (7,065)
  Net loss before minority
     interest.......................   (10,825)    (39,856)    (65,737)    (31,324)    (31,983)
  Minority Interest.................    (1,160)      3,191       2,968       1,120          75
  100% loss recognition.............        --      (3,735)     (5,222)     (2,095)     (7,779)
  Net loss after minority
     interest.......................   (11,985)    (40,400)    (67,991)    (32,199)    (39,687)
 
BALANCE SHEET DATA (AT END OF
  PERIOD):
  Cash and cash equivalents.........  $ 32,757    $ 23,817    $ 72,870    $ 42,316    $ 31,262
  Current assets....................    46,211      48,245     156,709      89,237     114,890
  Property and equipment, net.......    24,137      77,399     125,672      99,085     143,028
  Total assets......................    80,625     162,319     329,389     231,382     314,071
  Total debt........................     6,290      29,572      93,403      77,726      90,193
  Total liabilities.................    18,217      79,968     168,369     156,408     177,801
  Net Assets:
     Minority interest, stock
       subject to repurchase and
       shareholder
       loans........................     5,806      27,810      48,609      28,335      38,614
     Shareholders' equity...........    56,602      54,541     112,411      46,639      97,656
</TABLE>
 
                                       28
<PAGE>   34
 
  UNAUDITED SELECTED HISTORICAL FINANCIAL DATA -- COMBINING OPERATIONS: DETAIL
                                     REVIEW
 
     The following unaudited selected historical financial data -- combining
operations: detail review, as of and for the years ended, December 31, 1994,
1995 and 1996 and as of and for the six months ended June 30, 1996 and 1997, are
derived from the Company's financial records. It is intended to supplement the
aforementioned selected historical financial data -- combined operations which
were derived from the Company's financial records.
 
     The Company has a significant degree of operational and management control
over many of its ventures. In this regard, the Company has presented combined
financial information for such ventures. The following unaudited selected
historical financial data -- combining operations: detail review includes
selected operating and balance sheet data of the Company and its subsidiaries
and ventures on a combining basis. Under this method, the total revenues and
expenses of the Company and its subsidiaries and ventures are combined, as are
their assets, liabilities and equity. This method of presentation is intended to
supplement the above selected historical consolidated financial data by
combining financial data for all entities under the common ownership or control
of the Company.
 
     Included in the selected financial data is "EBITDA." "EBITDA" consists of
earnings (losses) before interest expense, income tax benefit and depreciation
and amortization. EBITDA is provided because it is a measure commonly used in
the telecommunications industry. It is presented to enhance an understanding of
the Company's operating results and is not intended to represent cash flow or
results of operations for the periods presented. EBITDA is not a measurement
under U.S. GAAP and may not be similar to EBITDA measures of other companies.
See the Company's consolidated financial statements and the notes thereto
appearing elsewhere in this Prospectus.
 
                                       29
<PAGE>   35
 
<TABLE>
<CAPTION>
                                            WESTERN     CENTRAL                 CORPORATE &                        GTS
                                  CIS       EUROPE      EUROPE       ASIA      NON-OPERATING   INTER-AFFILIATE    TOTAL
                               REGION(1)   REGION(2)   REGION(3)   REGION(4)     COMPANIES      ELIMINATIONS     COMBINED
                               ---------   ---------   ---------   ---------   -------------   ---------------   --------
                                                                     (IN THOUSANDS)
<S>                            <C>         <C>         <C>         <C>         <C>             <C>               <C>
FISCAL YEAR 1994
Income Statement Data:
  Revenues...................   $23,986     $   --      $ 1,295      $  --       $  1,173         $     --       $ 26,454
  Operating income (loss)....       840       (186)      (1,722)        --         (9,455)            (686)       (11,209)
  Interest (expense) income,
    net......................      (174)        --         (106)        --          1,189             (486)           423
  Net income (loss) before
    minority interest........       394       (546)      (1,835)        --        (10,210)           1,372        (10,825)
  Minority interest..........    (1,333)       123          174         --             --             (124)        (1,160)
  100% loss recognition......        --         --           --         --             --               --             --
  Net (loss) income after
    minority interest........      (939)      (423)      (1,661)        --        (10,210)           1,248        (11,985)
Balance Sheet Data (at end of
  period):
  Cash and cash
    equivalents..............     1,683        866        3,952         --         25,877              379         32,757
  Current assets.............    13,447        873        4,806         --         28,050             (965)        46,211
  Property and equipment,
    net......................    18,552         --        3,883         --          1,702               --         24,137
  Total assets...............    37,817      2,670       10,658         --         59,295          (29,815)        80,625
  Total debt.................     4,673         --        1,710         --             --              (93)         6,290
  Total liabilities..........    20,636          8        7,748         --          2,719          (12,894)        18,217
  Net assets (liabilities)...    17,181      2,662        2,910         --         56,576          (16,921)        62,408
  EBITDA.....................     2,777       (186)      (1,184)        --        (11,319)            (481)       (10,393)
</TABLE>
 
- ---------------
 
(1) The CIS Region includes the following significant operating ventures:
    Sovintel, TeleRoss, and Sovam.
 
(2) The Western Europe Region is comprised of Hermes.
 
(3) The Central Europe Region includes the following significant operating
    ventures: GTS-Hungary, EuroHivo and CzechNet.
 
(4) The Asia Region did not have significant activity in 1994.
 
<TABLE>
<CAPTION>
                                                                                                       HOLDING
                                                                                                     COMPANIES &
                                                                                          GTS      INTER-AFFILIATE     CIS
                                                 SOVINTEL    TCM    TELEROSS   SOVAM    CELLULAR    ELIMINATIONS      TOTAL
                                                 --------   -----   --------   ------   --------   ---------------   -------
                                                                               (IN THOUSANDS)
<S>                                              <C>        <C>     <C>        <C>      <C>        <C>               <C>
FISCAL YEAR 1994
Income Statement Data:
  Revenues.....................................  $20,728    $  --   $    --    $3,258    $  --         $   --        $23,986
  Operating income (loss)......................    3,565       --    (1,684)    (345)       --           (696)           840
  Interest (expense) income, net...............     (612)      --        --       48        --            390           (174)
  Net income (loss) before minority interest...    2,623       --    (1,684)    (436)       --           (109)           394
  Minority interest............................   (1,709)      --        --      292        --             84         (1,333)
  100% loss recognition........................       --       --        --       --        --             --             --
  Net income (loss) after minority interest....      914       --    (1,684)    (144)       --            (25)          (939)
Balance Sheet Data (at end of period):
  Cash and cash equivalents....................      897       --       216      570        --             --          1,683
  Current assets...............................    8,887       --     3,193    1,552        --           (185)        13,447
  Property and equipment, net..................   13,539       --     2,858    2,155        --             --         18,552
  Total assets.................................   22,486       --     9,332    4,105        --          1,894         37,817
  Total debt...................................    4,673       --        --       --        --             --          4,673
  Total liabilities............................   14,091       --     4,081    2,611        --           (147)        20,636
  Net assets...................................    8,395       --     5,251    1,494        --          2,041         17,181
  EBITDA.......................................    5,050       --    (1,634)     341        --           (980)         2,777
</TABLE>
 
                                       30
<PAGE>   36
 
<TABLE>
<CAPTION>
                                                WESTERN     CENTRAL                 CORPORATE &                        GTS
                                      CIS       EUROPE      EUROPE       ASIA      NON-OPERATING   INTER-AFFILIATE    TOTAL
                                   REGION(1)   REGION(2)   REGION(3)   REGION(4)     COMPANIES      ELIMINATIONS     COMBINED
                                   ---------   ---------   ---------   ---------   -------------   ---------------   --------
                                                                         (IN THOUSANDS)
<S>                                <C>         <C>         <C>         <C>         <C>             <C>               <C>
FISCAL YEAR 1995
  Income Statement Data:
    Revenues.....................  $ 55,993     $   179    $  4,523     $   140      $      2         $    (644)     $ 60,193
    Operating loss...............    (8,398)     (8,854)     (6,088)     (4,900)      (15,563)              (74)      (43,877)
    Interest (expense) income,
      net........................    (1,541)        134        (143)        104         1,689                --           243
    Net loss before minority
      interest...................   (15,590)     (8,702)     (7,091)     (4,791)       (2,876)             (806)      (39,856)
    Minority interest............    (1,231)      3,250       1,056         105            --                11         3,191
    100% loss recognition........    (2,594)         --      (1,056)        (85)           --                --        (3,735)
    Net (loss) after minority
      interest...................   (19,415)     (5,452)     (7,091)     (4,771)       (2,876)             (795)      (40,400)
  Balance Sheet Data (at end of
    period):
    Cash and cash equivalents....     7,674       6,021       1,694       2,599         5,829                --        23,817
    Current assets...............    28,847       7,227       3,570       2,901       106,299          (100,599)       48,245
    Property and equipment,
      net........................    58,560       5,093      10,729         291         2,726                --        77,399
    Total assets.................   109,153      14,911      17,187      10,435       121,114          (110,481)      162,319
    Total debt...................    14,165          20       3,209       1,000        10,292               886        29,572
    Total liabilities............    97,919      16,378      28,507      13,577        24,716          (101,129)       79,968
    Net assets (liabilities).....    11,234      (1,467)    (11,320)     (3,142)       96,398            (9,352)       82,351
    EBITDA.......................    (3,980)     (8,114)     (5,339)     (3,645)       (4,428)             (204)      (25,710)
</TABLE>
 
- ---------------
 
(1) The CIS Region includes the following significant operating ventures:
    Sovintel, TCM, TeleRoss, Sovam and GTS Cellular.
 
(2) The Western Europe Region includes the following significant operating
    ventures: Hermes and GTS-Monaco Access.
 
(3) The Central Europe Region includes the following significant operating
    ventures: GTS-Hungary, EuroHivo and CzechNet.
 
(4) The Asia Region is comprised of V-Tech.
 
<TABLE>
<CAPTION>
                                                                                                      HOLDING
                                                                                                    COMPANIES &
                                                                                         GTS      INTER-AFFILIATE     CIS
                                                 SOVINTEL   TCM   TELEROSS    SOVAM    CELLULAR    ELIMINATIONS      TOTAL
                                                 --------   ---   --------   -------   --------   ---------------   --------
                                                                               (IN THOUSANDS)
<S>                                              <C>        <C>   <C>        <C>       <C>        <C>               <C>
FISCAL YEAR 1995
  Income Statement Data:
    Revenues...................................  $44,292    $49   $ 3,781    $ 4,434   $ 4,128       $   (691)      $ 55,993
    Operating income (loss)....................   10,900    (7)    (6,751)    (1,753)   (3,592)        (7,195)        (8,398)
    Interest expense, net......................     (650)   --         (6)        --      (741)          (144)        (1,541)
    Net income (loss) before minority
      interest.................................    7,648    (7)    (6,898)    (1,789)   (4,515)       (10,029)       (15,590)
    Minority interest..........................   (3,824)   --        104        596       997            896         (1,231)
    100% loss recognition......................       --    --       (104)      (596)     (997)          (897)        (2,594)
    Net income (loss) after minority
      interest.................................    3,824    (7)    (6,898)    (1,789)   (4,515)       (10,030)       (19,415)
  Balance Sheet Data (at end of period):
    Cash and cash equivalents..................    3,094    20        163        683     3,672             42          7,674
    Current assets.............................   14,168    32     11,139      2,483     5,638         (4,613)        28,847
    Property and equipment, net................   21,349    41     17,304      3,912    15,575            379         58,560
    Total assets...............................   36,732    73     29,820      6,395    29,441          6,692        109,153
    Total debt.................................      694    --        648         --       603         12,220         14,165
    Total liabilities..........................   20,689    80     25,507      6,760    19,861         25,022         97,919
    Net assets (liabilities)...................   16,043    (7)     4,313       (365)    9,580        (18,330)        11,234
    EBITDA.....................................   13,363    (7)    (6,475)    (1,280)   (2,686)        (6,895)        (3,980)
</TABLE>
 
                                       31
<PAGE>   37
 
<TABLE>
<CAPTION>
                                                WESTERN     CENTRAL                 CORPORATE &                        GTS
                                      CIS       EUROPE      EUROPE       ASIA      NON-OPERATING   INTER-AFFILIATE    TOTAL
                                   REGION(1)   REGION(2)   REGION(3)   REGION(4)     COMPANIES      ELIMINATIONS     COMBINED
                                   ---------   ---------   ---------   ---------   -------------   ---------------   --------
                                                                         (IN THOUSANDS)
<S>                                <C>         <C>         <C>         <C>         <C>             <C>               <C>
FISCAL YEAR 1996
  Income Statement Data:
    Revenues.....................  $130,250    $  3,985    $  9,731    $  8,582      $    507         $    (850)     $152,205
    Operating income (loss)......     9,481     (19,247)     (4,387)     (5,263)      (24,226)               --       (43,642)
    Interest (expense) income,
      net........................    (2,830)        466        (302)        120        (7,165)                1        (9,710)
    Net loss before minority
      interest...................    (3,679)    (20,152)     (5,295)     (5,138)      (31,358)             (115)      (65,737)
    Minority interest............    (7,899)      9,452         826         589            --                --         2,968
    100% loss recognition........    (3,994)         --        (826)       (402)           --                --        (5,222)
    Net loss after minority
      interest...................   (15,572)    (10,700)     (5,295)     (4,951)      (31,358)             (115)      (67,991)
  Balance Sheet Data (at end of
    period):
    Cash and cash equivalents....    14,230       4,022       1,053       2,271        51,294                --        72,870
    Current assets...............    57,572      12,415       4,750      19,628       237,124          (174,780)      156,709
    Property and equipment,
      net........................    87,916      22,116      12,637         925         2,078                --       125,672
    Total assets.................   171,402      37,992      20,541      30,371       313,463          (244,380)      329,389
    Total debt...................     4,407       2,969       7,286          --        78,741                --        93,403
    Total liabilities............   155,211      50,533      36,143      25,308       120,884          (219,710)      168,369
    Net assets (liabilities).....    16,191     (12,541)    (15,602)      5,063       192,579           (24,670)      161,020
    EBITDA.......................    23,604     (18,861)     (2,785)     (4,257)      (22,505)             (120)      (24,924)
</TABLE>
 
- ---------------
 
(1) The CIS Region includes the following significant operating ventures:
    Sovintel, TCM, TeleRoss, Sovam and GTS Cellular.
 
(2) The Western Europe Region includes the following significant operating
    ventures: Hermes and GTS-Monaco Access.
 
(3) The Central Europe Region includes the following significant operating
    ventures: GTS-Hungary, EuroHivo and CzechNet.
 
(4) The Asia Region includes the following significant ventures: V-Tech and
    Beijing Tianmu.
 
<TABLE>
<CAPTION>
                                                                                                   HOLDING
                                                                                      GTS        COMPANIES &
                                                                                   CELLULAR    INTER-AFFILIATE      CIS
                                     SOVINTEL      TCM      TELEROSS     SOVAM     COMPANIES    ELIMINATIONS       TOTAL
                                     --------    -------    --------    -------    ---------   ---------------    --------
                                                                        (IN THOUSANDS)
<S>                                  <C>         <C>        <C>         <C>        <C>         <C>                <C>
FISCAL YEAR 1996
  Income Statement Data:
    Revenues.......................  $75,040     $16,507    $ 9,241     $11,671     $25,557       $ (7,766)       $130,250
    Operating income (loss)........   20,839      11,322    (10,205)     (2,279)       (574)        (9,622)          9,481
    Interest expense, net..........     (551)         (3)      (304)        (18)     (1,861)           (93)         (2,830)
    Net income (loss) before
      minority interest............   14,762       8,874    (10,922)     (2,138)     (4,576)        (9,679)         (3,679)
    Minority interest..............   (7,381)     (4,418)       462         713       1,771            954          (7,899)
    100% loss recognition..........       --          --       (464)       (713)     (1,863)          (954)         (3,994)
    Net income (loss) after
      minority interest............    7,381       4,456    (10,924)     (2,138)     (4,668)        (9,679)        (15,572)
  Balance Sheet Data (at end of
    period):
    Cash and cash equivalents......    3,606         345      2,553       1,550       4,209          1,967          14,230
    Current assets.................   25,367       3,504     18,930       5,191      13,725         (9,145)         57,572
    Property and equipment, net....   27,709       5,097     22,635       4,996      26,731            748          87,916
    Total assets...................   54,156       8,601     42,584      10,310      46,949          8,802         171,402
    Total debt.....................       --          --      1,435          --       2,750            222           4,407
    Total liabilities..............   23,351       1,841     51,813      12,813      40,482         24,911         155,211
    Net assets (liabilities).......   30,805       6,760     (9,229)     (2,503)      6,467        (16,109)         16,191
    EBITDA.........................   24,027      11,671     (7,772)     (1,224)      3,235         (6,333)         23,604
</TABLE>
 
                                       32
<PAGE>   38
 
<TABLE>
<CAPTION>
                                                    WESTERN     CENTRAL                 CORPORATE &                        GTS
                                          CIS       EUROPE      EUROPE       ASIA      NON-OPERATING   INTER-AFFILIATE    TOTAL
                                       REGION(1)   REGION(2)   REGION(3)   REGION(4)     COMPANIES      ELIMINATIONS     COMBINED
                                       ---------   ---------   ---------   ---------   -------------   ---------------   --------
                                                                             (IN THOUSANDS)
<S>                                    <C>         <C>         <C>         <C>         <C>             <C>               <C>
SIX MONTHS ENDED JUNE 30, 1996
Income Statement Data:
  Revenues...........................  $ 53,631    $  1,327    $  3,761     $ 1,722      $     --         $    (540)     $ 59,901
  Operating (loss) income............      (494)     (8,566)     (2,258)     (1,493)       (8,979)              367       (21,423)
  Interest (expense) income, net.....    (2,252)        288        (153)         52        (3,260)              (10)       (5,335)
  Net loss before minority
    interest.........................    (5,332)     (8,797)     (3,073)     (1,437)      (12,945)              260       (31,324)
  Minority interest..................    (3,313)      4,034         409          81             9                --         1,220
  100% loss recognition..............    (1,594)         --        (409)        (92)           --                --        (2,095)
  Net (loss) income after minority
    interest.........................   (10,239)     (4,763)     (3,073)     (1,448)      (12,936)              260       (32,199)
Balance Sheet Data (at end of
  period):
  Cash...............................    11,107      11,612         678       7,144        11,774                 1        42,316
  Current Assets.....................    49,681      22,050       4,771       8,190       150,532          (145,987)       89,237
  Property and equipment, net........    66,676      16,482      11,333         214         2,380                --        99,085
  Total assets.......................   139,927      42,663      18,914      19,410       139,595          (129,127)      231,382
  Total debt.........................    16,776         970       4,881          --        55,099                --        77,726
  Total liabilities..................   121,163      57,916      31,948      16,908        73,508          (145,035)      156,408
  Net assets/(liabilities)...........    18,764     (15,253)    (13,034)      2,502        66,087            15,908        74,974
  EBITDA.............................     6,325      (8,383)     (1,789)     (1,011)       (8,196)              366       (12,688)
</TABLE>
 
- ---------------
 
(1) The CIS Region includes the following significant operating ventures:
    Sovintel, TCM, TeleRoss, Sovam and GTS Cellular.
 
(2) The Western Europe Region includes the following significant operating
    ventures: Hermes and GTS-Monaco Access.
 
(3) The Central Europe Region includes the following significant operating
    ventures: GTS-Hungary, EuroHivo and CzechNet.
 
(4) The Asia Region includes the following significant ventures: V-Tech and
    Beijing Tianmu.
 
<TABLE>
<CAPTION>
                                                                                                    HOLDING
                                                                                                  COMPANIES &        CIS
                                                                                       GTS      INTER-AFFILIATED    REGION
                                          SOVINTEL     TCM     TELEROSS    SOVAM     CELLULAR     ELIMINATIONS     COMBINED
                                          --------   -------   --------   --------   --------   ----------------   --------
                                                                           (IN THOUSANDS)
<S>                                       <C>        <C>       <C>        <C>        <C>        <C>                <C>
SIX MONTHS ENDED JUNE 30, 1996
Income Statement Data:
  Revenues..............................  $31,993    $ 7,741   $ 3,047    $ 5,014    $ 9,337        $(3,501)       $ 53,631
  Operating income (loss)...............    8,383      5,104    (5,462)    (1,553)    (1,855)        (5,111)           (494)
  Interest expense, net.................     (159)    (1,313)       --         --       (651)          (129)         (2,252)
  Net income (loss) before minority
    interest............................    6,051      3,884    (5,608)    (1,280)    (3,359)        (5,020)         (5,332)
  Minority interest.....................   (3,026)    (1,944)      218         96        613            730          (3,313)
  100% loss recognition.................       --         --      (218)       (96)      (613)          (667)         (1,594)
  Net income (loss) after minority
    interest............................    3,025      1,940    (5,608)    (1,280)    (3,359)        (4,957)        (10,239)
Balance Sheet Data (at end of period):
  Cash..................................    3,257      1,556       874        841      4,181            398          11,107
  Current assets........................   17,877      4,209    14,339      3,941     12,444         (3,129)         49,681
  Property and equipment, net...........   24,066      2,055    21,521      4,616     15,757            661          68,676
  Total assets..........................   43,091      6,328    36,729      8,556     35,056         10,167         139,927
  Total debt............................       --         --     1,485         --      3,016         12,275          16,776
  Total liabilities.....................   20,997      4,050    37,987     10,201     28,521         19,407         121,163
  Net assets/(liabilities)..............   22,094      2,278    (1,258)    (1,645)     6,535         (9,240)         18,764
  EBITDA................................    9,939      5,239    (4,579)      (885)       320         (3,715)          6,325
</TABLE>
 
                                       33
<PAGE>   39
 
<TABLE>
<CAPTION>
                                                       WESTERN     CENTRAL                 CORPORATE &                     GTS
                                             CIS       EUROPE      EUROPE       ASIA      NON-OPERATING                   TOTAL
                                          REGION(1)   REGION(2)   REGION(3)   REGION(4)     COMPANIES     ELIMINATIONS   COMBINED
                                          ---------   ---------   ---------   ---------   -------------   ------------   --------
                                                                              (IN THOUSANDS)
<S>                                       <C>         <C>         <C>         <C>         <C>             <C>            <C>
SIX MONTHS ENDED JUNE 30, 1997
Income Statement Data:
  Revenues..............................   $96,534    $  5,097     $ 6,692     $ 1,016      $    153       $    (314)    $109,178
  Operating income (loss)...............    15,248     (10,735)     (1,509)     (4,780)      (12,450)             96      (14,130)
  Interest expense, net.................    (2,145)        (11)       (265)       (137)       (3,978)           (529)      (7,065)
  Net income (loss) before minority
    interest............................     4,595     (11,069)     (3,041)     (4,903)      (17,565)             --      (31,983)
  Minority interest.....................    (6,624)      5,575         359         765            --              --           75
  100% loss recognition.................    (2,201)     (4,963)       (359)       (256)           --              --       (7,779)
  Net loss after minority interest......    (4,230)    (10,457)     (3,041)     (4,394)      (17,565)                     (39,687)
Balance Sheet Data: (at end of period)
  Cash..................................    14,307       2,563         932       1,135        12,324              --       31,262
  Current assets........................    75,214      13,543       4,459      11,097       199,996        (189,419)     114,890
  Property and equipment, net...........   102,221      25,671      11,984       1,092         2,061              --      143,028
  Total assets..........................   207,572      42,847      19,149      29,692       211,169        (196,358)     314,071
  Total debt............................     3,793       3,363       5,949          --        77,087              --       90,193
  Total liabilities.....................   181,147      62,974      38,729      28,464       103,555        (237,068)     177,801
  Net assets/(liabilities)..............    26,425     (20,127)    (19,580)      1,228       107,614          40,710      136,270
  EBITDA................................    25,244      (9,514)     (1,450)     (3,375)      (11,280)           (302)        (677)
</TABLE>
 
- ---------------
 
(1) The CIS Region includes the following significant operating ventures:
    Sovintel, TCM, TeleRoss, Sovam and GTS Cellular.
 
(2) The Western Europe Region includes the following significant operating
    ventures: Hermes and GTS-Monaco Access.
 
(3) The Central Europe Region includes the following significant operating
    ventures: GTS-Hungary, EuroHivo and CzechNet.
 
(4) The Asia Region includes the following significant ventures: V-Tech and
    Beijing Tianmu.
 
<TABLE>
<CAPTION>
                                                                                                      HOLDING
                                                                                                    COMPANIES &       CIS
                                                                                         GTS      INTER-AFFILIATE    REGION
                                             SOVINTEL     TCM     TELEROSS    SOVAM    CELLULAR    ELIMINATIONS     COMBINED
                                             --------   -------   --------   -------   --------   ---------------   --------
                                                                             (IN THOUSANDS)
<S>                                          <C>        <C>       <C>        <C>       <C>        <C>               <C>
SIX MONTHS ENDED JUNE 30, 1997
Income Statement Data:
  Revenues.................................  $54,139    $12,935   $ 9,901    $ 8,032   $17,550        $(6,023)      $ 96,534
  Operating income (loss)..................   13,188      8,970    (2,645)      (154)      731         (4,842)        15,248
  Interest (expense) income, net...........     (216)       222      (718)      (104)   (1,589)           258         (2,145)
  Net income (loss) before minority
    interest...............................    9,730      6,458    (3,464)      (440)   (3,115)        (4,574)         4,595
  Minority interest........................   (4,865)    (3,229)     (177)       127     2,106           (586)        (6,624)
  100% income (loss) recognition...........       --         --       103        (68)   (1,937)          (299)        (2,201)
  Net income (loss) after minority
    interest...............................    4,865      3,229    (3,538)      (381)   (2,946)        (5,459)        (4,230)
Balance Sheet Data: (at end of period)
  Cash.....................................    3,160      2,776       820      1,299     5,314            938         14,307
  Current assets...........................   34,042      7,575    20,076      5,977    16,866         (9,322)        75,214
  Property and equipment, net..............   34,105      5,671    23,412      5,354    33,125            554        102,221
  Total assets.............................   69,160     13,373    44,726     11,433    56,745         12,135        207,572
  Total debt...............................       --         --     1,434         --     2,138            221          3,793
  Total liabilities........................   28,626      2,613    57,394     14,317    53,587         24,610        181,147
  Net assets/(liabilities).................   40,534     10,760   (12,668)    (2,884)    3,158        (12,475)        26,425
  EBITDA...................................   15,392      9,150      (688)       286     3,565         (2,461)        25,244
</TABLE>
 
                                       34
<PAGE>   40
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
     The following is a discussion of the financial condition and results of
operations of the Company as of June 30, 1997 and 1996, December 31, 1996 and
1995 and for the six months ended June 30, 1997 and 1996 and for the years ended
December 31, 1996, 1995 and 1994. The following discussion should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
related thereto. Certain statements contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" including, without
limitation, those concerning (i) projected traffic volume, (ii) future revenues
and costs, (iii) changes in the Company's competitive environment and (iv) the
performance of future equity-method investments, contain forward-looking
statements concerning the Company's operations, economic performance and
financial condition. Because such statements involve risks and uncertainties,
actual results may differ materially from those expressed or implied by such
forward-looking statements.
 
OVERVIEW
 
     Business. GTS is a provider of a broad range of telecommunications services
to businesses, other telecommunications service providers and consumers in
Russia and the CIS, Central Europe and Asia. In Western Europe, through Hermes,
GTS is developing, and operating the initial segment of, a pan-European high
capacity fiber optic network which is designed to interconnect a majority of the
largest Western and Central European cities and to transport international
voice, data and multimedia/image traffic for other carriers throughout Western
and Central Europe. GTS's strategy to develop its businesses generally has been
to establish joint ventures with a strong local partner or partners while
maintaining a significant degree of operational control. The Company's business
activities consist of the ownership and operation of (i) international long
distance businesses, which operate through international gateways that provide
international switching services and transmission capacity, (ii) local access
networks, which provide local telephone service, (iii) cellular networks, which
provide wireless telecommunications services, (iv) a domestic long distance
business, (v) data networks and (vi) carriers' carrier networks, which provide
high volume transmission capacity to other carriers.
 
     The Company began to acquire interests in numerous telecommunications
ventures beginning in 1994 and continued to acquire such interests throughout
1995 and 1996. Ventures with significant financial results in 1994 included
Sovintel (an international long distance and domestic and local access
telecommunications service provider) and GTS-Hungary (a VSAT network
telecommunications service provider); ventures that incurred start-up costs
associated with building out their business infrastructure in 1994 included
Sovam (a data and internet telecommunications service provider) and EuroHivo (a
paging telecommunications service provider). In 1995, TeleRoss (a domestic long
distance telecommunications service provider) and GTS Cellular (a basic cellular
telecommunications service provider) began operations and expanded into numerous
regions within the CIS by the end of 1996. Telecommunications of Moscow ("TCM")
(a local access telecommunications service provider) began operations in 1996.
Hermes (a carriers' carrier telecommunications service provider) began its
network build-out in 1995, began limited operations at the end of 1996 and
expects to continue to develop its network during 1997 and beyond. The fact that
these ventures are in various stages of development affects the discussion of
comparative results below.
 
     GTS has invested significantly in its ventures through capital
contributions and loans. In addition, the Company has made a significant
commitment to its businesses and ventures through the provision of management
assistance and training. GTS has also incurred significant expenses in
identifying, negotiating and pursuing new telecommunications opportunities. GTS
and certain of its ventures are experiencing continuing losses and negative
operating cash flow primarily because the businesses are in the developmental
and start-up phases of operations. Management recognizes that the Company must
generate additional capital resources in order to continue its operations and
meet its new development initiatives. The ultimate recoverability of the
Company's investments in and advances to ventures is dependent on many factors
including, but not limited to, the ability of the Company to obtain sufficient
financing to continue to meet its capital and operational commitments, the
economies of the countries in which it does business and the ability of the
Company to maintain the necessary telecommunications licenses.
 
                                       35
<PAGE>   41
 
     The Company's businesses are developing rapidly. Some of the businesses
operate in countries with emerging economies which have uncertain economic,
political and regulatory environments. The general risks of operating businesses
in the CIS and other developing countries include the possibility for rapid
change in government policies including telecommunications regulations, economic
conditions, the tax regime and foreign currency regulations.
 
ACCOUNTING METHODOLOGY
 
     Accounting for Business Ventures. Wholly-owned subsidiaries and
majority-owned ventures where the Company has unilateral operating and financial
control are consolidated. Those ventures where the Company exercises significant
influence, but does not exercise unilateral operating and financial control, are
accounted for by the equity method. The Company has certain majority-owned
investments that are accounted for by the equity method as a result of
super-majority voting conditions or other governmentally imposed uncertainties
so severe that they prevent the Company from obtaining unilateral control of the
venture.
 
     The CIS region includes the following significant operating ventures:
Sovintel, TCM, Sovam, TeleRoss (which includes TeleRoss Operating Company and
TeleRoss Ventures, as hereinafter defined) and GTS Cellular. With the exception
of the TeleRoss Operating Company, which is accounted for by the consolidation
method of accounting, all of these ventures are accounted for by the equity
method of accounting. The Western Europe region includes the following
significant operating ventures: Hermes and GTS-Monaco Access. These ventures
have been accounted for by the equity method of accounting. Upon the
finalization of the Hermes recapitalization and the execution of the new
shareholder agreement by Hermes, GTS-Hermes, Inc. ("GTS-Hermes") and HIT Rail
B.V. ("HIT Rail"), Hermes will be accounted for by the consolidation method of
accounting. The Central Europe region includes the following significant
operating ventures: GTS-Hungary, EuroHivo, CzechNet and CzechCom (collectively,
the "Czech Companies"). GTS-Hungary and the Czech Companies are accounted for by
the consolidation method of accounting, and EuroHivo is accounted for by the
equity method of accounting. The Asia region includes the following significant
operating ventures: V-Tech and Beijing Tianmu. These ventures are accounted for
by the equity method of accounting.
 
     Accounting Methodology for TeleRoss. TeleRoss provides domestic long
distance service and last mile interconnectivity in fourteen cities in Russia,
including Moscow. TeleRoss is comprised of (i) two wholly-owned holding
companies and a 99% owned subsidiary (collectively, the "TeleRoss Operating
Company") that operates a domestic long distance network and holds the
applicable operating license for TeleRoss and performs the customer invoicing
and collection functions for telecommunications services, and (ii) thirteen
joint ventures that are 50% beneficially owned by GTS (the "TeleRoss Ventures"),
which originate traffic and provide local termination of calls through agency
arrangements with TeleRoss Operating Company. TeleRoss Operating Company is
accounted for under the consolidation method of accounting because GTS has
unilateral control over the operations and management decisions made at TeleRoss
Operating Company. GTS does not exercise unilateral control over the TeleRoss
Ventures and therefore, they are accounted for under the equity method of
accounting. TeleRoss Operating Company's operations are further discussed in
"-- Results of Operations -- Consolidated Ventures" and TeleRoss Venture's
operations are further discussed in "-- Results of
Operations -- Non-Consolidated Ventures." A significant portion of TeleRoss
Operating Company's costs of revenue consists of settlement fees paid to the
TeleRoss Ventures, with such fees being recorded as revenue by the TeleRoss
Ventures. In 1996 and for the three and six months ended June 30, 1997, all of
the TeleRoss Ventures' revenue was derived from such fees. Any decline in the
business or operations of the TeleRoss Ventures would have a material adverse
effect on the results of operations of TeleRoss Operating Company.
 
     Profit and Loss Accounting. The Company recognizes profits and losses in
accordance with its underlying ownership percentage or allocation percentage as
specified in the agreements with its partners; however, the Company recognizes
100% of the losses in ventures where the Company bears all of the financial risk
(which includes all of the Company's significant ventures except for Sovintel
and, historically, Hermes). Accordingly, the portion of the losses that would
normally be assigned to the minority interest partner ("Excess Losses") is
recognized by the Company. When such ventures become profitable, the Company
recognizes 100% of the profits until such time as the Excess Losses previously
recognized by the Company have been recovered. The
 
                                       36
<PAGE>   42
 
Company implemented this policy in 1995. Effective January 1, 1997, the Company
recognizes 100% of Hermes' losses due to GTS becoming the financing partner.
 
     Inter-Affiliate Transactions. Several of the Company's ventures have
entered into business arrangements through which they provide integrated
solutions for their customers by leveraging each others' telecommunications
infrastructure. These arrangements have historically been focused primarily
within a region; however, as GTS has increased its geographic coverage and
telecommunication capabilities, these arrangements have expanded between
regions. In accordance with generally accepted accounting principles, all
significant intercompany accounts and transactions are eliminated upon
consolidation.
 
     Turnover Taxes. The Company's ventures within the CIS region incur a 4%
turnover tax that is based on the revenues earned. The Company includes these
taxes as a component of its operating expenses, since these taxes are incidental
to the revenue cycle.
 
RESULTS OF OPERATIONS -- CONSOLIDATED VENTURES
 
     Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, GTS-Hungary and the Czech
Companies. See "Results of Operations -- Non-Consolidated Ventures" for a
discussion of the operating results of Sovintel, TCM, Sovam, TeleRoss Ventures,
GTS Cellular, Hermes, GTS-Monaco Access, EuroHivo and the Asia business
ventures.
 
  Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
 
     Revenue. The Company's consolidated revenue for the six months ended June
30, 1997 increased by $8.6 million, an approximately 100% increase from the
comparable period in 1996. TeleRoss Operating Company's growth accounted for
approximately 57.2% of the Company's total growth over the six months ended June
30, 1997. The remainder of the growth was primarily derived from the increase of
customers in the Central Europe businesses.
 
     TeleRoss Operating Company's revenue increased by $6.9 million for the six
months ended June 30, 1997, from the comparable period in 1996. Service revenue
represented approximately 79.8% of the total TeleRoss Operating revenue for the
six months ended June 30, 1997. The growth in service revenue was a result of
increased traffic volume generated by the TeleRoss Ventures as they expanded
from ten cities at June 30, 1996 to thirteen cities at June 30, 1997 and added
customers in existing cities. The average revenue per minute for intercity and
international traffic for the six months ended June 30, 1997 was $0.76 and
$2.62, respectively, as compared with $1.00 and $2.71, respectively, for the six
months ended June 30, 1996. The decrease in the average revenue per minute for
both intercity and international traffic was primarily attributable to the use
of wholesale rates for regional Electrosviaz companies' traffic that commenced
in July 1996 and a higher proportion of lower margin traffic originating at
Moscow, respectively.
 
     The remaining revenue generated by TeleRoss Operating Company was primarily
related to equipment sales and installation revenue. The Company anticipates
that equipment and installation sales will continue to represent a low
percentage of total TeleRoss Operating Company revenue.
 
     GTS-Hungary's revenue increased by $1.0 million for the six months ended
June 30, 1997, from the comparable period in 1996, representing approximately a
35.0% growth rate. The increase in revenue was largely due to a doubling of its
customer base since June 1996 and the introduction of frame relay and packet
services.
 
     Revenue of the Czech Companies, which provide a growing range of
international telephony, private data and Internet access services, increased by
$1.6 million for the six months ended June 30, 1997, from the comparable period
in 1996. The increase in revenue was primarily due to the increase in voice
traffic carried from 17 buildings at June 30, 1997 as compared to 13 buildings
at June 30, 1996. Revenue per minute for the six months ended June 30, 1996 and
1997 was $1.05 and $0.79, respectively. This decrease was directly related to
the devaluation of the Koruna against the U.S. dollar. Management anticipates
that revenue per minute will continue to diminish as a result of competitive
pressures. Additional increases in revenue were generated from
 
                                       37
<PAGE>   43
 
internet services revenue and leased line services, with subscribership
increasing by 424 subscribers for the six months ended June 30, 1997, from the
comparable period in 1996.
 
     The remaining consolidated revenue, related to sales of equipment and
consulting services, decreased by $0.9 million for the six months ended June 30,
1997. The Company anticipates that equipment sales and consulting revenue will
continue to diminish as a percentage of total company revenue.
 
     Gross Margin. GTS's consolidated gross margin was $4.3 million and $0.9
million, or 24.9% and 10.0% of total revenue, for the six months ended June 30,
1997 and 1996, respectively. The growth in margin as a percentage of revenue was
attributed to increased utilization of capacity and renegotiated, lower voice
traffic settlement costs.
 
     TeleRoss Operating Company had a gross margin of $1.5 million, or 15.2% of
revenue, and $(0.5) million for the six months ended June 30, 1997 and 1996,
respectively. TeleRoss Operating Company's margin is expected to improve as
additional customers increase utilization of existing capacity, thereby enabling
TeleRoss Operating Company to spread fixed costs over a broader customer base.
Traffic settlements and charges for lines leased from outside vendors in 1997
remained relatively stable compared to such charges in 1996.
 
     GTS-Hungary had gross margins of $1.9 million and $1.1 million for the six
months ended June 30, 1997 and 1996, respectively (representing 50.0% and 39.3%
of GTS-Hungary's revenue during these periods). The favorable gross margin trend
reflects the increased utilization of GTS-Hungary's 1,000 VSAT capacity hub
located in Budapest. Management anticipates that competitive pressures within
the VSAT market could negatively affect future gross margins. The remaining
consolidated gross margin of $0.9 million for the six months ended June 30,
1997, was primarily attributed to the Czech Companies and the sale of spare
capacity on its leased data communications connection between London and Prague
to banking customers.
 
     Operating Expenses. Consolidated operating costs were $27.1 million and
$23.2 million for the six months ended June 30, 1997 and 1996, respectively. The
Company's operating expenses were comprised primarily of personnel related costs
and professional and consulting fees. The increase in operating costs reflected
the growth in expenditures associated with building business infrastructure for
primarily the TeleRoss Operating Company and increasing corporate staff. The
Company's corporate headquarters incurred costs of $12.2 million and $9.0
million for the six months ended June 30, 1997 and 1996, respectively.
 
     Equity in (Losses)/Earnings of Ventures. GTS recognized losses from its
investments in non-consolidated ventures of $10.2 million and $5.4 million for
the six months ended June 30, 1997 and 1996, respectively. Included in these
losses were $2.4 million and $3.3 million for the six months ended June 30, 1997
and 1996, respectively, that related to GTS's ownership share of the losses
incurred. In addition, the Company's results were negatively affected by the
recognition of Excess Losses of $7.8 million and $2.1 million for the six months
ended June 30, 1997 and 1996, respectively. The significant increase in Excess
Losses was primarily due to recognizing 100% of the losses of Hermes, effective
January 1, 1997, resulting in Excess Losses of $5.0 million for the six months
ended June 30, 1997. The Company would have recognized additional losses of $3.5
million for the six months ended June 30, 1996 had the Company been considered
the financing partner of Hermes during that time period. See "-- Overview." The
Company's losses from its ventures were primarily the result of most of its
ventures being in the early stages of operations. Sovintel and TCM, however,
generated combined earnings of $8.1 million and $5.0 million for the six months
ended June 30, 1997 and 1996, respectively, which partially offset losses
generated by other ventures. See "-- Results of Operations -- Non-Consolidated
Ventures."
 
     Interest, Net. GTS incurred interest expense of $7.2 million and $4.0
million for the six months ended June 30, 1997 and 1996, respectively. Interest
expense is comprised of interest accrued from debt maturing within one year,
long-term debt obligations, amortization of debt discount on the long-term debt
obligations and various other debt instruments. The increase in interest expense
was primarily due to increases in the Company's level of third party debt from
1996 to 1997. See "-- Liquidity and Capital Resources."
 
                                       38
<PAGE>   44
 
     GTS earned interest income of $2.2 million and $0.8 million for the six
months ended June 30, 1997 and 1996, respectively, primarily as a result of
investing the proceeds from equity and debt offerings in various highly liquid
investments.
 
     Provision for Income Taxes. The effective income tax rate was (2.1)% for
the six months ended June 30, 1997 and 1996. The Company's income tax rates are
significantly affected by foreign taxes and the utilization of net operating
losses. In addition, the Company operates world-wide in numerous tax
jurisdictions. As a result, losses incurred in one jurisdiction may not be
available to offset income in another.
 
  Year Ended December 31, 1996 compared to Year Ended December 31, 1995 and
  compared to Year Ended December 31, 1994
 
     Revenue. The Company's consolidated revenue was $24.1 million, $8.4 million
and $2.5 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The growth in revenue was attributable to the commencement in 1995
of commercial operations by TeleRoss Operating Company, as well as the continued
expansion of services and customer base in Central Europe.
 
     TeleRoss Operating Company generated revenue of $9.2 million and $3.8
million, representing 38.3% and 44.9% of the Company's consolidated revenue for
the years ended December 31, 1996 and 1995, respectively. Service revenue
represented 64.1% and 21.1% of TeleRoss Operating Company's revenue for the
years ended December 31, 1996 and 1995, respectively, with the balance of its
revenue in such periods principally represented by equipment sales. The growth
in revenue was a result of increased traffic volume generated by the TeleRoss
Ventures as they expanded to seven new cities during the year ended December 31,
1996, added customers in existing cities and installed several VSATs at customer
locations outside of cities in which they have a presence. Total intercity and
international minutes carried by TeleRoss Operating Company for the year ended
December 31, 1996 were 4.3 million and 0.3 million, respectively, as compared
with 0.2 million and 0.01 million, respectively, for the year ended December 31,
1995. The average revenue per minute for intercity and international traffic for
the year ended December 31, 1996 was $0.99 and $2.76, respectively, as compared
with $0.95 and $2.52, respectively, for the year ended December 31, 1995. The
increase in the average revenue per minute for both intercity and international
traffic was primarily attributable to the expanded geographic coverage of the
TeleRoss Ventures, because customers who are further away from Moscow were
charged a higher toll. The Company anticipates that equipment and installation
sales will continue to decline as a percentage of total TeleRoss Operating
Company revenue.
 
     GTS-Hungary and the Czech Companies accounted for $6.9 million and $2.3
million of the Company's consolidated revenue in 1996, respectively, compared to
$4.2 million and $0.3 million in 1995, respectively, and $1.3 million and none
in 1994, respectively. The growth in revenue of GTS-Hungary from 1994 to 1996
was due to the expansion of its customer base and the introduction of microwave
technology services. The Hungary state lottery accounted for 55.3%, 65.0% and
67.2% of GTS-Hungary's revenue in 1996, 1995 and 1994, respectively. The growth
in revenue of the Czech Companies was generated through increases in voice
traffic carried from sixteen buildings at December 31, 1996 as compared to eight
buildings at December 31, 1995.
 
     The remaining consolidated revenue of $5.7 million in 1996, related to
sales of equipment and consulting services.
 
     Although the Company expects increases in traffic volume in 1997, it
expects lower margins due to competition.
 
     Gross Margin. GTS's consolidated gross margin was $5.2 million, or 21.6% of
revenue, for the year ended December 31, 1996 and $0.02 million, or 0.0% of
revenue, for the years ended December 31, 1995 and 1994.
 
     TeleRoss Operating Company incurred a negative gross margin of $1.0 million
for both the years ended December 31, 1996 and 1995 which was the result of the
high fixed cost component of its network hub in Moscow. TeleRoss Operating
Company's margin is expected to improve to the extent that additional customers
increase utilization of existing capacity and allow TeleRoss Operating Company
to spread fixed
 
                                       39
<PAGE>   45
 
costs over a broader customer base. Traffic settlements and charges for lines
leased from outside vendors for the year ended December 31, 1996 remained
relatively stable compared to such charges for the year ended December 31, 1995.
 
     GTS-Hungary had a gross margin of $3.0 million, $1.7 million and $(0.3)
million, representing 43.4%, 40.5% and (23.1)% of GTS-Hungary's revenue for the
years ended December 31, 1996, 1995 and 1994, respectively. The favorable gross
margin trend reflected the increased utilization of GTS-Hungary's 1,000 VSAT
capacity hub located in Budapest. Management anticipates that competitive
pressures within the VSAT market may negatively affect future gross margins.
 
     The remaining gross margin of $3.2 million for the year ended December 31,
1996 was attributable to the higher margin sales of equipment and consulting
services. The Company expects such equipment sales and consulting services to
represent a significantly lower portion of revenue, and consequently a
significantly lower portion of gross margin, in the future.
 
     Operating Expenses. Consolidated operating costs were $52.9 million, $41.0
million and $12.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company's selling, general and administrative expenses were
comprised primarily of personnel related costs and professional and consulting
fees. The Company's corporate headquarters incurred costs of $24.6 million,
$21.4 million and $9.7 million, for the years ended December 31, 1996, 1995 and
1994, respectively. The increase in selling, general and administrative costs
reflected the growth in expenditures associated with building business
infrastructure for primarily the TeleRoss Operating Company and GTS-Hungary and
increasing corporate staff.
 
     Equity in (Losses)/Earnings of Ventures. GTS recognized losses from its
investments in non-consolidated ventures of $10.2 million, $7.9 million and $0.1
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Included in these losses were $5.7 million, $5.2 million and $0.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively, that related to
GTS's ownership share of the losses. In addition, the Company's results were
negatively affected due to the recognition of Excess Losses of $4.5 million and
$2.7 million for the years ended December 31, 1996 and 1995, respectively. See
"--Overview." The Company would have recognized additional losses of $8.2
million and $3.3 million for the years ended December 31, 1996 and 1995,
respectively, had the Company been considered the financing partner of Hermes
during those time periods. The Company's losses from its ventures were primarily
the result of most of its ventures being in the early stages of operations.
Sovintel and TCM, however, generated combined earnings of $11.8 million and $3.8
million for the years ended December 31, 1996 and 1995, respectively, which
partially offset losses generated by other ventures.
 
     Other Non-Operating Income. Favorably affecting the 1995 results was the
non-recurring $10.3 million gain the Company recognized as a result of its
settlement of certain claims with a third party.
 
     Interest, Net. GTS incurred interest expense of $11.1 million, $0.7 million
and $0.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in interest expense was due to the $60.0 million
increase in debt during 1996. See "--Liquidity and Capital Resources."
 
     GTS earned interest income of $3.6 million, $2.2 million and $1.2 million
for the years ended December 31, 1996, 1995 and 1994, respectively, primarily as
a result of investing the proceeds from private placements of common stock in
various highly liquid investments.
 
     Provision for Income Taxes. The effective income tax rate for the year
ended December 31, 1996 was (2.1)% as compared with (6.8)% for the year ended
December 31, 1995. These rates were significantly affected by foreign taxes and
the utilization of net operating losses. In addition, the Company operates
world-wide in numerous tax jurisdictions. As a result, losses incurred in one
jurisdiction may not be available to offset income in another. The Company had
no income tax expense for the year ended December 31, 1994.
 
                                       40
<PAGE>   46
 
RESULTS OF OPERATIONS -- NON-CONSOLIDATED VENTURES
 
  Six Months Ended June 30, 1997 compared to Six Months Ended June 30, 1996
 
     RUSSIA -- CIS
 
     Sovintel. Sovintel's revenue increased by 69.1% to $54.1 million for the
six months ended June 30, 1997, as compared to $32.0 million for the six months
ended June 30, 1996. The increase in revenue was primarily the result of
telecommunications services revenue which increased by $20.5 million to $41.3
million for six months ended June 30, 1997, as compared to $20.8 million for the
six months ended June 30, 1996.
 
     The growth in telecommunications services revenue resulted from Sovintel's
increased customer base in Moscow and traffic from other GTS ventures that
increased the volume of outgoing international and domestic minutes carried by
Sovintel to 29.2 million minutes of use ("MoU") for the six months ended June
30, 1997 as compared to 11.3 million MoU for the six months ended June 30, 1996.
Due to competitive pressures, the average revenue per minute for outgoing
international and domestic long distance traffic decreased by 23.2% for the six
months ended June 30, 1997 from the comparable period in 1996. Sovintel's
incoming international traffic revenue increased to $6.5 million for the six
months ended June 30, 1997 as compared to $2.2 million for the six months ended
June 30, 1996. Due to competitive pressures, the average revenue per minute
decreased by 12.9% from $0.31 for the six months ended June 30, 1996 to $0.27
for the six months ended June 30, 1997. The average revenue per minute for local
service traffic decreased to $0.07 from $0.08 for the six months ended June 30,
1997 and 1996, respectively. Included in Sovintel's 1997 traffic revenue was
$7.7 million for the six months ended June 30, 1997 that was related to
customers using phone numbers provided by TCM. Sovintel and TCM have an
arrangement whereby Sovintel reimburses TCM 50% of installation charges, monthly
fees and local traffic revenues and approximately 33% of the international/ long
distance billings from TCM-supplied phone numbers.
 
     Sovintel's non-traffic related revenue increased to $12.8 million for the
six months ended June 30, 1997 as compared to $11.2 million for the comparable
period in 1996. Sovintel's historically largest customer for port sales revenue,
MTS, received its own numbering plan in March 1997. Accordingly, management
expects revenue from port sales to decline as future port sales to reseller
companies will be affected by both MTS and TCM activities.
 
     Sovintel's gross margin percentage remained relatively unchanged at
approximately 39.2%, as the decrease in average revenue per minute for
international/domestic long distance was partially offset by comparable
decreases in average settlement cost per minute primarily as a result of rate
competition among the international carriers.
 
     Operating expenses were $8.1 million and $4.6 million, or 14.9% and 14.4%
of total revenue, for the six months ended June 30, 1997 and 1996, respectively.
The increase in operating expenses for the six months ended June 30, 1997 was
related to an increase in turnover taxes associated with revenues, and also
increased personnel, advertising and sales force costs required to support
Sovintel's growth.
 
     Income tax expense was $2.1 million and $1.1 million for the six months
ended June 30, 1997 and 1996, respectively. The increase in income tax expense
was attributable to Sovintel's profitable operations.
 
     TCM. TCM's revenue grew 67.1% to $12.9 million for the six months ended
June 30, 1997, from the comparable period in 1996. Traffic revenue increased to
$3.3 million for the six months ended June 30, 1997. Recurring port charge
revenue increased to $2.4 million from $0.7 million for the six months ended
June 30, 1997 and 1996, while sales of ports decreased to $4.2 million from $4.3
million for the six months ended June 30, 1997 and 1996, respectively.
 
     TCM's gross margin was $10.2 million and $6.4 million, or 79.1% and 83.1%
of total revenue, for the six months ended June 30, 1997 and 1996, respectively.
The decrease in gross margin as a percentage of revenue was attributable to
higher infrastructure and settlement costs.
 
     Operating expenses were $1.3 million and $1.2 million, or 9.7% and 17.1% of
total revenue, for the six months ended June 30, 1997 and 1996, respectively.
Personnel related costs, consulting expenses and turnover
 
                                       41
<PAGE>   47
 
taxes comprised approximately 50.0% and 51.0% for the six months ended June 30,
1997 and 1996 notwithstanding an increase in head count to 20 at June 30, 1997,
as compared to 7 at June 30, 1996.
 
     Sovam. Sovam's revenue increased by 60.2% to $8.0 million for the six
months ended June 30, 1997, from the comparable period in 1996. Sovam's revenue
was derived primarily from data service and application revenues. The increase
was attributed to the increase in the number of ports connected, increases in
bandwidth, customer demand for frame relay and TCP/IP data solutions, and a
63.9% increase in Russia On Line subscribers from approximately 1,890 at June
30, 1996 to approximately 3,091 at June 30, 1997. The continued growth in Russia
On Line resulted from the first quarter 1997 introduction of the E-1 channel to
improve the quality of service and capacity of the network.
 
     Sovam's gross margin was $2.9 million or 36.4% for the six months ended
June 30, 1997, up from $1.2 million, or 24.8%, for the six months ended June 30,
1996. The increase in gross margin was reflective of the higher proportion of
value added transportation service revenue and Sovam's low variable cost
structure.
 
     Operating expenses were $3.1 million and $2.8 million, or 38.3% and 55.8%
of total revenue, for the six months ended June 30, 1997 and 1996, respectively.
The increase in operating expenses was primarily attributable to the increase in
turnover taxes and personnel costs.
 
     TeleRoss Ventures. The TeleRoss Ventures are a series of 50% owned joint
ventures which provide installation services, sales support and customer service
through agency arrangements with TeleRoss Operating Company. See "-- Accounting
Methodology -- Accounting Methodology for TeleRoss." Revenue for the TeleRoss
Ventures for the six months ended June 30, 1997 and 1996 was $2.8 million and
$0.6 million, respectively. The increase in revenues reflected growth in
settlement fees charged to the TeleRoss Operating Company. The settlement fees
are based on minutes of use by regional customers in the core switched voice
services, as well as installation work and equipment sales.
 
     Gross margin as a percentage of total revenue was 75.0% and 57.1% for the
six months ended June 30, 1997 and 1996, respectively. The increase in margin
was the result of the low variable costs of providing services for the TeleRoss
Operating Company.
 
     Operating expenses of $1.6 million and $0.9 million were incurred for the
six months ended June 30, 1997 and 1996, respectively. The increase in operating
expenses was primarily attributable to personnel related costs, approximately
37.5% of total operating expenses, as evidenced by the increase in personnel to
95 at June 30, 1997 from 56 at June 30, 1996.
 
     GTS Cellular. The Company operates three cellular networks through
differing ownership structures: Vostok Mobile, PrimTelefone and Bancomsvyaz.
 
     Revenue for Vostok Mobile increased by 78.8% to $10.8 million for the six
months ended June 30, 1997, from the comparable period in 1996. Vostok's
cellular telecommunications revenue increased by $5.1 million for the six months
ended June 30, 1997, from the comparable period in 1996, as a result of
increased subscribership from approximately 3,300 at June 30, 1996 to
approximately 8,900 at June 30, 1997. Although revenue and volume of traffic
increased at similar rates, the average revenue per minute decreased slightly to
$0.44 per minute for the six months ended June 30, 1997, as compared to $0.46
for the same period in 1996. The remaining revenue was comprised of equipment
sales and installation revenue.
 
     Vostok Mobile's gross margin was $5.7 million and $2.8 million, or 53.3%
and 46.5% of total revenue, for the six months ended June 30, 1997 and 1996,
respectively. The increase in revenues and gross margin for the six months ended
June 30, 1997 was reflective of the growth in the subscriber base.
 
     Operating expenses were $5.0 million and $5.3 million for the six months
ended June 30, 1997 and 1996, respectively. The decrease in operating expenses
was attributed to development and start-up expenses related to new business
ventures entered into in 1996.
 
     Revenue for PrimTelefone increased by 54.0% to $5.0 million for the six
months ended June 30, 1997 from the comparable period in 1996. The increase in
revenue was primarily due to increases in cellular traffic revenue which
increased to $3.0 million from $1.4 million for the six months ended June 30,
1997 and 1996,
 
                                       42
<PAGE>   48
 
respectively. PrimTelefone's subscribership doubled to approximately 3,700 as of
June 30, 1997 in comparison to June 30, 1996. However, the increase in cellular
traffic revenue was partially offset by a decrease in handset revenues as a
result of a price reduction in handsets and connection fees due to increased
competition. Management expects pricing pressure to continue as competitors
lower cellular traffic tariffs and entry level pricing of equipment.
 
     PrimTelefone's gross margin was $3.3 million and $1.6 million, or 66.7% and
50.4% of total revenue, for the six months ended June 30, 1997 and 1996,
respectively. The increase in the gross margin was reflective of the growth in
the subscriber base and the fixed cost nature of the business.
 
     Operating expenses were $1.5 million and $0.9 million, or 29.7% and 29.1%
of total revenue, for the six months ended June 30, 1997 and 1996, respectively.
The increase in operating expenses reflected the growth of the business
infrastructure and increases in turnover taxes and personnel costs, as the total
number of employees increased to 51 at June 30, 1997.
 
     Revenue for Bancomsvyaz was $1.8 million for the six months ended June 30,
1997. Bancomsvyaz derived 42.9% and 30.1% of its revenue from traffic associated
with its cellular and overlay operations, respectively, for the six months ended
June 30, 1997. The remaining 27.0% of Bancomsvyaz's revenue was attributable to
the sale of handsets and related equipment for the six months ended June 30,
1997.
 
     Bancomsvyaz's gross margin was $0.3 million for the six months ended June
30, 1997, of which $0.1 million was associated with its cellular and overlay
operations. The remaining $0.2 million of gross margin was attributable to the
sale of handsets and related equipment.
 
     Operating expenses were $2.1 million for the six months ended June 30,
1997. The increase in operating expenses reflected the growth of the business
infrastructure and increases in advertising, marketing and personnel costs.
 
     WESTERN EUROPE
 
     Hermes. For the six months ended June 30, 1997, Hermes generated revenue of
$0.6 million. This revenue was generated from the operation of the Brussels to
Amsterdam segment of the Hermes Network, which began commercial operation in
November 1996. There was no revenue generated from operations for the six months
ended June 30, 1996.
 
     Gross Margin. Hermes had gross margins of $(2.7) million and $(2.3) million
for the six months ended June 30, 1997 and 1996, respectively. The unfavorable
gross margins were primarily due to higher depreciation expense on network
assets related to the Brussels to Amsterdam segment which were transferred from
construction in process to telecommunications equipment at the end of 1996.
 
     Operating Expenses. Operating expenses were $6.3 million and $4.7 million
for the six months ended June 30, 1997 and 1996, respectively. The increase in
operating expenses was due primarily to the increase in the number of employees.
The Company had 115 and 74 employees at June 30, 1997 and 1996, respectively.
 
     GTS-Monaco Access. In 1997, GTS-Monaco Access revenue increased
significantly to $4.5 million for the six months ended June 30, 1997 from $0.9
million for the six months ended June 30, 1996. The increase in revenue for the
six months ended June 30, 1997 was the result of additional customer contracts
and the corresponding increase in international minutes to 10.5 million MoU for
the six months ended June 30, 1997 from 2.3 million MoU in the comparable period
in 1996.
 
     Gross margin for the six months ended June 30, 1997 and 1996 was 3.1% and
(18.4)%, respectively. The growth resulted from an increased volume of business
in 1997 as compared to the start-up phase in 1996, when costs for termination of
traffic were higher than revenue.
 
     CENTRAL EUROPE
 
     EuroHivo. EuroHivo's revenue increased to $0.6 million for the six months
ended June 30, 1997 from $0.4 million in the comparable period in 1996. The
growth in revenue was primarily attributable to the higher
 
                                       43
<PAGE>   49
 
number of paging customers, although it was partially offset by lower revenue
per customer. The number of subscribers increased from approximately 7,900 at
June 30, 1996 to approximately 31,200 at June 30, 1997, which was attributed to
sales and marketing effort and lower prices for new subscribers. Furthermore,
revenue from existing customers declined as a result of devaluation of the
Hungarian currency against the U.S. dollar.
 
     Despite its revenue growth, EuroHivo continued to realize break-even gross
margins for the six months ended June 30, 1997.
 
     Operating expenses decreased by 8.6% to $0.8 million for the six months
ended June 30, 1997 from the comparable period in 1996. The decrease in
operating expenses was the result of a decrease in advertising expenses offset
by an increase in personnel costs and rent expenses.
 
     ASIA
 
     Most of the Company's ventures within the Asia region were in the start-up
phase and had not commenced operations in 1996. The non-consolidated ventures in
the Asia region had revenue of $0.7 million and $0.3 million for the six months
ended June 30, 1997 and 1996, respectively, which consisted primarily of sales
generated by the V-Tech business.
 
 Year Ended December 31, 1996 compared to Year Ended December 31, 1995 and
 compared to Year Ended December 31, 1994
 
     RUSSIA -- CIS
 
     Sovintel. Sovintel's revenue for the years ended December 31, 1996, 1995
and 1994 was $75.0 million, $44.3 million, and $20.7 million, respectively.
Sovintel's revenue was derived from telecommunications services, including
international, domestic and local traffic, and other non-traffic related revenue
associated with port and equipment sales, leased line installation and
maintenance. Telecommunications services revenue was $50.8 million, $26.8
million and $19.5 million, representing 67.7%, 60.5% and 94.2% of Sovintel's
total revenue, for the years ended December 31, 1996, 1995 and 1994,
respectively.
 
     Revenue from outgoing international, domestic long distance and Moscow
local traffic was $44.0 million, $24.6 million and $18.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively. This growth was due to
Sovintel's increased customers in Moscow and traffic from other GTS ventures
that generated outgoing international and domestic minutes carried by Sovintel
of 30.1 million, 12.6 million and 7.7 million minutes for the years ended
December 31, 1996, 1995 and 1994, respectively. Due to competitive pressures,
the average revenue per minute for outgoing international and domestic long
distance traffic decreased to $1.25 per minute for the year ended December 31,
1996, from $1.87 and $2.35 per minute for the years ended December 31, 1995 and
1994, respectively. Sovintel began providing Moscow local access services in
1995. The average revenue per minute for Moscow local traffic increased to $0.08
per minute for the year ended December 31, 1996, from $0.06 per minute for the
year ended December 31, 1995. Revenue from incoming international minutes was
$6.8 million, $2.2 million and $1.5 million for the years ended December 31,
1996, 1995 and 1994, respectively. Incoming traffic generated 24.3 million, 3.8
million and 2.0 million minutes for the years ended December 31, 1996, 1995 and
1994, respectively. Included in Sovintel's 1996 traffic revenue was $5.0 million
from customers using phone numbers provided by TCM.
 
     Sovintel's non-traffic related revenue of $24.2 million, $17.5 million and
$1.2 million for the years ended December 31, 1996, 1995 and 1994, respectively,
was primarily attributable to non-recurring port sales revenues of $12.4 million
and $14.4 million for the years ended December 31, 1996 and 1995, respectively.
Included in 1996 non-traffic related revenue was $3.7 million from one-time
installation charges related to TCM-supplied phone numbers. There were no
significant port sales in 1994.
 
     Sovintel's gross margin was $31.1 million, $18.0 million and $8.2 million,
or 41.5%, 40.6% and 39.6% of revenue, for the years ended December 31, 1996,
1995 and 1994, respectively. The gross margin percentage remained relatively
unchanged over the past three years as the decrease in average revenue per
minute for international and intercity calls was partially offset by the
decrease in average settlement cost per minute.
 
                                       44
<PAGE>   50
 
     Operating expenses were $10.3 million, $7.1 million and $4.6 million, or
13.7%, 16.0% and 22.2% of total revenue, for the years ended December 31, 1996,
1995 and 1994, respectively. Turnover taxes and personnel related costs
comprised the majority of the increase in selling, general and administrative
costs. The increase in personnel related costs reflected the growth in sales and
general operations of Sovintel.
 
     Income tax expense was $5.2 million and $2.6 million for the years ended
December 31, 1996 and 1995, respectively. The increase in income tax expense was
attributable to Sovintel's profitable operations. According to Russian
Federation tax holiday provisions, Sovintel was exempt from income taxes for a
two-year period beginning with the first year of taxable income, which was in
1993.
 
     TCM. TCM's total revenue was $16.5 million for the year ended December 31,
1996 and had minimal activities in 1995. Service revenue was $10.0 million in
1996, of which $4.1 million was derived from international and intercity traffic
through the Sovintel arrangement and the remaining $5.9 million was derived from
local traffic monthly fees billed directly by TCM. TCM generated $6.5 million in
port sale revenue in 1996, from the sale of 21,000 ports.
 
     In 1996, TCM had a gross margin of $13.2 million, or 80.0% of total
revenue. The gross margin was favorably affected because the revenue earned from
Sovintel was net of settlement costs and included only direct costs, with no
allocation for overhead costs. As traffic-related revenue becomes a higher
proportion of revenue, the gross margin percentage is expected to decrease.
 
     Operating expenses for the year ended December 31, 1996 were $1.9 million,
or 11.5% of total revenue. Personnel grew to 15 at December 31, 1996, compared
to 4 at December 31, 1995.
 
     Sovam. Sovam's revenue was $11.7 million, $4.4 million and $3.3 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Data service
revenue decreased from 96.0% of total revenue for the year ended December 31,
1994, to 91.0% for the year ended December 31, 1995, to 79.0% for the year ended
December 31, 1996. The number of data subscribers increased from approximately
1,330 at the end of 1994 to approximately 1,590 and 1,730 at the end of 1995 and
1996, respectively. Equipment and software sales increased from 4.0% for the
year ended December 31, 1994, to 8.0% for the year ended December 31, 1995, to
14.0% for the year ended December 31, 1996; however, the decrease in data
service revenue as a percentage of total revenue was attributed to the wider
variety of service offerings and the introduction of Russia On Line services.
The Company anticipates that this revenue will continue to decrease as a
percentage of total revenue as traffic revenues grow. Revenue related to Sovam's
Russia On Line services, which were introduced in 1995, increased from 1.4% of
total revenue for the year ended December 31, 1995 to 7.3% for the year ended
December 31, 1996. Although the number of Russia On Line subscribers increased
from approximately 400 at the end of 1995 to approximately 2,300 at the end of
1996, Sovam encountered international bandwidth capacity constraints during the
fourth quarter of 1996 that limited the growth rate for sales. Management
introduced an E-1 channel during the first quarter of 1997 to address this
problem.
 
     Gross margin was $3.4 million, $1.5 million and $1.8 million, or 29.1%,
34.1% and 54.6% of total revenue for the years ended December 31 in 1996, 1995
and 1994, respectively. The decline in gross margin as a percentage of revenue
was reflective of the higher cost of sales component in Sovam's recently
introduced products. In addition, gross margin in 1996 was negatively affected
by the decrease in revenue related to Russia On Line services to total revenue
in 1996. If future delays in working capital and capital expenditures occur that
result in capacity constraints or other problems, gross margin may be negatively
affected.
 
     Operating expenses were $5.7 million, $3.3 million and $2.1 million, or
48.7%, 75.0% and 63.6% of total revenue, for the years ended December 31, in
1996, 1995 and 1994, respectively. The increase in selling, general and
administrative expenses was attributable to the establishment and marketing of
the Russia On Line services in late 1995 and increase in turnover taxes.
 
     TeleRoss Ventures. Revenues for TeleRoss Ventures for the years ended
December 31, 1996 and 1995 were $2.4 million and $0.1 million, respectively.
Revenues resulted from settlement fees charged to TeleRoss Operating Company.
The growth in total revenue was the result of steady growth in sales of core
switched voice services in the five cities serviced in 1995 as well as the
addition of seven new cities to the network in 1996.
 
                                       45
<PAGE>   51
 
     Gross margin for the years ended December 31, 1996 and 1995 was $1.6
million and $0.1 million, respectively. The 66.7% margin for the year ended
December 31, 1996 was representative of the growth in revenue and reflected the
low variable costs of providing services for the TeleRoss Operating Company.
 
     Operating expenses of $2.3 million and $0.2 million were incurred for the
years ended December 31, 1996 and 1995, respectively.
 
     GTS Cellular. The Company operates three cellular networks through
differing ownership structures: Vostok Mobile, PrimTelefone and Bancomsvyaz.
 
     Revenue for Vostok Mobile was $16.5 million and $2.0 million for the years
ended December 31, 1996 and 1995, respectively. Vostok Mobile's subscribers grew
from approximately 850 at December 31, 1995 to approximately 6,880 at December
31, 1996. The average revenue per minute for traffic decreased to $0.39 per
minute for the year ended December 31, 1996 as compared to $0.59 for the year
ended December 31, 1995.
 
     Vostok Mobile's gross margin was $9.3 million and $1.1 million, or 56.4%
and 55.0% of total revenue for the years ended December 31, 1996 and 1995,
respectively. The increase in the gross margin as a percentage of revenue
reflected the growth in the subscriber base and the fixed cost nature of the
business.
 
     Operating expenses were $9.2 million and $4.7 million for the year ended
December 31, 1996 and 1995, respectively. The increase in selling, general and
administrative expenses reflected the growth of the business infrastructure and
increase in turnover taxes.
 
     Revenue for PrimTelefone was $8.4 million and $2.2 million for the years
ended December 31, 1996 and 1995, respectively. PrimTelefone derived 29.9% and
54.5% of its 1996 and 1995 revenue, respectively, from the sale of handsets and
related equipment to new and existing subscribers. PrimTelefone's subscribers
grew from approximately 800 at December 31, 1995 to approximately 2,800 at
December 31, 1996.
 
     PrimTelefone's gross margin was $4.7 million and $0.6 million, or 56.0% and
27.3% of total revenue, for the years ended December 31, 1996 and 1995,
respectively. The increase in the gross margin as a percentage of revenue was
reflective of the growth in the subscriber base and the fixed cost nature of the
business.
 
     Operating expenses were $3.7 million and $0.7 million for the years ended
December 31, 1996 and 1995, respectively, reflecting the growth of the business
infrastructure and increase in turnover taxes.
 
     Bancomsvyaz did not have significant operations until 1997.
 
     WESTERN EUROPE
 
     Hermes. Hermes represents substantially all of GTS's investment in the
Western Europe region. A small operational revenue stream was earned in 1996.
 
     Operating expenses were $16.0 million, $6.7 million and $0.2 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The increase in
selling, general and administrative expenses reflected Hermes' continued
transition from the start-up phase to the operational phase.
 
     GTS-Monaco Access. Limited international traffic was carried from GTS
subsidiaries through GTS-Monaco Access for termination worldwide during 1995
which resulted in minimal revenues earned. Total revenue was $3.9 million for
the year ended December 31, 1996 despite a three month delay in the completion
of the link between GTS-Monaco Access to Russia.
 
     Although termination costs were reduced substantially in 1996, gross
margins of $(0.4) million and $(0.3) million for the years December 31, 1996 and
1995, respectively, were negative primarily because of lower average revenue per
minute in the wholesale market, underutilization of capacity on several routes
and lower overall traffic than anticipated.
 
                                       46
<PAGE>   52
 
     CENTRAL EUROPE
 
     EuroHivo. EuroHivo's revenue was $1.0 million and $0.5 million for the
years ended December 31, 1996 and 1995, respectively. The growth in revenue was
reflective of the increase in subscriber levels, which in turn, was principally
a result of the fourth quarter 1996 launch of the POCSAG paging technology
protocol.
 
     Although revenue improved significantly during 1996, EuroHivo continued to
show negative gross margins of $(0.2) million and $(0.5) million for the years
ended December 31, 1996 and 1995, respectively, which was attributable to a
15.0% increase in pager costs due to the increased competition in the pager
market and the devaluation of the Hungarian currency relative to the U.S.
dollar.
 
     Operating expenses decreased to $1.9 million for the year ended December
31, 1996 from $2.4 million for the year ended December 31, 1995 despite a 64.0%
increase in personnel during 1996. This was primarily attributable to
management's decision to grow revenue through alternative measures resulting in
significant reductions to advertising expenditures in 1996.
 
     ASIA
 
     Most of the Company's ventures within the Asia region were in the start-up
phase and had not commenced operations in 1996. The non-consolidated ventures in
the Asia region had revenue of $7.0 million and $0.0 million for the years ended
December 31, 1996 and 1995, respectively. The revenue in 1996 consisted
principally of equipment sales. The Company believes that future revenue will be
derived primarily from providing telecommunications engineering and consulting
services.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The telecommunications business is capital intensive. The Company generally
is the primary source of funding for its ventures, both for working capital and
capital expenditures. Under a typical arrangement, GTS's venture partner
contributes the necessary licenses or permits under which the venture will
conduct its business, office space and other equipment. GTS's contribution is
generally cash and equipment, but may consist of other specific assets as
required by the joint venture agreement.
 
     The Company has primarily raised capital through the issuance of equity
securities. As of September 15, 1997, these issuances have raised $36.9 million,
$107.7 million, $42.1 million and $62.1 in 1997, 1996, 1995 and 1994,
respectively, net of placement fees, for a total of $248.8 million. In addition,
as of September 15, 1997, the Company received $144.8 million, $60.0 million and
$23.3 million in 1997, 1996 and 1995, respectively, under various debt
agreements. Included within the debt proceeds identified above, the Company
received $3.5 million, $60.0 million and $10.0 million in 1997, 1996 and 1995,
respectively, from lenders who are affiliated with, and are considered related
parties to, the Company as a result of their ownership of the Company's common
stock.
 
     The Company had working capital of $6.5 million as of June 30, 1997 and a
working capital deficit of $0.5 million as of June 30, 1996. The Company had an
accumulated deficit of $165.6 million as of June 30, 1997, including a net loss
of approximately $39.7 million and $32.2 million for the six months ended June
30, 1997 and 1996, respectively. During 1997, the Company has incurred and
expects to continue to incur substantial expenditures to fund the working
capital requirements of its ventures, to provide capital equipment for certain
of its ventures, and to engage in new development and acquisitions.
 
     GTS will require substantial capital investment to execute its business
plans and to fund expected operating losses. Management expects that GTS and its
ventures will incur over $475 million of capital expenditures and investments in
ventures during the next three years, of which approximately $200 million will
be incurred in 1997. The Company has obtained funds through a variety of
financing arrangements, including (i) the sale in September 1997 of $39.2
million (of which $8 million remains to be funded) of GTS common stock in a
private placement of equity for $23.50 per share, (ii) the issuance in August
1997 of $265.0 million in gross proceeds (of which $56.5 million was placed into
escrow to fund the first two years' interest payments) of 11.5% Senior Notes by
Hermes, and (iii) the issuance in July 1997 of $144.8 million in gross
 
                                       47
<PAGE>   53
 
proceeds of convertible bonds by GTS, that are convertible into common stock
upon the Company's completion of a complying equity offering.
 
     The Company believes that the net proceeds from the Offerings, together
with existing cash and cash flow from operations, will be sufficient to fund its
expected capital needs until at least June 1999. The Company expects that it may
require additional capital to execute its current business plan and to fund
expected operating losses, as well as to consummate future acquisitions and
exploit opportunities to expand and develop its businesses. There can be no
assurances that the Company will be able to consummate additional financing on
favorable terms. As a result, the Company may be subject to additional or more
restrictive financial covenants, its interest obligations may increase
significantly and its existing shareholders may be adversely diluted. Failure to
generate sufficient funds in the future, whether from operations or by raising
additional debt or equity capital, may require the Company to delay or abandon
some or all of its anticipated expenditures, to sell assets, or both, either of
which could have a material adverse effect on the operations of the Company.
 
  Hermes
 
     Construction of the Hermes fiber optic network is one of the Company's most
significant business activities. The buildout of the network is expected to
require approximately $335 million of capital expenditures, with approximately
$100 million required for initial five country network. As of June 30, 1997,
approximately $22.6 million has been spent on network capital expenditure. In
August 1997, Hermes completed the issuance of $265.0 million in gross proceeds
(of which $56.5 million was placed into escrow to fund the first two years'
interest payments) of 11.5% Senior Notes due in August 2007. The Senior Notes
will be general unsecured obligations of Hermes. Hermes currently estimates that
after the issuance of these Senior Notes, Hermes' capital resources will be
sufficient to fund operations and expected network development through December
1998, at which time it may be required to obtain additional funds. Sources of
capital to fund network development after 1998 may include internally generated
funds, bank debt and vendor financing. Hermes is currently in discussion with a
number of financial institutions to obtain debt financing and to negotiate
vendor financing with key suppliers of network equipment. Any failure to obtain
necessary financing may require Hermes to delay or abandon its plans for the
deploying the remainder of the network and would jeopardize the viability of
Hermes, or may require the Company to make additional capital contributions to
Hermes at the expense of the Company's other operations, either of which could
have a material adverse effect on the operations of the Company. There can be no
assurance that GTS or its partners in Hermes would have sufficient capital to
make contributions to Hermes, or that they would be willing to do so.
 
     In January and February 1997, additional loans of ECU 6.5 million
(approximately $7.5 million) were advanced to Hermes by a wholly-owned
subsidiary of the Company. These loans were converted to equity upon completion
of the first phase of the Hermes Recapitalization, as discussed in the notes to
the unaudited, condensed, consolidated financial statements, to increase the
equity of Hermes. See "Business -- Western Europe -- Hermes -- Hermes
Recapitalization."
 
  Liquidity Analysis
 
     The Company had cash and cash equivalents of $14.6 million and $31.3
million on a consolidated and combined basis method of financial statement
presentation, respectively, as of June 30, 1997. The Company had restricted cash
of $13.4 million and $10.1 million on a consolidated and combined basis method
of financial statement presentation, respectively, as of June 30, 1997.
Restricted cash included amounts held for equipment purchases under various debt
agreements as well as cash maintained in foreign financial institutions which
may not be readily convertible into dollars or easily repatriated.
 
     During the six months ended June 30, 1997 and 1996, the Company used $23.3
million and $26.0 million, respectively, of cash for operating activities. Cash
used for investing activities was $17.1 million and $27.7 million for the six
months ended June 30, 1997 and 1996, respectively. The use of cash in operations
and for investing activities reflected the development and build-out of existing
telecommunications networks, the funding of fully operational ventures and the
establishment of many new telecommunications businesses.
 
                                       48
<PAGE>   54
 
                                    BUSINESS
 
INTRODUCTION
 
     GTS is a provider of a broad range of telecommunications services to
businesses, other telecommunications service providers and consumers in Russia
and the CIS, Central Europe and Asia. Through Hermes, GTS is developing, and
operating the initial segment of, a pan-European high capacity fiber optic
network that is designed to interconnect a majority of the largest Western and
Central European cities and to transport international voice, data and
multimedia/image video traffic for other carriers throughout Western and Central
Europe. GTS's strategy to develop its businesses generally has been to establish
joint ventures with a strong local partner or partners while maintaining a
significant degree of operational control. The Company's business activities
consist of the ownership and operation of (i) international long distance
businesses, which operate through international gateways that provide
international switching services and transmission capacity, (ii) local access
networks, which provide local telephone service, (iii) cellular networks, which
provide wireless telecommunications services, (iv) a domestic long distance
business, (v) data networks and (vi) carriers' carrier networks, which provide
high volume transmission capacity to other carriers. For the year ended December
31, 1996, and the six months ended June 30, 1997, ventures operated by GTS
generated approximately $152.2 million and $109.2 million, respectively, in
combined revenue and as of June 30, 1997 were serving over 32,800 customers.
 
     In Russia and the CIS, GTS's objective is to become the premier alternative
telecommunications operator. To attain its objective, the Company has partnered
with regional telephone companies and with Rostelecom, the national long
distance carrier in Russia. The Company currently operates in 23 oblasts
(regions) and the city of Moscow in Russia, as well as in 11 additional cities
in the CIS, and believes it is well-positioned to become the leading independent
telecommunications service provider in Russia. GTS operates five lines of
business in Russia and the CIS, which in the aggregate accounted for
approximately 85.6% and 88.4% of the Company's combined revenue, for the year
ended December 31, 1996 and the six months ended June 30, 1997, respectively.
These businesses include: (i) Sovintel, which provides Moscow, and recently St.
Petersburg, with international long distance and local telephone services and
access to the major domestic long distance carriers; (ii) TCM, which provides
local access services in Moscow; (iii) TeleRoss, which provides domestic long
distance services in fourteen cities in Russia, including Moscow, as well as
VSAT service to customers outside its primary long distance satellite network;
(iv) Sovam, which provides data services, including high-speed data
transmission, electronic mail, Internet access services, as well as Russia On
Line, the first Russian language internet service; and (v) GTS Cellular, which
operates cellular networks in twelve regions in Russia and also in Kiev,
Ukraine, with licenses covering regions with an aggregate population of
approximately 25 million people at the end of 1996. Whenever practical, GTS's
businesses integrate and co-market their service offerings in Russia and the
CIS, utilizing TeleRoss as the domestic long distance provider, Sovintel as the
international gateway, TCM and GTS Cellular for local access, and Sovam as the
data communications and Internet access network for business applications and
on-line services. Together, GTS's Russian and CIS ventures carried 202.5 million
and 179.3 million minutes of traffic for the year ended December 31, 1996 and
the six months ended June 30, 1997, respectively, and had approximately 27,600
customers, including approximately 13,500 cellular subscribers, as of June 30,
1997. See "-- Russia and the CIS."
 
     In Western Europe, GTS seeks to position itself as the leading independent
carriers' carrier through the development of two ventures, Hermes and GTS-Monaco
Access. Hermes is developing an approximately 17,000 kilometer pan-European high
capacity fiber optic network designed to interconnect a majority of Western and
Central European cities. Hermes is currently operating over an approximately
240-kilometer portion of the network linking Brussels and Amsterdam. Hermes
expects the initial five country network to be placed in operation in the second
quarter of 1998 and the 17,000 kilometer network to be operational during the
year 2000. Hermes' objective is to become the leading pan-European carriers'
carrier by providing centrally managed cross-border telecommunications
transmission capacity to telecommunications companies including traditional PTOs
and New Entrants. GTS-Monaco Access operates an international gateway in Monaco
in partnership with, and utilizing the existing gateway infrastructure of, the
Principality of Monaco
 
                                       49
<PAGE>   55
 
and provides advanced transit and routing of international calls to other
telecommunications operators. Through its Hermes and GTS-Monaco Access ventures,
GTS is building a new network for transporting voice, data and multimedia/image
traffic for other carriers throughout Western Europe and for worldwide
international voice, data and multimedia/image traffic that either originates or
terminates in, or transits through, Western Europe. See " -- Western Europe."
 
     In Central Europe, GTS's objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to governmental and commercial customers in
Hungary and the Czech Republic. In the Czech Republic, the Company also provides
outgoing international voice services. Through its subsidiary GTS-Hungary, GTS
operates a VSAT network in Hungary, which GTS believes is the largest VSAT
network in Central Europe as measured by number of VSAT sites. In addition,
through its subsidiary EuroHivo, GTS operates a national paging network in
Hungary and, through its subsidiary CzechNet, operates an international gateway
and a data services network in Prague and the Czech Republic. During 1996, GTS's
ventures in the Czech Republic carried approximately 1.6 million minutes of
international long distance voice and data traffic. GTS's strategy is to expand
its service offerings as the regulatory environment permits, leveraging its
existing VSAT and international gateway infrastructure where possible and
providing a broad range of services to its target markets. For the year ended
December 31, 1996 and the six months ended June 30, 1997, the Company's Central
Europe ventures generated approximately $9.7 million and $6.7 million,
respectively, in combined revenue and as of June 30, 1997 were serving over
5,200 customers. See " -- Central Europe."
 
     In Asia, GTS's objective is to become an established and diversified
telecommunications provider in China and India. In China, GTS participates in
ventures which provide technical, operational, financial, engineering and other
services to two VSAT networks and a planned cellular network. In India, the
Company's venture carries international traffic for certain multinational
corporations. Although GTS does not currently own or operate significant
telecommunications assets in Asia, GTS seeks to leverage its position in these
countries to capitalize on opportunities that arise as the Chinese and Indian
telecommunications markets develop. To date, the Company's Asian operations have
not had a significant impact on the Company's combined results of operations,
representing $8.6 million and $1.0 million, or 5.7% and 0.9% of the Company's
combined revenue for the year ended December 31, 1996 and for the six months
ended June 30, 1997, respectively. See " -- Asia."
 
BUSINESS STRATEGY
 
     GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS's goal in emerging markets is to establish
itself as the leading alternative to the incumbent telecommunications service
providers and as a premier provider of value-added services. In addition, the
Company seeks to position itself as the leading independent carriers' carrier
within Western Europe through the development of a pan-European fiber optic
network in partnership with Western European railways and other infrastructure
providers, and an international gateway in partnership with, and utilizing the
gateway infrastructure of, the Principality of Monaco.
 
     GTS believes that it will be able to successfully operate its businesses
and develop business opportunities by pursuing the following strategies:
 
     - Identify and Seize Early Market Opportunities. GTS's primary strategy is
       to identify less developed markets in which the incumbent operator offers
       inadequate service and where liberalization of telecommunications
       regulations may be pending. The Company believes entering these less
       developed markets quickly is a key competitive advantage in the global
       telecommunications market. GTS leverages its management's knowledge of
       the markets in which the Company operates to assess and react quickly
       when attractive business opportunities arise.
 
     - Establish Joint Ventures with Experienced Local Partners. GTS seeks to
       establish and maintain strategic partnerships and relationships with key
       telecommunications operators and service providers in the countries in
       which it operates. The Company believes that these relationships increase
       its ability to
 
                                       50
<PAGE>   56
 
       anticipate and respond to changes in the regulatory and legal environment
       and assist with license renewal and expansion of its operating companies.
 
     - Retain Significant Operational Control. In general, GTS actively
       participates in the management of its ventures by (i) providing most of
       the funding for the ventures' operations, (ii) selecting key members of
       the local management team, (iii) developing business plans and marketing
       strategies together with local management, (iv) monitoring operating
       functions, (v) maintaining close working relationships with local
       partners and (vi) integrating its networks and businesses in a manner
       which is consistent with the Company's overall strategic objectives.
 
     - Build Infrastructure to Provide High Quality Services. GTS continues to
       develop and expand its network infrastructure. The Company believes that
       its networks offer service, quality and cost advantages over incumbent
       providers as a result of the Company's customer support, network
       monitoring, management systems and its ability to integrate and co-market
       its service offerings.
 
     - Leverage Management Depth and Experience. GTS's management has
       significant experience in the development and operation of
       telecommunications businesses outside the United States. The Company
       believes that this experience, together with the Company's extensive
       operations, has provided its management with the ability to identify,
       evaluate and pursue international telecommunications business
       opportunities. Additionally, GTS has assembled a management team
       comprised of executives with extensive experience managing
       telecommunications companies in the respective local markets. GTS
       believes that its management team possesses a broad knowledge of relevant
       political and regulatory structures, as well as the cultural awareness
       and fluency with international and local business practices necessary to
       implement the Company's objectives.
 
     - Ability to Access Capital. In general, the Company's financing strategy
       is to establish parent level funding to meet general corporate needs and
       the costs of start-ups and acquisitions and, when it is possible and
       cost-effective, to finance ongoing operations at the venture level. Since
       1993, the Company has raised approximately $269 million in equity and
       approximately $215 million of debt (of which approximately $74 million
       was raised through shareholders). In addition, Hermes completed a $265
       million private placement of senior notes (of which $56.5 million was
       placed in escrow for the first two years' interest payments) in 1997. The
       Company's principal investors include affiliates of George Soros and Alan
       B. Slifka.
 
     In addition to its overall business strategy, GTS has developed specific
market strategies to achieve its goals in emerging markets and Western Europe.
 
     Emerging Markets. The Company pursues its goals in emerging markets through
a three stage approach of market entry, market expansion and market integration.
 
     - Market Entry. GTS identifies a market as a suitable target for entry
       based upon: (i) superior growth prospects for such market, demonstrated
       by growing demand for high quality telecommunications services; (ii) the
       provision of inadequate services by incumbent providers, typically
       resulting from the incumbents' unwillingness to offer high quality
       services with reliable customer support at attractive prices; and (iii)
       attractive regulatory environments in which emerging alternative
       telecommunications providers such as GTS have, or expect to have over a
       clearly defined time horizon, the ability to compete on a substantially
       equal basis with the incumbent providers in terms of certain services and
       the cost of providing those services. Once GTS has identified a market as
       suitable for entry, the Company seeks to establish its presence in that
       market by establishing a venture with a strong local partner or partners.
       In general, GTS maintains a significant degree of operational control in
       such ventures. Through such ventures, the Company benefits from its
       partners' ability to provide infrastructure, regulatory expertise and
       personnel that will provide GTS with a competitive advantage in entering
       that market. When entering a new market, GTS's strategy is to provide its
       customers with higher quality service as compared to the services offered
       by incumbent providers.
 
     - Market Expansion. Having entered a market successfully and established a
       limited service offering to its targeted customer base, GTS then seeks to
       expand the range of services it offers to existing and
 
                                       51
<PAGE>   57
 
       potential customers and to further develop its relationships with local
       partners. By broadening its service offerings, GTS anticipates achieving
       increased economies of scale through the common use of administrative and
       operating functions already in place, increasing the Company's share of
       its customers' telecommunications spending and expanding GTS's base of
       potential customers through the provision of a bundled service offering.
       The Company also seeks to expand its targeted geographic market by
       forming new partnerships, installing infrastructure and offering services
       in additional geographic regions, allowing the Company to further enhance
       its operating leverage and ability to service its customers'
       telecommunications needs.
 
     - Market Integration. GTS ultimately intends to integrate and co-market its
       service offerings in each of the markets in which it operates. The
       Company believes such integration enables it to enhance its operating
       efficiency by leveraging its distribution channels, infrastructure and
       networks, and management information systems. As customers develop a need
       for a broader variety of telecommunications services, the Company
       believes GTS's integrated operations will represent an attractive service
       alternative for customers seeking a single provider with the ability to
       meet all their telecommunications needs.
 
     Western Europe. The Company seeks to position itself as the leading
independent carriers' carrier within Western Europe through the development of
Hermes' pan-European fiber optic network and the operation of GTS-Monaco
Access's international gateway in partnership with, and utilizing the gateway
infrastructure of, the Principality of Monaco. The overall strategy of GTS in
Western Europe is to complement and enhance the services provided by emerging
carriers and PTOs in a way that helps them to more successfully meet the needs
of their end-user customers. Hermes seeks to enter the market ahead of
competition and encourage a wide variety of carriers to use its network with
service offerings that meet their needs. To establish itself as the leading
carriers' carrier for international telecommunications within Europe, Hermes
intends to provide its customers with significantly higher quality transmission
and advanced network capabilities at a competitive price by utilizing advanced,
uniform technology across the region and providing redundant routing for higher
levels of reliability. In addition, Hermes is not aligned with any major Western
telecommunications company and GTS believes that Hermes' status as an
independent developer and operator of a new pan-European fiber optic network
will make it attractive to primary carriers throughout Western Europe.
 
RUSSIA AND THE CIS
 
     OVERVIEW
 
     GTS is a leading provider of a broad range of telecommunications services
in Russia. GTS's services include international long distance services, domestic
long distance services, high speed data transmission and Internet access,
cellular services and local access services. GTS was among the first foreign
telecommunications operators in the CIS, where it began offering data links to
the United States in 1986, international long distance services in 1992, local
access to its networks in 1994 and cellular services in 1995. GTS has developed
these businesses into a leading provider of telecommunications service offerings
in Russia by building its own infrastructure, including a fully digital overlay
network and interconnections with its local Russian telecommunications partners.
 
     The Company believes that evolving changes in government policy over the
last several years and the overall inadequacy of basic telecommunications
services throughout Russia have created a significant opportunity. Before 1990,
all international, domestic long distance and local telecommunications in the
Soviet Union were provided by a monopoly state telecommunications company
managed by the Ministry of Posts and Communications. In 1990, the Council of
Ministers established a joint-stock company called Sovtelecom and transferred to
it all of the telecommunications assets and operations of the Soviet Ministry of
Posts and Communications. Following the dissolution of the Soviet Union in 1991,
the name of the company was changed to Intertelecom. In 1992, the Russian
government decided to split Intertelecom into several components to foster
privatization, competition and investment. The international and long-distance
assets and operations were combined into Rostelecom, creating a monopolistic
service provider. The local telecommunications assets and operations were broken
up into 88 independent regional joint-stock companies, seven
 
                                       52
<PAGE>   58
 
of which serve cities, including the Moscow City Telephone Network and the
Petersburg Telephone Network. Most of the regional companies have a
telecommunications trunk operator and provide a domestic long distance service
within their service region. Domestic long distance calls to and from areas
outside the companies' service area, as well as international calls, are
switched to and from Rostelecom, which forwards the calls to and from another
regional company or a foreign carrier for international calls. Exceptions to
this rule include the seven city operators. In Moscow and St. Petersburg, the
trunk operators have been isolated into separate, long distance companies called
Moscow MMT and St. Petersburg MMT. All domestic long distance and international
calls originating from or terminating in Moscow and St. Petersburg are switched
through the MMTs, which forward the calls to and from Rostelecom.
 
     Following the former Soviet Union's transformation from a centralized
economy to a more market-oriented economy, increased demand from emerging
private businesses and from individuals, together with the poor state of the
public telephone network, has led to rapid growth in the telecommunications
sector in Russia and the CIS. In 1991 the MOC was established as the Russian
successor to the Soviet Ministry of Posts and Communications to regulate and
improve the telecommunications industry and to be the government's
representative for its ownership share of 88 regional operating companies, the
assets currently held by Svyazinvest (then the monopoly international and
domestic long distance service provider) and national radio, television and
satellite operating companies. This enabled the MOC and operating organizations
to begin the privatization process, attract foreign investment and initiate
joint ventures with foreign partners.
 
     Although it remains subject to certain restrictions, significant progress
in privatization of the telecommunications industry in Russia and the CIS has
occurred. Under Russian law, state-owned enterprises within the
telecommunications sector were subject to privatization but only pursuant to a
decision of the Russian government in each individual case and with the state
retaining a certain percentage of the stock of the privatized entity for three
years, subject to extension for national security reasons. At present, virtually
all of the former state telecommunications enterprises have been privatized and,
subject to the above restrictions, shares of the newly formed joint stock
companies have been sold to the public. Also, a significant number of private
operators provide a wide variety of telecommunications services pursuant to
licenses from the MOC to a growing number of customers throughout Russia.
According to the MOC, more than 6,000 licenses have been granted to
telecommunications operators in Russia, a large portion of which is assumed to
represent licenses reissued to the same operators as a result of their
reorganization or obligation to hold such licenses on counterfeit-proof paper.
 
     In October 1994, the President authorized the establishment of Svyazinvest
with the stated purpose of fostering greater efficiency and economies of scale
within the industry through competition. As a wholly government-owned company,
Svyazinvest was granted a controlling stake in approximately 85 regional
telecommunications companies in order to compete in these respective markets.
Svyazinvest was also given control of more than 20 million of the 25.5 million
telephone lines in Russia, except in Moscow and St. Petersburg.
 
     In April 1997, President Yeltsin approved the transfer of the federal
government's 51% stake in Rostelecom, as well as similar stakes in Central
Telegraph (the national PTO), the Yekaterinberg City Telephone Network and
Giprosvyaz (a telecommunications research institute), to Svyazinvest. On July
30, 1997, Mustcom Ltd., a Cyprus-based company that represents the interests of
a consortium which includes ICFI Cyprus, Renaissance International Ltd.,
Deutsche Morgan Grenfell, Morgan Stanley, and an affiliate of George Soros,
purchased a 25% stake in Svyazinvest for $1.87 billion. The President has also
authorized the sale of another 24% of Svyazinvest at a future date. The Russian
government has announced that it will retain a controlling 51% interest in
Svyazinvest.
 
     The Russian government's interest in Svyazinvest is held by the MOC, which
was recently reclassified as the State Committee on Telecommunications and
Informatics during a recent government reorganization. The MOC remains the
central body of federal authority in the Russian Federation, having
responsibility for state management of the communications industry and
supervisory responsibility for the condition and development of all types of
communications.
 
                                       53
<PAGE>   59
 
     Despite the recent changes in the Russian telecommunications industry, the
level of telecommunications service generally available from most public
operators in Moscow remains significantly below that available in cities of
Western Europe and the United States, although in recent years, the Moscow local
telephone infrastructure has benefitted from significant capital investment. By
1995, there were approximately 16 lines per 100 persons in Russia and 45 lines
per person in Moscow. In comparison, there were 60 and 58 lines per 100 persons
in the United States and Western Europe, respectively. In addition, the quality
of services, reflected as the percentage of digital switching in local telephone
networks, currently is approximately 12% in Russia compared to 65% and 66% in
the United States and Western Europe, respectively.
 
     Outside Moscow (and to a lesser extent St. Petersburg), most standard
Russian telecommunications equipment is obsolete. For example, many of the
telephone exchanges are electromechanical and most telephones still use pulse
dialing. The Russian population is over 145 million, of which approximately two-
thirds is concentrated in urban areas. The telecommunications market in Russia
currently includes a number of operators that compete in different service
offering segments -- local, inter-city, international, data and cellular
services. In large measure, the relative lack of economic development in the
regions accounts for the lack of improvement in local telecommunications
infrastructure. Although the regions still generally rely on an outdated
infrastructure inherited from the former Soviet Union, they are starting to
resort to sophisticated sources of finance, such as municipal bond offerings, in
order to upgrade it.
 
     Growth in the Russian telecommunications industry has been principally
driven by businesses in Moscow requiring international and domestic long
distance voice and data services and by consumers using mobile telephony. This
growth has been most significant as multinational corporations have established
a presence in Moscow and Russian businesses have begun to expand. The service
sector, which includes operations in distribution, financial services and
professional services and tends to be the most telecommunications-intensive
service sector of the economy, is growing rapidly in Moscow. Since moving to a
more market-oriented economy, the economic conditions in the outlying regions in
Russia have also generally improved. The telecommunications industry in the
outlying regions has experienced recent growth, principally as a result of
growth in the industrial sector as well as the establishment of satellite
offices in the regions by multinational corporations and growing Russian
businesses. The extent of overall market growth will depend in part on the rate
at which the Russian economy expands, although recent revenue growth in the
sector has been significant (in spite of a declining economy in certain regions)
because of increasing traffic from pre-existing customers and the normalization
of tariffs for business services.
 
     The Company believes it is well-positioned to take advantage of market
growth factors due to (i) its early market entry, (ii) its strong infrastructure
position in Moscow, by far the most important regional market, (iii) the local
market experience of its local partners, (iv) the extent of its existing
customer base and (v) its extensive range of international and domestic
telecommunications services. GTS believes it is the only operator in Russia
currently capable of providing a broad range of service offerings and marketing
them as a single end-to-end service offering for its customers.
 
     STRATEGY
 
     GTS's objective is to become the premiere carrier in Russia and other key
growth markets of the CIS. To attain this objective, the Company has developed
and implemented the following strategy:
 
     - Develop Strong Local Partnerships. The Company has and continues to
       develop its Russian and CIS business through alliances with experienced
       local partners, which to date have been primarily regional telephone
       companies and Rostelecom. These ventures combine the management,
       financial and marketing expertise of GTS together with its partner's
       ability to provide infrastructure and local regulatory experience. GTS
       believes that these relationships lend it credibility and increase its
       ability to anticipate and respond to the evolving regulatory and legal
       environment. GTS maintains a significant degree of managerial and
       operational control in its joint ventures through its foundation
       documents, which enable GTS to develop them in a manner consistent with
       its overall strategic objectives.
 
     - Expand Customer Base. The Company continues to expand its customer base
       through the provision of basic telephone and digital services in markets
       where such services are not currently provided. Once
 
                                       54
<PAGE>   60
 
       they have established a presence in a market, the Company's ventures seek
       for opportunities to expand further into neighboring regions and cities.
 
     - Increase Range of Digital Services. As its business customers expand
       their operations throughout Russia and the CIS and as their
       telecommunications needs become more sophisticated, the Company seeks to
       increase its revenues by expanding the range of integrated digital
       services offered to its customers.
 
     - Offer High Quality Telecommunications Service and Customer Service. The
       Company continues to invest in and build sophisticated high-speed digital
       networks and other infrastructure through which customers can gain local
       access to the Company's services. In addition to providing advanced, high
       quality network infrastructure, the Company emphasizes and offers its
       customers a level of customer service which the Company believes cannot
       be found elsewhere in the market.
 
     To date, GTS has made substantial progress employing this strategy. The
Company provides digital voice, data and local services in Moscow through its
Sovintel, Sovam and TCM ventures and provides these same services to thirteen
additional Russian cities through its TeleRoss long distance network.
 
     OPERATIONS
 
     GTS provides a broad range of telecommunications services in Russia,
including international long distance services, domestic long distance services,
cellular services, high speed data transmission, Internet access and local
access services. These services are supported by operator assistance, itemized
call reporting and billing, and other value-added capabilities that leverage
GTS's investment in advanced switching, data collection and processing
equipment. GTS also provides customized systems integration, including PABXs,
key systems, wiring and interconnectivity. GTS's own infrastructure is
supplemented with dedicated and leased capacity to allow GTS to bypass the
severely congested and poorly maintained local, domestic and long distance
circuits of the Russian carriers. Whenever practical, GTS's business units
integrate and co-market their service offerings, utilizing TeleRoss as the long
distance provider, Sovintel as the international gateway, TCM and GTS Cellular
for local access, and Sovam as the data communications and Internet access
network for business applications and on-line services. Through this integrated
marketing approach, GTS is able to provide comprehensive telecommunications
solutions to multinational corporations operating throughout Russia and the CIS.
 
     The following table sets forth certain operating data related to the
Company's operating ventures in Russia and the CIS.
 
<TABLE>
<CAPTION>
                                                      AT AND FOR THE YEAR
                                                       ENDED DECEMBER 31,        AT AND FOR THE SIX
                                                    ------------------------        MONTHS ENDED
                                                    1994(1)    1995    1996        JUNE 30, 1997
                                                    -------    ----    -----    --------------------
<S>                                                 <C>        <C>     <C>      <C>
Cities In Service.................................    5        24       32              39
Total Voice Minutes (millions)(2)
  Inter-city......................................   --  (3)    2.3     15.8            19.5
  Local...........................................    0.0      22.1    133.0           107.0
  International Outgoing..........................    7.7(3)   10.5     20.5            20.2
  Incoming........................................    2.0       4.5     33.2            32.6
Total Data Customers (thousands)..................    1.9       3.0      6.3            14.1
Total Cellular Subscribers (thousands)............    0.0       1.6      9.8            13.5
</TABLE>
 
- ---------------
 
(1) In 1994, the Company's interest in ventures operating in Russia consisted of
    a ten-percent interest in Baltic Communications Limited, a one-third
    interest in Sovam, and Sovintel, in which the Company owned a 12.5% interest
    through May 1994 and a 50% interest thereafter.
 
(2) Amounts include minutes between Company affiliates.
 
(3) International and inter-city long distance outgoing minutes not segregated
    in 1994.
 
                                       55
<PAGE>   61
 
     SOVINTEL
 
     GTS owns 50% of Sovintel, a joint venture with Rostelecom, the national
long distance carrier. Sovintel was founded in 1990 by GTS, Rostelecom and GTE
Spacenet, with GTS acquiring GTE Spacenet's interest in 1994. Sovintel markets a
broad range of high quality telecommunications services by (i) directly
providing international direct dial access to over 170 countries and private
line dedicated voice channels and (ii) leveraging the infrastructure and
services of the other GTS ventures, including TeleRoss, TCM and Sovam. In
addition, Sovintel provides and installs for its customers equipment such as
PABXs, key systems and wiring and provides maintenance and other value-added
services. Sovintel customers, which primarily consist of businesses, hotels and
Moscow-based cellular operators, are able to access these telecommunications
services through Sovintel's fully-digital overlay network in Moscow. In
addition, Sovintel has recently commenced construction of a limited network in
St. Petersburg that is interconnected to Sovintel's Moscow network and is
intended to support Sovintel's Moscow clients which have a presence in St.
Petersburg. Sovintel serviced over 40,249 telephone numbers, or "ports," for
business customers and cellular providers and had over 230 employees as of June
30, 1997.
 
     Sovintel has constructed and operates a fully-digital overlay network in
and around Moscow which consists of (i) an approximately 420-kilometer fiber
optic ring, (ii) over 180 PABXs linked to the fiber optic ring, (iii) a
fully-digital microwave network, (iv) a wireless local loop and (v) an
international gateway connected to the fiber optic ring. In addition, Sovintel
leases dedicated international long distance channels. Customers are connected
to the Sovintel network via last mile connections to over 180 PABXs that provide
"points-of-presence" in and around Moscow. The PABXs are connected to the
network through a direct fiber connection or a digital microwave network. Some
of Sovintel's new customers are temporarily connected to the network through a
wireless local loop. The wireless local loop provides a significant competitive
advantage because it allows Sovintel to connect customers to its network more
quickly than alternative methods. As these customers are provided permanent
connections to Sovintel's network through direct connections to the PABXs,
additional customers are rolled onto the wireless local loop.
 
                         [GTS SOVINTEL MOSCOW NETWORK]
 
                                       56
<PAGE>   62
 
     After a customer is connected to the Sovintel network, local telephone
services are provided through the Sovintel fiber optic ring's interconnection
with the switches of either TCM or MTU Inform. These switches provide access to
local telephone service in Moscow through interconnections with the Moscow city
telephone network ("MGTS") and the principal Moscow cellular providers. Sovintel
provides its customers access to domestic long distance service through the
TeleRoss long distance network, or through Rostelecom's network in cities not
currently served by TeleRoss. International long distance service is provided
primarily through the Sovintel international gateway, which transmits
international traffic via dedicated international leased long distance channels.
Sovintel's customers also can receive high speed data services through
Sovintel's interconnection with the Sovam data network. Accordingly, from a
customer's perspective, Sovintel offers a broad range of telecommunication
services.
 
     The following table sets forth certain operating data related to Sovintel's
operations:
 
<TABLE>
<CAPTION>
                                                                                        AT AND FOR THE
                                            AT AND FOR THE YEAR ENDED DECEMBER 31,        SIX MONTHS
                                            --------------------------------------      ENDED JUNE 30,
                                              1994          1995           1996              1997
                                            --------      ---------      ---------      ---------------
<S>                                         <C>           <C>            <C>            <C>
MINUTES OF USE(1)
  International Minutes
     Number of Minutes....................     7,681(2)      10,516         20,839           19,102
     Average Rate Per Minute..............    $ 2.35        $  2.06        $  1.55          $  1.33
  Domestic Long Distance Minutes
     Number of Minutes....................        --(2)       2,047         10,098           10,105
     Average Rate Per Minute..............        --        $  0.86        $  0.65          $  0.57
  Moscow (Local) Fixed Line Minutes
     Number of Minutes....................        --             --             --            1,613
     Average Rate Per Minute..............        --             --             --          $  0.06
  Moscow (Local) Cellular Minutes
     Number of Minutes....................        --         21,478         83,673           52,164
     Average Rate Per Minute..............        --        $  0.06        $  0.08          $  0.07
  Incoming Minutes
     Number of Minutes....................     1,967          3,839         24,306           24,011
     Average Rate Per Minutes.............    $ 0.76        $  0.58        $  0.28          $  0.27
PORTS
  Number of Ports (cumulative)............        --          6,079         29,646           40,249
NUMBER OF PRIVATE LINE CHANNELS
  International...........................         1             26             89              128
  Inter- and Intra-City...................         1             26            103              155
APPROXIMATE EQUIPMENT SALES (THOUSANDS)...    $1,100        $ 1,400        $ 2,200          $ 1,800
</TABLE>
 
- ---------------
 
(1) Minutes in thousands. Amounts include minutes among affiliates.
 
(2) International and domestic long distance outgoing minutes not segregated in
    1994.
 
     Services. Sovintel markets a broad range of high quality telecommunications
services by (i) directly providing international direct dial access to over 170
countries and private line dedicated voice services and (ii) by leveraging the
infrastructure and services of the other GTS ventures. Sovintel's services
include:
 
     - Switched International, Domestic Long Distance and Local
       Services. Customers are provided switched international long distance
       services directly through Sovintel's international gateway in Moscow and
       its leased long distance channels. Domestic long distance services are
       marketed by Sovintel and provided either through the TeleRoss long
       distance network or, where the call destination is not served by
       TeleRoss, through Rostelecom's network. Local call service is provided by
       Sovintel indirectly as a result of its interconnection, through TCM or
       MTU Inform, with the Moscow city telephone network. Based on its
       familiarity with the market, the Company believes that Sovintel's
       services are distinguished by a higher level of quality than those of its
       competitors, particularly with respect to call
 
                                       57
<PAGE>   63
 
       completion rates for its domestic long distance and local call services.
       In addition, the Company trains its employees to provide customer service
       at a level which is comparable to that provided by Western
       telecommunications companies. As a result, the Company believes that
       customers choose Sovintel over its competitors because it has earned a
       reputation for providing high quality telecommunications services through
       an experienced and professional customer service staff.
 
     - Private Line Channels. Private line channels, which are provided over
       dedicated leased lines, are principally utilized by customers with
       high-volume data traffic needs, such as Sovam and large data providers.
       Private line customers have access to intra-city service in Moscow
       through Sovintel's fiber optic ring and to inter-city service between
       Moscow and St. Petersburg via fiber leased by Sovintel, in each case
       benefitting from Sovintel's high quality infrastructure. Private line
       domestic long distance service is provided through TeleRoss and, for
       cities not served by TeleRoss, through Rostelecom. International private
       line service is provided through dedicated leased fiber channels from
       Rostelecom.
 
     - Equipment Sales, Installation Services and Project Planning and
       Management Services. In providing the above services to its customers,
       Sovintel installs and maintains equipment on its customers' premises,
       including PABXs, key systems and wiring. Sovintel also provides project
       planning and management services, including system design and management,
       to its customers.
 
     - World Access Service. Customers are able to access Sovintel's
       international long distance services through the World Access Card, which
       provides customers either direct or calling-card-based portable access to
       domestic and international long distance service. The calling card can be
       used in 14 Russian cities, including Moscow and St. Petersburg, and 23
       countries.
 
     Sovintel complements its service offerings by providing a wide range of
value-added services including operator assistance, maintenance and customer
support and itemized call reporting and billing.
 
     Customers and Pricing. Sovintel's customers consist primarily of
high-volume business and professional customers, such as IBM, Credit Suisse
Group and Reuters, other multinational corporations and Russian enterprises, a
number of premium Moscow hotels and other telecommunications carriers. In
addition, Sovintel is one of the primary providers of domestic and international
long distance service for the major cellular service providers in Moscow,
including VimpelCom, MTS and Moscow Cellular. Sovintel's customers typically
demand a higher level of service than generally available in the market.
 
     The pricing structure for international and domestic long distance calls is
based upon traffic volume and overall market rates, with Sovintel's rates
varying depending on the time and destination of the call. Local calls, other
than calls placed to cellular phones, are completed without charge. Sovintel
expects to continue its practice of not charging to complete local calls unless
and until the MGTS begins to charge for completion of such calls. Sovintel
prices its international long distance services slightly below those of its
principal competitors, and has recently reduced its rates in anticipation of
increased competitive pricing pressures. Sovintel's average revenue per minute
for outgoing international long distance calls has declined from approximately
$2.35 per minute for the year ended December 31, 1994 to approximately $1.33 per
minute for the six months ended June 30, 1997. Sovintel expects increased
pricing pressure from competitors over time. Sovintel prices domestic long
distance services in line with those of its principal competitors. Prices for
domestic long distance services have increased significantly over the last
several years, although such prices stabilized in the second half of 1996.
Sovintel's private line services are priced competitively. Sovintel provides
private line channels by releasing lines it leases from Rostelecom. The lines
are leased by Sovintel from Rostelecom at wholesale rates and leased by Sovintel
to its customers at prices in line with Rostelecom's retail rate.
 
     Customers are billed monthly with larger-volume customers receiving
discounts of up to 30%. Customers using international services, domestic long
distance or data services are billed in U.S. dollars. To the extent permitted by
law, payment is made either in U.S. dollars or in rubles at the ruble/dollar
exchange rate at the time of payment, plus a conversion charge in order to
minimize the impact of currency fluctuations. Sovintel currently bills on an
invoicing system that was internally developed. Currently, the system is
adequate for
 
                                       58
<PAGE>   64
 
Sovintel's present customer base; however, the Company is evaluating
alternatives for upgrading the system in anticipation of future growth.
 
     Sales and Marketing. Sovintel's sales and marketing strategy targets large
multinational and Russian businesses both directly and through contacts with
real estate developers and business center managers in the greater Moscow area.
These developers and managers typically determine which telecommunications
service provider will service their respective properties. By identifying and
building relationships with these developers and managers at an early stage
(typically up to one year prior to the completion of a new building project),
Sovintel seeks to enhance the likelihood of winning the service contract. In
addition to its traditional target market, Sovintel has recently begun to market
its services to smaller businesses. Sovintel utilizes a departmentalized sales
force in order to focus its sale efforts on the different segments within its
target market. The sales force is comprised of 34 sales personnel, including 12
account managers, all of whom specialize in serving specific targeted
industries. Dedicated marketing and customer support personnel provide technical
support, customer service, training, market monitoring and promotional functions
for Sovintel. Sovintel's sales and marketing personnel are paid through a
combination of salary, commissions and incentive bonuses.
 
     Ownership and Control. Sovintel is a joint venture between a wholly-owned
entity of GTS and Rostelecom with each having a 50% ownership interest. Under
Sovintel's charter, GTS and Rostelecom each have the right to appoint three of
the six members of Sovintel's managing board. Rostelecom has the right to
nominate the Director General (the highest ranking executive officer at
Sovintel), while GTS has the right to nominate the First Deputy Director General
(the next-highest ranking executive officer at Sovintel). In practice, the
Director General and the First Deputy Director General together perform the role
of a chief executive officer. Certain business decisions, including the adoption
of Sovintel's annual budget and business plan as well as the distribution of
profits and losses require the approval of both GTS and Rostelecom. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control."
 
     TCM
 
     GTS beneficially owns approximately 50% of TCM, a joint venture founded in
1994 that provides a licensed numbering plan and interconnection to the Moscow
city telephone network for carriers needing basic local access service in
Moscow. GTS's partners in TCM are MTU-Inform and Swinton Ltd., a group of
entrepreneurs with extensive telecommunications experience in Russia. TCM is
currently licensed to provide 100,000 numbers in Moscow, of which approximately
40,000 have been leased. TCM has contracted with MGTS to construct up to an
additional 100,000 numbers in several stages over the next five years, subject
to obtaining a license covering the additional numbers and the construction of
the applicable numbering zone in Moscow by MGTS. TCM's switching facilities are
fully integrated with the networks of Rostelecom, Sovintel, and MGTS, allowing
it to provide high quality digital service to its customers.
 
     Services. TCM acts as a local gateway by providing numbers and ports to
carriers in Moscow and in outlying regions, including Sovintel, VimpelCom, MTS
and Moscow Cellular, and thus providing interconnectivity to the Moscow city
telephone network. Access to the Moscow city telephone network provides
customers with the higher quality and broader range of services available in
Moscow, such as the services provided by Sovintel. Access from outlying regions
is typically obtained through a domestic long distance service provider such as
TeleRoss. See "-- Sovintel" and "-- TeleRoss."
 
     Customers and Pricing. TCM provides its services on the wholesale level to
primary carriers. VimpelCom is TCM's primary customer and accounts for
substantially all of TCM's revenues and the loss of VimpelCom as a customer
would have a material adverse effect on TCM. TCM also provides ports to Sovintel
and to other network operators including MTS and Moscow Cellular. TCM's ports
are leased principally to carriers in Moscow, although ports are also available
to carriers throughout Russia. Although local access services are priced upon
the basis of supply and demand factors in the local market, in general, for each
port cellular operators pay an approximately $300 installation fee and a $16
flat monthly fee plus a per minute charge for traffic while other carriers pay a
larger initial fee of approximately $500 and a monthly fee of approximately $25.
Local access services are typically provided pursuant to five-year contracts
that may be renewed upon expiration for additional one-year periods. TCM has
entered into an agreement with Sovintel
 
                                       59
<PAGE>   65
 
pursuant to which billing and collecting functions for TCM customers are
performed by Sovintel, with Sovintel remitting such amounts (less applicable
settlement charges and administrative costs) to TCM . The rapid growth of
cellular services in markets like Moscow has placed a premium on new numbers,
which has translated into attractive prices for these numbers. TCM, however,
believes these prices will decline over time.
 
     Ownership and Control. GTS's indirect interest in TCM is represented by its
approximately 52% interest in a holding company, which owns 95% of TCM. This
structure provides GTS with 50% beneficial ownership interest in TCM. Decisions
of the holding company regarding TCM require unanimous board approval. See "Risk
Factors -- Dependence on Certain Local Parties; Absence of Control."
 
     TELEROSS
 
     TeleRoss, which began operations in 1995, consists of (i) two wholly-owned
holding companies and a 99% owned subsidiary of GTS that operates a domestic
long distance network (collectively, the "TeleRoss Operating Company") and (ii)
thirteen joint ventures that are 50% beneficially-owned by GTS that originate
traffic and provide local termination of calls (the "TeleRoss Ventures" and,
together with TeleRoss Operating Company, "TeleRoss"). The TeleRoss domestic
long distance network serves fourteen major Russian cities, including Moscow
and, through VSAT technology, 19 customers located outside these cities.
TeleRoss provides digital domestic long distance services and other value-added
services through its own infrastructure as well as access to Sovintel's
international gateway services and access to the Moscow city telephone network
through TCM's switching facilities. Sovam uses the TeleRoss digital channels to
provide regional data service and has co-located its access facilities with
TeleRoss. As of June 30, 1997, TeleRoss employed approximately 187 persons of
which approximately 95 people were based in Moscow and approximately 92 people
were deployed in the regions in which TeleRoss operates.
 
     TeleRoss's licenses cover the city of Moscow and a total of 39 regions
throughout Russia. Most of the thirteen cities in which TeleRoss primarily
operates are regional capitals, with an aggregate population of approximately
11.5 million. TeleRoss's licenses cover the entire oblast surrounding these
cities, with populations totalling approximately 38.1 million persons, and GTS
intends eventually to extend the reach of the TeleRoss network beyond the
regional capitals to the surrounding areas. The cities in which TeleRoss
currently offers its services are:
 
<TABLE>
<CAPTION>
                                                                1995 POPULATION
                                                    ---------------------------------------
                                                                 (IN MILLIONS)
                                                                 URBAN
                       CITY                         CITY(1)    OBLAST(2)    TOTAL OBLAST(2)
                       ----                         -------    ---------    ---------------
<S>                                                 <C>        <C>          <C>
Arkhangelsk.......................................    0.6         1.2             1.6
Ekaterinburg......................................    1.4         4.1             4.7
Irkutsk...........................................    0.6         2.3             2.9
Khabarovsk........................................    0.6         1.5             1.9
Krasnodar.........................................    0.6         2.6             4.8
Nizhni Novgorod...................................    1.4         2.9             3.7
Novosibirsk.......................................    1.4         2.1             2.8
Syktyvkar.........................................    0.3         0.9             1.3
Tyumen............................................    0.5         2.4             3.1
Ufa...............................................    1.0         2.6             4.0
Vladivostok.......................................    1.2         1.8             2.2
Volgograd.........................................    0.9         2.0             2.6
Voronezh..........................................    1.0         1.5             2.5
                                                     ----        ----            ----
          Total...................................   11.5        27.9            38.1
                                                     ----        ----            ----
</TABLE>
 
- ---------------
 
(1) This column reflects the population residing in cities. Source: GTS estimate
 
(2) This column reflects the urban population in oblast. Source: Rusline
 
(3) This column reflects the total population residing in the oblast, including
    rural population. Source: Rusline
 
                                       60
<PAGE>   66
 
     The TeleRoss network architecture involves local city switches connected to
remote earth stations which communicate via satellite to a Moscow-based hub.
This hub consists of the network control center, earth station equipment,
multiplexing equipment and a switch. The earth stations, hub and related
equipment are owned by TeleRoss, which gives TeleRoss the flexibility to
redeploy network assets to other locations as necessary. The hub interconnects
to Sovintel's network providing access to Sovam's data networks, TCM's switching
facilities and Sovintel's international gateway, which transports international
traffic via dedicated international leased satellites and fiber channels and
provides access to Rostelecom's long distance networks. TeleRoss's local joint
venture partners provide interconnection to the local public telephone networks
in each of the thirteen cities it serves. In addition to providing services
through its network, TeleRoss currently serves 19 customers in 18 additional
cities through VSAT technology which links the customers via satellite to the
Moscow hub.
 
     The following table sets forth certain operating data related to TeleRoss's
operations:
 
<TABLE>
<CAPTION>
                                                            AT AND FOR THE SIX MONTHS ENDED
                                                         --------------------------------------
                                                         JUNE 30,    DECEMBER 31,      JUNE 30,
                                                           1996          1996            1997
                                                         --------    ------------      --------
<S>                                                      <C>         <C>               <C>
MINUTES OF USE(1)
  Domestic Minutes (thousands).........................       827          3,478          7,904
  Average Rate Per Domestic Minute.....................  $   1.01     $     0.99       $   0.76
  International Minutes (thousands)....................        83            189            276
  Average Rate Per International Minute................  $   2.66     $     2.76       $   2.62
NUMBER OF CITIES SERVED................................        10             12             13
WORLD CONNECT DIAL/RUSSIA
  Number of Connect Dial Ports.........................       256            472            861
  Average Revenue Per Port Per Month...................  $    472     $      767       $    460
MOSCOW CONNECT
  Number of Ports......................................        38             49             54
  Average Revenue Per Port Per Month...................  $  1,388     $    1,165       $  1,409
DEDICATED CIRCUITS
  Number of Dedicated Channels.........................        15             33             41
  Average Price Per Channel............................  $  5,200     $    4,553       $  4,606
WORLD ACCESS SERVICE
  Number of World Access Card Users....................     1,674          3,929          4,276
  Average Revenue Per Card Per Month...................  $     52     $       52       $     59
VSAT SERVICES
  Number of VSATs......................................         7             12             20
</TABLE>
 
- ---------------
 
(1) Includes minutes among affiliates.
 
     Services. Through its network and VSAT offerings, TeleRoss offers the
following services:
 
     - Carriers' Carrier Services. TeleRoss provides services as a "carriers'
       carrier," providing domestic long distance carrier services to cellular
       operators, Sovintel, the TeleRoss Ventures' regional partners and
       competitive bypass operators from the cities in which the TeleRoss
       Ventures operate, and to customers in remote cities using VSAT stations.
       These services are provided to and from Moscow, and are provided by
       TeleRoss at wholesale rates competitive with those offered by Rostelecom.
       TeleRoss also provides private line channels to Sovam in cities where the
       TeleRoss Ventures operate. In addition, TeleRoss has recently received a
       license to provide international private line service.
 
     - World Connect Dial/Russia Connect Dial. Customers in TeleRoss's cities
      are provided dedicated local access to the regional TeleRoss switch
      through lines leased from the TeleRoss Venture's regional joint venture
      partner. These customers then have access to the domestic long distance
      service provided by TeleRoss, international long distance service provided
      by Sovintel and are fully integrated into the local
 
                                       61
<PAGE>   67
 
      phone networks operated by the applicable TeleRoss Venture's partner and
      to the Moscow city telephone network through TCM.
 
     - Moscow Connect. Customers are provided with dedicated last mile
       connection over lines leased from the regional joint venture partner
       which lines are connected to a local TeleRoss switch. The TeleRoss
       network and its interconnection to TCM provide customers with a Moscow
       dial tone which allows users in remote locations better access to
       Moscow's advanced telecommunications infrastructure. In addition, Moscow
       Connect service provides better call quality at lower rates for domestic
       and international long distance. Moscow Connect also facilitates
       communications between users and their Moscow-based associates as calls
       can be made to and from Moscow without the use of prefixes and without
       long distance charges accruing to the Moscow-based parties.
 
     - Dedicated Circuits. Customers are provided with point-to-point clear
       channel circuits within Russia and internationally through the TeleRoss
       backbone and its interconnection with Sovintel's international gateway in
       Moscow. Dedicated circuits are generally used by news services, banks and
       other commercial customers who require high capacity and high quality
       service. This service can be used for voice or data, depending on the
       user's needs. In providing dedicated circuits, TeleRoss competes against
       other alternative communications providers, however, TeleRoss believes
       that it has a distinct price advantage over its competitors because of
       the use of its own infrastructure and the bulk purchase of satellite
       capacity.
 
     - World Access Service. TeleRoss and Sovintel co-market World Access
       Service to their customers in each of the cities they serve through two
       products: World Access Direct and World Access Card. Through World Access
       Direct, TeleRoss customers can access domestic long distance and
       international service anywhere within the customer's city through the
       local telephone network. The World Access Card is a calling card which
       allows TeleRoss customers portable access to domestic long distance and
       international service from 15 Russian cities, including Moscow and St.
       Petersburg, and 23 countries. This service is provided through Sovintel's
       infrastructure.
 
     - VSAT Services. For customers that are located outside the 13 cities
       serviced by the TeleRoss Ventures or that cannot be physically linked to
       TeleRoss's regional switches, TeleRoss offers VSAT service which connects
       these customers directly to TeleRoss's Moscow-based hub through a VSAT
       antenna installed at the customer's location. Both dedicated and switched
       services are provided through these VSAT arrangements.
 
     In addition to continuing the development of its core domestic long
distance business, TeleRoss's strategy includes the development of local access
networks to capitalize on demand for local phone service and to capture
additional customers for its long distance and value-added service offerings.
Outside Moscow, TeleRoss has primarily pursued a strategy whereby it develops
its own intra-city trunking network with copper based or fiber optic facilities
leased from the regional joint venture partners. To date, TeleRoss, in
conjunction with regional joint venture partners, has installed approximately 25
kilometers of fiber optic cable in 3 cities and plans to install an aggregate of
approximately 100 kilometers of additional fiber optic cable in up to an
additional 6 cities over the next 24 to 30 months. Customers who obtain local
phone numbers from TeleRoss's venture partners are directly interconnected to
the local telephone company and to the Company's long distance network and
Sovintel's international gateway and may obtain a broad range of value-added
services offered by the Company.
 
     Customers and Pricing. TeleRoss's customers include businesses and other
telecommunications service providers such as carriers, PTOs, cellular operators,
Sovintel and Sovam. TeleRoss's business customers consist of large multinational
and Russian businesses in each of the regions it services, as well as medium and
small-sized businesses. Between 1993 and mid-1996, consumer prices in TeleRoss's
industry increased significantly as a result of Rostelecom raising its prices in
an effort to raise capital for investment and development of its network
infrastructure, although prices have stabilized over the past six months.
TeleRoss strategically prices its domestic long distance services at a slight
premium over similar services offered by Rostelecom to account for a higher
quality of service, but in line with the prices offered by regional competitors.
 
                                       62
<PAGE>   68
 
     Sales and Marketing. TeleRoss markets its services to carriers and
businesses through direct sales channels. TeleRoss employs 27 sales and
marketing personnel, approximately half of which are based in Moscow with the
other half deployed regionally to identify and contact prospective customers.
The Moscow-based sales and marketing personnel are organized into industry
groups in order to better identify and serve customer needs. Each region is
typically served by one or two sales representatives. TeleRoss's sales efforts
are supported by market research and promotional activities carried out at the
joint venture level and tailored to the specific market base of each region.
TeleRoss's marketing strategy is to attract carrier customers by focusing on
those carriers with high volume minutes operating in regions where TeleRoss has
a competitive advantage. Through cross-marketing agreements with Sovintel and
Sovam, TeleRoss markets many of the other service offerings of GTS's Russian
businesses to customers throughout its service regions. Billing functions and
the monitoring of quality control and technical issues are performed centrally
through the Moscow-based hub.
 
     Ownership and Control. TeleRoss consists of the TeleRoss Operating Company,
and the 50% beneficially-owned TeleRoss Ventures. GTS controls TeleRoss
Operating Company (which holds the network license) and co-manages the TeleRoss
Ventures under the terms of the applicable TeleRoss Ventures' foundation
agreements and charters. Under some of these charters, GTS generally has the
right to designate the Chairman of the board of directors, and GTS's local
partner has the right to designate the Deputy Chairman, for the first two-year
term (and thereafter GTS and the local partner nominate the Chairman and Deputy
Chairman for approval by the entire board on a rotating basis). While GTS has
significant influence within these ventures, decisions, including the decision
to declare and pay dividends, are generally subject to GTS's partner's approval.
See "Risk Factors -- Dependence on Certain Local Parties; Absence of Control."
 
     SOVAM
 
     Sovam is a venture owned 66.7% by GTS and 33.3% by the Institute for
Automated Systems ("IAS"). Sovam was founded in 1990 as a venture equally owned
by GTS and IAS. In 1992, Cable & Wireless acquired a 33% ownership interest in
Sovam, which interest was subsequently acquired by GTS in 1994, bringing GTS's
ownership interest to its current 66.7%. Sovam provides high-speed data
communications services, electronic mail and database access over a high-speed
packet/frame relay network in 29 major Russian and CIS cities. Sovam also offers
Russia On Line, the first Russian language Internet service, which provides
direct access to the Internet as well as access to a wide range of local and
international information services and databases. As of June 30, 1997, Sovam had
approximately 1,748 data service customers and approximately 3,091 Russia On
Line customers. Sovam employed over 100 persons in Moscow and other regions of
the CIS as of June 30, 1997. Sovam provides equipment and maintains marketing
and technical support personnel at each location either through its own
infrastructure or through the infrastructure of TeleRoss.
 
     In addition to serving the Moscow and St. Petersburg markets, Sovam
co-locates its operations with the TeleRoss Ventures, offering its services in
all 13 TeleRoss cities, and also serves 14 additional cities in Russia and the
CIS. Sovam operates under its own license within Russia while services elsewhere
in the CIS are provided through applicable joint venture or local partner
licenses. The local partners of the TeleRoss Ventures provide facilities, assist
in the provision of leased lines to Sovam customers that allow them to connect
with Sovam's local data switches and also provide technical support. Sovam
utilizes Sovintel's international capabilities and, in TeleRoss-served
locations, TeleRoss's satellite overlay network, to take data through its local
data switches and over the leased lines to its customers. Customers may obtain
virtual private data networks without investing in, acquiring, installing and
maintaining their own network nodes and switches.
 
                                       63
<PAGE>   69
 
     The following table sets forth certain operating data related to Sovam's
operations:
 
<TABLE>
<CAPTION>
                                           AT AND FOR THE YEAR ENDED
                                                 DECEMBER 31,            AT AND FOR THE
                                          ---------------------------   SIX MONTHS ENDED
                                           1994      1995      1996      JUNE 30, 1997
                                          -------   -------   -------   ----------------
<S>                                       <C>       <C>       <C>       <C>
BASIC DATA SERVICE
  Percentage of Total Sovam Revenue.....       96%       91%       79%           80%
  Number of Customers...................    1,335     1,587     1,726         1,748
  Average Revenue Per Month Per
     Customer...........................   $  180    $  201    $  446        $  604
  Number of Cities in Service...........        2        11        25            29
EQUIPMENT AND HARDWARE SALES
  Percentage of Total Sovam Revenue.....        4%        8%       14%           10%
RUSSIA ON LINE SERVICE
  Percentage of Total Sovam Revenue.....       --         1%        7%           10%
  Number of Customers...................       --       407     2,340         3,091
  Average Revenue Per Month Per
     Customer...........................       --    $   49    $   52        $   65
</TABLE>
 
     Services. Sovam's service offerings are comprised of data services,
equipment and hardware sales and its Russia On Line services.
 
     - Data Services. Sovam provided high speed connectivity, electronic mail,
       database access and fax services to approximately 1,748 customers as of
       June 30, 1997, in Russia and the CIS. Sovam customers can use electronic
       mail systems to send and receive messages and data and to access public
       and private data networks (including the Internet) worldwide. Customers
       may obtain virtual private data networks without investing in, acquiring,
       installing and maintaining their own network nodes and switches. In
       addition, Sovam offers its customers value-added data services. For
       example, Sovam offers "one-stop shopping" for hardware, software,
       installation and maintenance support and products such as "SovamMail," an
       e-mail service which allows customers to use Sovam's data network to send
       telex or facsimile messages to overseas recipients worldwide. Data
       services are currently available in 29 cities throughout Russia and the
       CIS, including Moscow, St. Petersburg, each of the cities served by
       TeleRoss and some cities outside of the TeleRoss network.
 
     - Equipment and Hardware Sales. Sovam sells communications equipment and
       hardware, and provides related installation, maintenance and support
       functions, to its customers. Sovam's primary customers in the equipment
       and hardware market are banking clients who use the equipment to
       interface with Sovam's network.
 
     - Russia On Line. Russia On Line is the first Russian language, as well as
       the first dual language, graphical user interface online service for
       accessing domestic and international information sources designed to
       appeal to a wide commercial audience. This service, which is distributed
       via GTS's domestic long distance infrastructure, provides customers with
       access to international databases (including the Internet), as well as an
       array of proprietary Russian and English language information services,
       such as news stories and market updates. Sovam had approximately 3,091
       Russia On Line customers as of June 30, 1997. Sovam encountered
       international bandwidth capacity constraints during the fourth quarter of
       1996 which limited growth in Russia On Line sales. Management introduced
       an E-1 channel during the first quarter of 1997 to address this problem.
       Sovam has developed a modified version of Netscape's Internet browser,
       which utilizes the Cyrillic alphabet, as part of its Russia On Line
       package. Sovam's enhanced Russian version of Netscape's browser is
       provided by Sovam to its customers under a distribution agreement with
       Netscape. In addition, Sovam has signed a letter of intent with Microsoft
       whereby Microsoft has agreed to include software access to Russia On Line
       in its Russian version of Windows 97, which had not been released as of
       September 1997. Sovam has also entered into agreements with equipment
       manufacturers, including Dell, Hewlett-Packard and U.S. Robotics, to
       include Russia On Line software with their products.
 
                                       64
<PAGE>   70
 
     Customers and Pricing. Sovam's data communications customers consist
primarily of banking and financial services organizations and large
multinational companies, while Sovam's Russia On Line customers consist of a
wide variety of commercial enterprises. Sovam charges customers an installation
fee when service is commenced and a charge for any equipment which is installed.
Thereafter, customers are billed on a monthly basis for leased line fees, port
access charges and charges for data and Russia On Line services rendered during
the month. Data services are priced on a two-tier structure with high volume
users generally negotiating a flat-rate fee and lower volume uses paying a
volume-based fee which on average was $446 and $604 per subscriber in 1996 and
for the six months ended June 30, 1997, respectively. Russia On Line customers
pay a fixed monthly access charge plus an additional volume-based fee. Customers
are billed in dollars and payment is remitted in rubles and, to the extent
permitted by law, in dollars, with a 5% conversion fee added to
ruble-denominated payments.
 
     Sales and Marketing. Sovam employs a dedicated sales and marketing force
comprised of 20 Russian nationals, 14 of which are based in Moscow with the
remainder deployed in the other Russian and CIS regions. Salespersons are paid a
fixed salary supplemented by sales commissions and performance-based bonuses.
Sovam's sale efforts are focused primarily on the banking and financial
communities and large multinational companies, although small and medium sized
entities are also emerging as potential Sovam customers. Bundled service
packages, which include Sovam's data and Internet service, Sovintel's
international service and TeleRoss's long distance service, are frequently
marketed together in order to offer customers a comprehensive telecommunications
solution. In addition to data communications services, Sovam offers its
customers hardware, installation and maintenance service and is a distributor of
Northern Telecom equipment.
 
     Ownership and Control. GTS owns 66.7% of Sovam and IAS owns the remaining
33.3%. The Sovam managing board is comprised of three GTS representatives and
two IAS representatives. Decisions of the managing board are adopted by a
majority vote. Changes to the charter and certain business decisions, including
decisions on distribution of profits and losses, obtaining loans and approving
major transactions, require unanimous approval. See "Risk Factors -- Dependence
on Certain Local Parties; Absence of Control."
 
    GTS CELLULAR
 
     GTS Cellular operates three distinctly branded cellular businesses in
Russia and Ukraine. In Russia, GTS holds a 62% beneficial interest in Vostok
Mobile B.V. ("Vostok Mobile"), which operates eleven AMPS cellular companies in
Russian regions west of the Urals under the trade name Unicel. Vostok Mobile
owns between 50% and 70% of these cellular joint ventures (the "Unicel
Ventures") in Russia, giving GTS beneficial interests ranging from approximately
31% to 43% in such ventures. The Company expects to purchase, pending execution
of definitive documentation, the minority interest in Vostok Mobile. After the
purchase, Vostok Mobile will be a wholly owned venture of GTS. In addition, GTS
intends to enter into the cellular markets of additional Russian regions through
its Vostok Mobile venture. GTS also participates in PrimTelefone, a 50% owned
joint venture that operates an NMT-450 network in Vladivostok, Russia. In
Ukraine, GTS has an approximately 25% beneficial interest in Bancomsvyaz which
operates a DCS-1800 cellular network in Kiev, and an international overlay
network in Ukraine. GTS Cellular entities possess licenses covering major
Russian and Ukrainian markets (excluding Moscow and St. Petersburg) with an
aggregate 1995 population of approximately 25 million people.
 
                                       65
<PAGE>   71
 
     GTS currently offers cellular services in the following regions as of June
30, 1997:
 
<TABLE>
<CAPTION>
                                                                                 URBAN
                                    GTS'S                                      POPULATION       TOTAL
          OPERATING                ECONOMIC                        CITY            IN          OBLAST        NUMBER OF
           COMPANY              INTEREST(1)(4)      CITY       POPULATION(3)   OBLAST(2)    POPULATION(2)   SUBSCRIBERS
          ---------             --------------      ----       -------------   ----------   -------------   -----------
                                                                (MILLIONS)     (MILLIONS)    (MILLIONS)
<S>                             <C>              <C>           <C>             <C>          <C>             <C>
RUSSIA
  Vostok Mobile(4)
     Arkhangelsk Mobile
       Networks...............       31.0%       Arkhangelsk        0.6            1.2           1.6             433
     Astrakhan Mobile.........       31.0%       Astrakhan          0.6            0.7           1.0             930
     Chuvashi Mobile..........       43.4%       Cheboksary         0.5            0.8           1.4             913
     Lipetsk Mobile...........       43.4%       Lipetsk            0.5            0.8           1.2           1,018
     Murmanskaya Mobilnaya
       Set....................       31.0%       Murmansk           0.6            1.1           1.8           1,017
     Penza Mobile.............       37.2%       Penza              0.6            1.0           1.5             496
     Saratov Mobile...........       31.0%       Saratov            0.2            2.0           2.7           1,174
     Parma Mobile.............       31.0%       Syktyvkar          0.3            0.9           1.3             317
     Volgograd Mobile.........       31.0%       Volgograd          0.9            2.0           2.6             955
     Votec Mobile.............       31.0%       Voronezh           1.0            1.5           2.5           1,274
     Mar Mobile...............       31.0%       Yoshkar-ola        0.4            0.5           0.8             349
  PrimTelefone................       50.0%       Vladivostok        1.2            1.8           2.2           3,712
UKRAINE
  Bancomsvyaz.................       24.9%       Kiev               2.6            3.7           4.5             852
                                                                   ----           ----          ----          ------
          Total...............                                     10.0           18.0          25.1          13,494
                                                                   ----           ----          ----          ------
</TABLE>
 
- ---------------
(1) Represents the indirect economic interest of GTS in each entity.
 
(2) Source: Rusline (1995), except Kiev (from Ukraine Ministry of Statistics
    (1995)).
 
(3) Source: GTS estimate (1995).
 
(4) Vostok Mobile is a GTS venture which owns between 50% and 70% of a series of
    11 cellular joint ventures in various regions in Russia. GTS currently holds
    a 62% beneficial interest in Vostok Mobile. The Company expects to purchase,
    pending execution of definitive documentation, the minority interest in
    Vostok Mobile. After the purchase, Vostok Mobile will be a wholly owned
    venture of GTS. GTS intends to enter into the cellular markets of additional
    Russian regions through its Vostok Mobile venture.
 
                                       66
<PAGE>   72
 
     The following table sets forth certain operating data related to GTS
Cellular's operations:
 
<TABLE>
<CAPTION>
                                                            AT AND FOR THE
                                                              YEAR ENDED
                                                             DECEMBER 31,        AT AND FOR THE
                                                           -----------------    SIX MONTHS ENDED
                                                            1995      1996       JUNE 30, 1997
                                                           ------    -------    ----------------
<S>                                                        <C>       <C>        <C>
  Vostok Mobile
     Total Subscribers...................................     850      6,884          8,930
     Average Revenue Per Subscriber Per Month............      --    $   128        $   145
     Minutes of Use(1)(thousands)........................      --     10,561         12,231
     Population Covered by Licenses (thousands)..........  18,400     18,400         18,400
     Population Covered by Networks (thousands)..........   4,000      6,500          6,500
     Subscriber Penetration of Population Covered by
       Networks..........................................      --       0.11%          0.14%
  PrimTelefone
     Total Subscribers...................................     792      2,822          3,712
     Average Revenue Per Subscriber Per Month............  $  282    $   236        $   193
     Minutes of Use(1)(thousands)........................     725      6,919          5,378
     Population Covered by Licenses (thousands)..........   2,200      2,200          2,200
     Population Covered by Networks (thousands)..........     500      1,175          1,175
     Subscriber Penetration of Population Covered by
       Networks..........................................    0.16%      0.24%          0.32%
  Bancomsvyaz
     Cellular Network
     Total Subscribers...................................      --        121            852
     Average Revenue Per Subscriber Per Month............      --    $    62        $   181
     Minutes of Use(1) (thousands).......................      --          9            967
     Population Covered by Licenses (thousands)..........      --      4,500          4,500
     Population Covered by Networks (thousands)..........      --      1,669          1,669
     Subscriber Penetration of Population Covered by
       Networks..........................................      --       0.01%          0.05%
     Overlay Network
     Minutes of Use(1)(thousands)........................      --         --            721
     Number of Ports.....................................      --         --            293
     Average Revenue Per Minute..........................      --         --        $  0.36
</TABLE>
 
- ---------------
 
(1) Includes minutes among affiliates.
 
     Vostok Mobile. Through Vostok Mobile, GTS participates in eleven cellular
joint ventures in Russia. Vostok Mobile owns between 50% and 70% interests in
each of the eleven Unicel Ventures with regional telephone companies and, in one
instance, a private Russian company, owning the remaining ownership interest.
The Unicel Ventures each operate an AMPS-based cellular network, which was
chosen principally because of the lower licensing fees and equipment costs
associated with AMPS operations. The Company believes that the Unicel Ventures'
AMPS-based networks can be upgraded to digital AMPS ("D-AMPS") for an
incremental capital investment. Cellular networks which utilize digital
technology, such as D-AMPS, DCS and GSM offer several advantages over analog
technology including improved overall signal and sound quality, improved call
security, potentially lower incremental infrastructure costs for additional
subscribers and the ability to provide enhanced data transmission services, such
as facsimile and e-mail. Digital technology also provides increased system
capacity. The ventures intend to convert to D-AMPS at such time as there exists
sufficient competitive pressures and/or market demand for digital services to
merit the additional investment.
 
     AMPS technology is widely used by other cellular networks throughout
Russia, making roaming commercially feasible. The Unicel Ventures have entered
into roaming agreements with other AMPS-based cellular providers, which allow
their subscribers to manually roam throughout Russia. Manual roaming, as opposed
to automated roaming, requires subscribers to notify their local cellular
providers of their travel plans
 
                                       67
<PAGE>   73
 
in order to receive roaming capability. Vostok Mobile is currently working with
VimpelCom to develop automated roaming standards which will provide subscribers
with automated roaming capability.
 
     The Unicel Ventures, collectively, are licensed to provide cellular service
to regions with an aggregate population of approximately 18 million people and
the cellular networks of these ventures cover populations of approximately 6.5
million people. Over the next five years, Vostok Mobile plans to expand the
coverage of the cellular networks to approximately 9.8 million people.
 
     The Unicel Ventures are the only cellular operators in many of their
respective regions. Each region, however, has the potential for three licensed
operators, including one operator for each of the AMPS, NMT and GSM cellular
standards, and the Company expects competition to increase in the future as the
Russian economy develops and telephony demands increase. Each of the Unicel
Ventures operates independently within uniform guidelines established by Vostok
Mobile. The Unicel Ventures employ local engineering and marketing personnel,
which helps the ventures maximize their presence in their respective markets and
maintain quality control. Vostok Mobile and its ventures employed over 279
persons as of June 30, 1997, with over 240 persons employed regionally.
 
     PrimTelefone. GTS's cellular operations in Vladivostok are conducted
through PrimTelefone, a 50% owned GTS subsidiary, with the local electrosviaz
owning the remaining 50%. PrimTelefone began operations in 1995 and operates an
NMT-450 network in Vladivostok. PrimTelefone entered and penetrated the
Vladivostok market by leveraging its network design and full interconnection
with the city telephone network. As a result, PrimTelefone's subscriber base has
grown to 3,712 as of June 30, 1997 and PrimTelefone has been able to capture
approximately half of the Vladivostok cellular market. PrimTelefone has also
updated its billing system, which will allow it to offer automated roaming.
Although PrimTelefone has experienced significant growth, it does face
competition. PrimTelefone's only current competitor has recently upgraded its
network for more complete coverage and has been fully interconnected to the city
telephone network and may prove to be more competitive in the future.
PrimTelefone employs approximately 50 persons which include dedicated sales,
marketing and customer service personnel.
 
     PrimTelefone holds a license to provide cellular service to a region having
a population of approximately 2.2 million people and, as of June 30, 1997, its
cellular network covered an area with a population of approximately 1.2 million
people. PrimTelefone plans to expand its network's coverage to approximately 1.7
million people over the next five years.
 
     Bancomsvyaz. GTS operates in Ukraine through a 60% owned intermediate
holding company which holds an approximately 49% interest in Bancomsvyaz, giving
GTS an indirect approximately 25% economic interest in Bancomsvyaz. The
remaining approximately 51% interest in Bancomsvyaz is owned by Bancomservice, a
private company whose principals include telecommunications industry
participants in Ukraine, and a Ukranian national. Bancomsvyaz is co-managed by
GTS and Bancomservice, with Bancomservice appointing the General Director and
GTS appointing the Chief Operating Officer, Chief Financial Officer and two
Business Line directors. The current General Director has been active in the
development of the telecommunications industry in Ukraine. Through Bancomsvyaz,
GTS participates in the operation of a cellular network and an international
overlay network. While Bancomsvyaz's operations are currently concentrated in
the Kiev area, management plans to expand its offerings to other major Ukrainian
population centers, including Odessa, Kharkov and Lviv. Currently, Bancomsvyaz
holds licenses in Kiev and Odessa and is in the process of obtaining additional
licenses in connection with its planned expansion. With over 65 employees,
Bancomsvyaz aggressively markets its services and closely monitors technical and
quality-related issues.
 
     Cellular network. Bancomsvyaz operates a cellular network in Kiev utilizing
DCS-1800 cellular technology, and operates under a cellular license that covers
the Kiev oblast. Bancomsvyaz began cellular operations in 1996 by covering the
city center of Kiev and expanded its coverage to include the entire city in
1997. Management is currently negotiating a clearinghouse agreement with a
European PTO which would give Bancomsvyaz customers automated roaming capability
with all GSM signatories with a roaming agreement with this PTO.
 
                                       68
<PAGE>   74
 
     Bancomsvyaz holds a license to provide cellular service to a region having
a population of approximately 4.5 million people and, as of June 30, 1997, its
cellular network covered an area with approximately 1.2 million people.
Bancomsvyaz plans to expand its network's coverage to approximately 3.2 million
people over the next five years.
 
     Overlay network. Bancomsvyaz provides switched traffic service through its
overlay network in Kiev. Bancomsvyaz owns and operates a mobile switch and seven
central offices in the city and also provides last mile connections (which are
primarily copper) from the central offices to customers. Local traffic is routed
to the local telephone network through the mobile switch. International traffic
is routed through a government-owned satellite dish to the GTS-Monaco Access
international gateway. Bancomsvyaz emphasizes its high quality service and
markets primarily to multinational companies, real estate developers and hotels.
Bancomsvyaz is also negotiating with Sovintel to provide a link to Moscow and
plans to offer VSAT-based connections to its network in the future.
 
     Sales and Marketing. The GTS Cellular entities have entered into agreements
with local distributors to more effectively reach their target markets.
Particular emphasis is placed on product branding. Vostok Mobile's sales and
marketing efforts are focused on the branding of its trade name, Unicel, which
is marketed and promoted at the local level by each of the Unicel Ventures. By
promoting the Unicel trade name, local ventures can emphasize their
relationships with Vostok Mobile and the other Unicel Ventures, allowing
customers to view the Unicel Ventures as integrated parts of a large cellular
organization rather than as lone, independent operators. Bancomsvyaz operates
under the trade name Golden Telecom.
 
     Customers and Pricing. GTS Cellular's customers are primarily large,
mid-sized and start-up businesses and wealthy individuals. Increases in the
number of customers for GTS Cellular's ventures is typically linked to the
economic health of the region in which such venture operates. Cellular service
is generally a premium service in the cities in which GTS Cellular operates and
is priced as such. Each venture begins with two tariff plans, a "standard"
tariff plan and a "premium" tariff plan, which includes a fixed amount of
airtime at a discounted per-minute rate. Each plan prices late night and weekend
calls at off-peak rates. The Company expects that prices will decrease as
competition increases. Connection fees are minimized in order to reduce license
fees in AMPS regions (which are partially calculated by reference to connection
fees), as well as to keep market entry costs low. GTS Cellular has benefited
from high margins generated by the sale of handsets, which are marked up in line
with other cellular operators in Russia and the CIS. Value-added services, such
as call forwarding and conference calling, when available, are priced nominally
and discounted when sold in packages. Cellular accounts are recorded in dollars
and customers remit payment in rubles at the exchange rate on the date of the
bill and, in instances permitted by law, in dollars. Ruble accounts generally
are charged a two percent conversion fee and payments in rubles are applied at
the rate of exchange on the date of payment. In order to lessen risks to its
receivables, the Company and its cellular ventures require advance payment from
all customers with prepayments averaging approximately $250 per customer or six
to eight weeks of service.
 
     Ownership and Control. GTS Cellular's Russian operations (except for the
Vladivostok operations) are conducted through ventures that are owned between
50% and 70% by Vostok Mobile. GTS currently holds a 62% beneficial interest in
Vostok Mobile. The Company expects to purchase, pending execution of definitive
documentation, the minority interest in Vostok Mobile. After the purchase,
Vostok Mobile will be a wholly owned venture of GTS. GTS Cellular's Vladivostok
and Ukrainian operations are conducted through ventures which require partner
approval for most decisions. See "Risk Factors -- Dependence on Certain Local
Parties; Absence of Control."
 
    LICENSES AND REGULATORY ISSUES
 
     Telecommunications operators in Russia are nominally subject to the
regulations of the Regional Communications Committee (the "RCC"). As a practical
matter, national telecommunications authorities of the individual CIS countries
and certain regional and local authorities generally regulate telecommunications
operators in their markets through their power to issue licenses and permits.
 
                                       69
<PAGE>   75
 
     The Communications Law sets out a comprehensive legal and regulatory
framework for the sector. It also sets forth general principles for the right to
carry on telecommunications activities, describes government involvement in
telecommunications regulation and operation, establishes the institutional
framework involved in regulation and administration of telecommunications, and
deals with various operational matters, such as ownership of networks,
protection of fair competition, interconnection, privacy and liability. This
institutional framework is implemented by separate legislation.
 
     Licenses to provide telecommunications services are issued by the MOC on
the basis of a decision by the Licensing Commission at the MOC. No new licensing
regulations have been issued since the enactment of the Communications Law and
in practice the MOC continues to issue licenses based on the Licensing
Regulations. Under the Licensing Regulations, licenses for rendering
telecommunications services may be issued and renewed for periods ranging from 3
to 10 years and several different licenses may be issued to one person. Once the
licenses are received, the licensee is required to register its right to hold
and operate under the license with Gossvyaznadzor, the national authority
responsible for monitoring compliance with regulatory and technical norms.
Renewals may be obtained upon application to the MOC and verification by
appropriate government authorities that the licensee has conducted its
activities in accordance with the licenses. Officials of the MOC have fairly
broad discretion with respect to both the issuance and renewal procedures. Both
the Communications Law and the Licensing Regulations provide that a license may
not be transferred. However, regional authorities are sometimes in a practical
position to limit these national authorities. In August 1995, the Russian
government created Svyazinvest, a holding company, to hold the federal
government's interests in the majority of Russian local telecommunications
operators. Such entities at the oblast and krai levels (administrative regions
within Russia) and two cities -- Moscow and St. Petersburg -- exercise
significant control over their respective local telephone networks.
 
     License procedures for the Company's cellular services include frequency
licensing from the MOC through a two step process. A license must first be
obtained from the MOC for permission to operate mobile cellular services on a
commercial basis in a specific standard and frequency bandwidth. Thereafter, an
approval to use specific frequencies within the band must be received from the
State Radio Frequencies Commission. Once the licenses are received,
Gossvyaznadzor confirms the rights of an operator to offer radio frequency
transmissions on specific frequencies, administers type acceptance procedures
for radio communications equipment and monitors compliance with licensing
constraints. In each instance, the Company is required to obtain additional
licenses and permits with respect to the use of equipment and the provision of
services.
 
     Telecommunications laws and regulations in Ukraine are similar in many
respects to those of Russia but are subject to greater risks and uncertainties.
Regulations currently prohibit foreign entities from owning more than 49% of any
telecommunications operating company. GTS's Ukrainian joint venture agreements
provide it with the option of purchasing an additional one percent of the
cellular network if these rules are liberalized. The Ukrainian government has
proposed substantial frequency permit fees in connection with providing GSM
service in Ukraine. Although the government has not imposed additional fees on
Bancomsvyaz's existing DCS-1800 service, there can be no assurance that such
fees will not be imposed in the future.
 
     GTS's subsidiaries and ventures hold the following licenses in Russia and
Ukraine:
 
     Switched Services. In Russia, the Company holds two licenses. The first
license was reissued to Sovintel in November 1996 and authorizes Sovintel to
operate as an international overlay network with the ability to interconnect
with the Moscow region and St. Petersburg public switched telecommunications
network ("PSTN"). This license covers a total of 50,000 subscribers and expires
in May 2000. It was amended in February 1997 to cover the Leningrad region. The
second license was reissued to SFIT, Ltd., a wholly-owned subsidiary of GTS in
February 1997, for provision of intercity services in 39 regions and in Moscow
with ability to interconnect with the PSTN. In Kiev, Ukraine, the company holds
a license for provision of overlay network services, including international
services, in the name of its affiliate, Bancomsvyaz. In addition, Sovintel is an
ITU recognized private operating agency ("RPOA"), which enables it to maintain a
separate dialing code (7-501) that can be directly dialed from over 170
countries. Sovintel's status as an RPOA also enables it to terminate calls
directly with other operators.
 
                                       70
<PAGE>   76
 
     Leased Circuits. In September 1996 the MOC issued to Sovintel a five-year
license to lease local, intercity and international circuits in the territory of
Moscow, Moscow region and St. Petersburg, valid until September 2001. The total
amount of circuits leased is approximately 300 and may be increased up to a
total authorized capacity of 2,500.
 
     Data Services. In August 1996, the MOC reissued to Sovam a 2 1/2-year
license, effective July 1996, to provide data transmission services via a
dedicated network to a number of oblasts and other regions covering a large
portion of Russia. The license permits a network capacity of not less than 5,000
customers, allows it to interconnect with other data transfer networks in
Russia, and expires January 1, 1999.
 
     Local Access Services. In January 1997, the MOC has licensed TCM to provide
local telephone service in Moscow to not less than 100,000 subscriber local
access lines. The license expires in May 2006. TCM has an agreement with MGTS to
provide up to 200,000 lines, which would require an extension to its license,
when its current capacity is reached.
 
     Cellular Services. In connection with cellular operations, Russian law
apportions the responsibility for regulating and licensing cellular businesses
between national and regional regulators. National telecommunications regulators
have been assigned the responsibility of regulating and licensing cellular
businesses utilizing the GSM and NMT-450 cellular standards prevalent in Europe.
These regulators have auctioned licenses to provide these services to a number
of ventures that have included large, well capitalized western
telecommunications providers such as US WEST and Nokia during the last four
years. Regional telecommunications authorities have been given the rights to
supervise the observance of licenses by cellular businesses utilizing AMPS
cellular standard service, which is prevalent in the United States. However,
AMPS licenses are issued by the MOC. GTS believes that, in many instances,
cellular operators obtaining AMPS standard licenses, particularly those in
second tier cities, pay license fees that are lower than those paid for the GSM
and NMT-450 "national standards". Licenses for cellular providers have a term of
approximately 10 years.
 
     The Company's twelve Russian cellular companies have licenses which expire
between 2005 and 2007. One of the companies initially received an operating
license in 1994, six companies initially received an operating license in 1995
and five companies initially received an operating license in 1996.
 
     Bancomsvyaz holds a license for provision of DCS-1800 mobile services in
the Kiev oblast.
 
     COMPETITION
 
     Overview. GTS faces significant competition in virtually all of its
existing telecommunications businesses in the CIS. Many of the Company's
competitors and potential competitors, which include large multinational
telecommunications companies, have substantially greater financial and technical
resources than the Company and have the ability to operate independently or with
global or local partners and to obtain a dominant position in these markets. The
Company believes that it has a competitive advantage in each of these markets
because of its operating history, its ability to bundle a broad range of
telecommunications services in the region and its ability to make rapid
decisions in pursuing new business opportunities and addressing customer service
needs. The Company also believes that its local partnerships and reliance on
nationals in the management of its businesses and joint ventures provide it with
better knowledge of local political and regulatory structures, cultural
awareness and access to customers.
 
     International Services. Sovintel faces significant competition from more
than ten other existing service providers in Moscow, including Rostelecom and
joint ventures between local parties and multinational telecommunications
providers. Large competitors include the "Combelga" joint venture, an RPOA
operator in which Alcatel and the Belgian PTO participate as foreign investors,
"Comstar", a joint venture between GPT Plessey and MGTS, providing services
similar to those provided by the Company, TelMos, a joint venture between AT&T,
MGTS, Global One, through its Moscow based ventures, and Peterstar, in
Petersburg, which is part of the PLDT group. Several smaller companies, such as
DirectNet, and Aerocom provide high-volume and carrier's carrier services in
Moscow. Bancomsvyaz competes in the switched international traffic market with
the Kiev electrosviaz and UTel, a joint venture that includes Western partners
with substantial capital and technical resources who together hold a dominant
share of the Kiev market.The
 
                                       71
<PAGE>   77
 
Company expects that market consolidation will take place among the competitive
field in international services.
 
     Domestic Long Distance Services. The Company believes its major competitors
in the Russian domestic long distance market consist of Rostelecom, the
electrosviazs, including those which are partners in the Company's TeleRoss
Ventures, and a variety of ventures that include Western partners with
substantial financial resources. The most significant of such competitors
include: Global One, through its regional operations; Rustel, a venture that
includes Rostelecom, other Russian partners and International Business
Communication Systems, a Massachusetts telecommunications firm; Belcom, a
private company in which Comsat has a majority interest and which provides VSAT
services primarily to the energy sector; Satcom, a Russian joint venture
licensed to provide local, long distance and international service over private
and public switched networks; Teleport TP, a satellite overlay company jointly
owned by Rostelecom and Petersburg Long Distance that provides satellite
teleports in cities throughout Russia; and Comincom, a Russian private venture.
In the Russian far east, TeleRoss competes with Vostok Telecom, which is owned
by the Japanese companies KDD and NIC and certain Russian partners; and Nakhodka
Telecom, which is owned by Cable & Wireless and certain Russian partners.
 
     GTS both cooperates and competes with Rostelecom. Rostelecom provides only
international and long distance services to international carriers and regional
electrosviazs, and does not provide end-to-end customer services. GTS provides
last mile, account management, and transit services for Rostelecom in Moscow,
and uses Rostelecom channels and switches for both international and long
distance services. GTS provides long distance and international services on an
end-to-end basis, using service elements of Rostelecom, the electrosviazs and
its own resources. However, Rostelecom does compete with Teleross, in that
Teleross provides intercity services to customers, using satellite channels
provided by other state agencies (Intersputnik), and provides transit services
to various electrosviazs, on a traffic overflow basis.
 
     GTS believes that it enjoys a number of competitive advantages in the
Russian domestic long distance market, the most important being the maturity of
its international and data service businesses in Russia. This provides GTS with
access to the services, customers, products, licenses and facilities of its
other businesses. The Company also believes that it has more experienced
management, a more comprehensive strategy to build out a nationwide long
distance network and stronger relationships with many regional telephone
companies and with satellite capacity providers, such as Intersputnik, than most
of its competitors. In addition, the Company believes that it does not have any
significant competitor in the regional inter-city market (i.e., calls between
Russian cities other than Moscow or St. Petersburg).
 
     Data Services. Sovam has several primary competitors in the market for data
services: Global One, which began packet-switched service in Moscow and St.
Petersburg in June 1992, under the Sprint Networks venture; Demos, an Internet
service provider; and Relcom, a cooperative affiliation of computer users that
relies on an older generation of technology that supplies slower and lower-cost
messaging facilities to customers (primarily domestic commodities traders) that
do not require higher levels of service. In addition MCI and Rostelecom have
recently announced their agreement to create a national Internet access network
utilizing Rostelecom's domestic network and MCI's international infrastructure.
Rostelecom has also announced the formation of a new Internet services company
called RTK Internet, with Relcom as its partner. Although Sovam's business has
grown quickly, the Company believes that Global One is the market leader. GTS
believes that other potential competitors, including foreign PSTNs, Infotel,
Infocom and Glasnet, are also active in this market.
 
     Although the Company faces significant competition in this market, it
believes that it enjoys certain competitive advantages, including the ability to
reach a wide area throughout Russia through TeleRoss, innovative service
offerings such as Russia On Line, the maturity of its business in the key
banking services segment, high levels of customer service and support, and high
speed digital channels through TeleRoss.
 
     Local Access Services. The Company believes that its major competition in
the Moscow local access market consists of a number of ventures with Western
partners, including Telmos (which includes AT&T), Comstar (which includes GPT
Plessey), and Combelga. However, since TCM has obtained an allocation of
 
                                       72
<PAGE>   78
 
up to 100,000 numbers, the Company believes that TCM will account for a
substantial proportion of the new capacity to come onto the market within the
next five years.
 
     Cellular Services. Most Russian cellular markets have the potential for
three licensed operators, including one operator for each of the GSM and NMT-450
cellular standards, which Russia has adopted as national standards, and one
operator using the AMPS cellular standard, which has been set as a regional
standard. Many large Western telecommunications operators, including U S WEST,
Deutsche Telekom, STET, Midcom and Millicom, have participated in auctions for
licenses to provide GSM and NMT-450 cellular service to certain significant
Russian urban centers. In addition, a CDMA auction is likely to occur in the
future which could result in one or more CDMA operators entering the market. In
Ukraine, Bancomsvyaz competes primarily with an NMT operator and a GSM operator
in Kiev. Additional GSM licenses were auctioned off in early 1997 and other GSM
operators may enter the market by year end.
 
                                       73
<PAGE>   79
 
WESTERN EUROPE
 
     OVERVIEW
 
     GTS seeks to position itself as the leading independent carriers' carrier
within Western Europe through the development of two ventures, Hermes and
GTS-Monaco Access. Hermes is developing an approximately 17,000 kilometer
pan-European high capacity fiber optic network designed to interconnect a
majority of the largest Western and Central European cities. Hermes is currently
operating over an approximately 240-kilometer portion of the network linking
Brussels and Amsterdam. Hermes expects the initial five country network to be
placed in operation in the second quarter of 1998 and the 17,000 kilometer
network to be operational during the year 2000. Hermes' objective is to become
the leading pan-European carriers' carrier by providing centrally managed
cross-border telecommunications transmission capacity to telecommunications
companies including traditional PTOs and New Entrants. Hermes commenced
commercial service over the Brussels-Amsterdam portion of the network in late
1996. Hermes expects to roll out full telecommunications transport services over
approximately 2,600 kilometers of fiber optic cable linking the cities of
London, Rotterdam, Amsterdam, Antwerp, Brussels, Paris, Dusseldorf and Frankfurt
through April 1998. GTS-Monaco Access operates an international gateway in
Monaco in partnership with, and utilizing the existing gateway infrastructure
of, the Principality of Monaco and provides transit and routing of international
calls to other telecommunications operators. Through its Hermes and GTS-Monaco
Access ventures, GTS is building a new network for transporting voice, data and
multimedia/image traffic for other carriers throughout Western Europe and for
worldwide international voice, data and multimedia/image traffic that either
originates or terminates in, or transits through, Western Europe.
 
     The Company believes that the international segment of the Western European
telecommunications market will be an attractive market for new
telecommunications entrants because of its large size, the high operating costs
and low productivity of current providers, and the barriers to entry created by
the need to control a network and its rights-of-way.
 
     The European telecommunications market has historically been dominated by
monopoly PTOs. This system has ensured the development of broad access to
telecommunications services in Europe, but it has also restricted the growth of
high quality and competitively priced pan-European voice and data services. The
current liberalization occurring in Europe is intended to address these
structural deficiencies by breaking down PTO monopolies, allowing new
telecommunications operators to enter the market and increasing the competition
within the European telecommunications market. In March 1996, the European
Commission adopted a directive (the "Full Competition Directive") requiring the
full liberalization of all telecommunications services in most EU member states
by January 1, 1998. The Company expects that full liberalization in these
European countries will lead to the emergence of New Entrants with new and
competitive service offerings. These New Entrants will seek to provide a more
diverse offering of telecommunications services that are priced competitively,
that offer higher value added services to customers, and that are accompanied by
a high level of customer service. The Company expects this increase in
competition will result in lower prices and a substantial increase in the volume
of traffic and range of telecommunication services provided. The Company
believes that as a result of the increased call volume and growth in value added
services, participants in these markets will require significant amounts of new
cross-border telecommunications transport capacity to provide their services.
 
     The Hermes network will offer PTOs and New Entrants an attractive
alternative for the transport of cross-border European telecommunications
traffic. In the traditional system, PTOs own and control circuits only within
their national borders, and as a result, cross-border traffic must be passed
from one PTO to another PTO at the national boundary. No one PTO therefore owns
or controls end-to-end cross-border circuit capacity. Consequently, the tariff
for cross-border switched voice traffic is determined by a series of bilateral
settlement agreements between PTOs. This system, known as the accounting rate
mechanism (the "ARM"), is highly complex and has kept the price of cross-border
calls at levels significantly higher than the underlying cost of transport and
terminating calls. Increasing competition, however, is forcing PTOs and New
Entrants to explore alternative means of transporting switched voice traffic
across borders. Full liberalization in 1998 will allow the PTOs and New Entrants
to transport this traffic across borders using dedicated circuits such as those
 
                                       74
<PAGE>   80
 
provided by the Company. The alternative for the transport of this traffic will
be for these competing carriers to build their own transport capacity or use
International Private Leased Circuits ("IPLCs") which are provisioned by
combining half-circuits on the networks of two or more PTOs. The Company
believes that there are a number of problems with these options that will make
Hermes' service offering attractive to these carriers. In particular, building
own transport capacity is unlikely to be an attractive option for most carriers
because of the high traffic volumes required to justify the expense, the need to
focus resources on marketing and customer service, the time commitment and the
regulatory and administrative complexities involved. Significant among these is
obtaining the rights of way along which to construct fiber optic cable across
national borders as these typically do not meet at the border crossing. Those
that do meet are often not available on both sides. Likewise, IPLCs provided by
the PTOs also have a number of disadvantages, including high prices, lack of
end-to-end quality control, lack of redundancy, low quality due to diversity of
network systems and equipment, limited availability of bandwidth and long lead
times for provisioning.
 
     GTS believes that it is well-positioned to become the leading independent
carriers' carrier within Western Europe as a result of several competitive
advantages. These competitive advantages include Hermes' anticipated early entry
with respect to the provision of services over both a high bandwidth
pan-European network and an international gateway with full PTO recognition
through GTS's partner in Monaco; access to customers early in the development of
their own businesses; cost structures which are not burdened by legacy networks
and historical monopoly operations; and existing partners that will be
developing domestic telecommunications operations.
 
     HERMES RAILTEL
 
     Hermes' objective is to become the leading pan-European carriers' carrier
by providing cross-border centrally managed telecommunications transmission
capacity to telecommunications companies including PTOs and New Entrants. Hermes
intends to offer these target customers a better transport system than is
currently available in Europe with a higher and more consistent level of
transmission quality, redundancy, network functionality and service across
Europe at lower prices. Development of the Hermes network is dependent upon,
among other things, Hermes' ability to obtain the necessary financing,
rights-of-way, licenses and other regulatory approvals in a timely and
cost-effective manner. See "Risk Factors -- Hermes Network Roll-out."
 
     Hermes is developing an approximately 17,000 kilometer, pan-European high
capacity fiber optic network designed to interconnect a majority of the largest
Western and Central European cities. Hermes began initial trials of the
Brussels-Amsterdam portion of the network in the third quarter of 1996 and
commenced commercial service in November 1996. Hermes expects the initial five
country network to be placed in operation in the second quarter of 1998 and the
17,000 kilometer network to be operational during the year 2000. Each access
point of the network will be placed in operation as it is linked to the network.
Hermes intends to build the network using the most accessible and cost-efficient
infrastructure base in each of the regions served, including using rights-of-way
and existing infrastructure of railways, motorways, pipeline companies,
waterways and power companies. Hermes plans a flexible approach to the network
build-out plan and intends to fine-tune the scope, route and design of the
network based upon the evaluation of customer demand.
 
     Hermes expects to continue to roll-out full telecommunications transport
service on the initial five country network linking London, Rotterdam,
Amsterdam, Antwerp, Brussels, Paris, Dusseldorf and Frankfurt through April
1998. The initial five country network is expected to consist of 2,600
kilometers of fiber optic cable covering countries which, in 1995, originated
over 60% of all outgoing calls and terminated over 60% of all incoming calls in
the countries to be served by the network. Network coverage is planned to be
expanded to include Geneva, Zurich, Stockholm, Copenhagen, and Milan in the
third quarter of 1998. Additional extensions of the network to be completed in
phases through the year 2000 will be built-out into Southern and Central Europe.
The Hermes network is expected to have points of presence in at least 32 cities
in 15 European countries.
 
     Hermes has entered into agreements for the construction and/or lease of
fiber optic routes for the initial five country network, except for some of the
routes in Germany which are currently under negotiation. Hermes has
 
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<PAGE>   81
 
completed the construction of one of the two undersea cables connecting the
United Kingdom to the Netherlands and to Belgium, which should be placed in
commercial service in January 1998. In France, Hermes has reached agreement with
an operator of motorways for the use of approximately 600 kilometers of
infrastructure in northern France, and has agreements with other providers to
complete the French segment of the initial five country network. Hermes expects
to start commercial service connecting Paris to Brussels, Amsterdam and London
by January 1998. Contracts are currently being negotiated with respect to the
portion of the network connecting Germany with each of France, the Netherlands
and Switzerland. Hermes has also entered into an agreement with two utility
companies to develop portions of the network in Germany and expects that
Dusseldorf, Frankfurt and Stuttgart will be connected to the network by April
1998. In addition, Hermes will be provided transport services between Stockholm
and Copenhagen pursuant to an agreement.
 
     Hermes continues to negotiate rights-of-way and other infrastructure
arrangements in six other Western European countries representing the remainder
of the Western European portion of the rollout, which negotiations involve
railway and other infrastructure providers. Hermes will need to negotiate
similar agreements to complete the network in four Central European countries.
Buildout of the Hermes network is subject to numerous risks and uncertainties
that could delay deployment or increase the costs of the network, or make the
network commercially unfeasible. See "Risk Factors -- Hermes Network Roll-out."
 
     Hermes was formed on July 6, 1993 by HIT Rail. HIT Rail was incorporated in
1990 by eleven national railways to carry out telecommunications engineering
activities in order to construct and exploit a data communications network for
railway traffic. GTS-Hermes purchased a 34.4% interest in Hermes in 1994 and has
increased its interest to 50% in 1995 and to 79% in 1997. GTS-Hermes is a wholly
owned subsidiary of GTS.
 
     Business and Marketing Strategy
 
     The overall strategy of Hermes is to offer PTOs and New Entrants
pan-European cross-border telecommunications transport services to help them, in
turn, more successfully meet the needs of their end-user customers. The Hermes
network also provides a vehicle through which a carrier can compete in other
markets where the carrier does not own infrastructure. Hermes expects to enter
the market ahead of competition and encourage a wide variety of carriers to use
its network with service offerings that meet their needs. Hermes' primary
service offerings are large-capacity circuits for "wholesale" customers such as
PTOs and New Entrants. Hermes does not intend to market its services to retail
end-user customers such as corporations. Hermes' focus on carriers is designed
to complement and not compete with carriers' own business objectives in
providing services to end-users.
 
     To establish Hermes as the leading carriers' carrier for international
telecommunications within Europe, Hermes intends to offer its customers
significantly higher quality transmission and extended/advanced network
capabilities at a competitive price by focusing on the following:
 
          High Capacity International Network Facilities.  The Hermes network is
     designed to offer its customers access to high capacity network facilities
     outside their domestic markets, providing cross-border capabilities without
     requiring customers to invest in network infrastructure or being
     constrained by a narrow range of capacity offerings.
 
          Uniform Network Architecture.  The Hermes network is designed to offer
     managed transport services from country to country and across multiple
     countries utilizing a single uniform network, in contrast to services
     currently available that use multiple providers over several networks with
     varying technologies and each under the control of separate, not
     necessarily compatible, network control systems. The Hermes network's
     uniform technology enhances service by providing quality and reliability as
     well as uniformity of features throughout the network.
 
          Diverse Routing.  The Hermes network architecture includes diverse,
     redundant routes that are designed to provide high levels of reliability.
     The network is designed to provide availability of over 99.98% for most
     routes and to provide customers with a wide range of telecommunications
     transmission capacity. To achieve this level of reliability without the use
     of a network similar to the Hermes network,
 
                                       76
<PAGE>   82
 
     Hermes believes that carrier customers would need to purchase additional
     dedicated circuits to provide for redundancy.
 
          Rapid Provisioning.  Hermes services provide access to the network,
     such that additional capacity can be provided to customers on the Hermes
     network on a rapid basis. This access provides a level of capabilities that
     Hermes believes is unavailable in Western Europe today.
 
     - Flexibility.  Hermes services are focused on providing customers
       flexibility across the network through which the customer may minimize
       risk by enabling network rerouting, eventually even under customer direct
       control.
 
     - Advanced Technology.  Hermes is deploying SDH technology which, by using
       WDM techniques and hardware, is upgradeable and will permit significant
       expansion of transmission capacity without increasing the number of fiber
       pairs in the network. This technology also provides the basis for
       structuring advanced operating features, such as virtual private network
       service and ATM-based services.
 
     - Innovative Pricing.  Currently the price of E1 equivalent circuits on
       transborder European routes is artificially high and not necessarily
       related to the cost of such circuits. Hermes intends to offer competitive
       pricing. Hermes will also offer highly tailored contract terms and volume
       discounts, which allow carrier customers to plan more efficiently the
       fixed costs of their service portfolio. Customers can select varying
       capacity, access, guaranteed availability and contract terms at
       competitive prices. Customers sourcing from PTOs are generally limited to
       order from a very narrow set of capabilities offered under inflexible
       pricing plans.
 
     Although Hermes and GTS have relationships with certain PTOs for specific
projects, they do not have wide-ranging alliances with any of the major
consortia or large Western telecommunications companies. Additionally, Hermes'
Western European strategy calls for it to focus on carriers' carrier services,
so that it will not compete with its carrier customers in consumer or corporate
markets. Hermes believes that this independence will make it an attractive
service provider for Western European carriers who may otherwise be reluctant to
obtain services from other providers of intra-European transport that also may
be their competitors in the retail market.
 
     SERVICES
 
     Hermes' primary service is large capacity cross-border European circuits
provided over an integrated, managed pan-European network structure thus
providing a service for wholesale customers such as PTOs and New Entrants.
Hermes' service is not intended for business or residential end users. The
Hermes network will be based on SDH technology, which provides for digital
transmission capability upon which a broad range of advanced functionality may
be built and which offers network availability, flexibility, bandwidth speeds
and error performance not otherwise available to carriers for transport of
telecommunications traffic across national borders in Western Europe. The
network is designed to provide customers with a wide variety of bandwidth
speeds, ranging from VC12/E1 Standard (equivalent to 2.048 Mbps) to STM-1/E4
Standard (equivalent to 155 Mbps) and beyond.
 
     Hermes will provide high quality cross-border transmission services for
licensed telecommunications providers. Services are based on the principle of
adding greater value than currently available in the market while retaining
competitive prices. Currently, Hermes is providing one structured service
offering (Point-to-Point Transport Service) on its Brussels-Amsterdam link and
an additional service offering (Virtual Infrastructure) will be available upon
completion of the Brussels-Amsterdam-London ring of the initial five country
network.
 
     Point-to-Point Transport Service.  The current market for cross-border
transport is served by IPLCs provided by PTOs. IPLCs are formed by combining
half-circuits from two PTOs between customer locations, often with additional
PTOs providing transit segments. Under the IPLC service, overall service quality
guarantees generally are not provided and only a limited range of bandwidth is
available, usually only E1 and in certain instances, E3. The Company believes
that Hermes' Point-to-Point Transport Service will be a major
 
                                       77
<PAGE>   83
 
improvement to the PTO-based approach because it provides a greater range of
bandwidths (from 2 Mbps (E1 or VC-12) to 140/155 Mbps (E4 or VC-4)) and allows
customers to choose a service level agreement with guarantees appropriate for
their applications, including guarantees for on-time service delivery and
service availability.
 
     Point-to-Point Transport Service consists of two services, "Integrated" and
"Node-to-Node." The Hermes "Integrated" service provides an end-to-end service
between customer-specified locations where the customer can request for Hermes
to arrange for "last mile" services from the Hermes node location to the
customer's location. The Hermes "Node-to-Node" service can be selected only
where the customer provides its own services to reach the local Hermes node
location. In Node-to-Node Service, Hermes guarantees service only on its portion
of the network between Hermes nodes. Both services will be competitively priced
relative to current service offerings. A premium is charged for the highest
guaranteed level of service which incorporates an end-to-end, fully diverse,
protected, "Integrated" service. The customer can choose flexible contract terms
from one to five or more years' duration, with volume discount schemes designed
to ensure that Hermes remains a cost-effective solution.
 
     Virtual Infrastructure Service.  Carriers and operators that plan to expand
their operations to become pan-European service providers as the European
marketplace is liberalized require a flexible and cost-effective means of
telecommunications transport. To date such service providers obtain European
cross-border transport service by leasing IPLCs from PTOs. Leasing IPLCs
requires a carrier to lease channels on a segment-by-segment basis from multiple
PTOs, linking the target cities under arrangements having fixed capacity and
pricing structure for each segment of the carrier's network. Leasing IPLCs has
several disadvantages, including (i) difficulty in obtaining discount/volume
pricing schemes since there is no single provider of pan-European coverage, (ii)
delays in implementation due to numerous contractual negotiations and having to
interconnect numerous IPLCs, (iii) limited availability of pan-European leased
capacity at high bandwidth and (iv) variability of quality due to multiple
operators and the absence of a single uniform network. Operators could also
construct their own network, which is expensive, time-consuming and complex and
which may not be justified by such operators' traffic volume.
 
     Hermes' Virtual Infrastructure Service will offer a new solution and an
attractive alternative to leasing IPLCs or building infrastructure. This service
will enable Hermes' customers to obtain a uniform pan-European or cross-border
network under one service agreement by allowing the customer to select any
number of cities along the Hermes network at a pricing structure based on the
overall amount of leased capacity for the customer's entire network. The key
feature behind Virtual Infrastructure Service is that it gives the customer the
ability to reconfigure or shift capacity among the customer's leased channels,
thereby enabling the customers to respond almost immediately to changes in
traffic. By being able to transfer capacity among the network routes, Hermes'
customers are able to avoid the risks of over- and under-utilization of leased
channels. This service offering provides a customer with the benefits of
ownership (rapid provisioning, freedom to rearrange and control) with a
"pay-as-you-go" managed service offering, without the burdens of up-front
investment and costs required to build a network, and without having to manage
the on-going maintenance and operation of the network.
 
     The service is delivered through pre-installed physical facilities at each
of the customer locations. These facilities are designed to ensure that most
growth or changes in customer requirements can be addressed purely by remote
logical reconfiguration from the Hermes Network Operations Center. This remote
network management ability is inherent in SDH technology and allows rapid
provisioning and high quality of service.
 
     Sales and marketing of Hermes' services are conducted through its sales and
marketing department, which includes a director and senior sales managers
responsible for various regions and customer segments. Additionally, Hermes
expects that its railway shareholders that develop domestic telecommunications
businesses, or other local network access providers, can provide an effective
distribution channel to smaller carrier customers.
 
                                       78
<PAGE>   84
 
     PRICING
 
     Currently the price of cross-border pan-European calls are often
significantly higher than the underlying cost of transport and terminating such
calls and higher than the price of intra-country calls or transborder calls to
and from liberalized markets. The low cost of operating the network enables
Hermes to attractively and competitively price services in the face of declining
overall tariffs for telecommunication services. Hermes' low-cost basis is due
to, among other things, its use of up-to-date technology without the burden of
legacy networks, which requires fewer employees to operate.
 
     The term of a typical customer agreement is expected to be from 1 to 3
years. The customer agrees to purchase, and Hermes agrees to provide,
cross-border transmission services. In general the customer agrees to pay
certain non-recurring charges and recurring charges on an annual basis, payable
in twelve monthly installments. If the customer terminates the service order
prior to the end of the contract term, it is generally required to pay Hermes a
cancellation charge equal to three months service for each of the twelve months
remaining in the contract term. Hermes guarantees transmission services to a
certain service level. If such levels are not met or Hermes fails to deliver
service by the committed delivery date, the customer is eligible for a credit
against charges otherwise payable in respect of the relevant link.
 
     CUSTOMERS
 
     Hermes' high capacity, SDH-based fiber optic network is designed to enable
PTOs and New Entrants to integrate high quality, cross-border capacity into
their end user offerings. Hermes will target seven major market segments or
customer groups which can be characterized as follows:
 
        -  Alternative Carriers.  This segment consists of second carriers,
           cable TV and mobile carriers and competitive access providers. These
           new carriers have chosen to compete with the incumbent PTOs in their
           respective countries, and the Company believes that they would look
           very favorably to an alternative such as Hermes. Hermes believes that
           this segment will sustain the largest growth as competition emerges
           in Europe. Hermes also believes that non-PTO competitors in Europe
           will prefer to use a non-PTO alternative like Hermes to meet their
           cross-border telecommunication transport needs.
 
        -  Existing PTOs.  This customer segment consists of the traditional
           European PTOs that generally participate in the standard bilateral
           agreements for cross-border connectivity. Hermes provides a vehicle
           for PTOs to compete in non-domestic markets both before and after
           January 1, 1998. Prior to January 1, 1998 when liberalization of the
           provision of switched telephony (reserved traffic) is scheduled to
           occur in the majority of Western European markets, a significant
           market opportunity for Hermes exists to provide cross-border
           transport services to PTOs for their non-reserved international
           traffic outside the standard ITU settlement process. As of January 1,
           1998, both reserved and non-reserved traffic can be transported by
           alternative infrastructure providers, thus vastly expanding the
           available PTO market for Hermes.
 
        -  Global Consortia of Telecommunications Operators.  Many of the
           largest PTOs and international carriers have pooled resources and
           formed consortia in order to compete more effectively in important
           telecommunications markets such as those in Western Europe
           particularly outside their home markets. Prior to liberalization of
           the provision of switched voice services in Western European markets,
           one of the primary objectives of these consortia is to provide
           non-reserved pan-European services to multinational business
           customers, including X.25/frame relay (high speed data network)
           service and closed-user group voice services. Under the current
           regulatory framework, consortia would otherwise be required to
           purchase leased lines at negotiated retail rates, even within their
           home countries. Hermes believes that it provides an attractive
           alternative at better pricing in those environments where such a
           consortium does not already own its infrastructure. Furthermore,
           Hermes believes that it is well positioned to provide cross-border
           connectivity between different domestic infrastructures of these
           alliances.
 
                                       79
<PAGE>   85
 
        -  International Carriers.  This customer segment consists of carriers
           whose primary business is to transport traffic between European and
           other international gateways. Such carriers include Teleglobe and
           GTS-Monaco Access. Hermes can provide these customers a pan-European
           distribution network to gather and deliver traffic to and from their
           own and other hubs.
 
        -  Internet Backbone Networks.  Internet backbone networks are a fast
           emerging segment and are expected to generate significant
           requirements for the services Hermes offers. These require large
           capacity international connectivity services between Internet nodes
           (point of interconnection between local Internet service providers)
           in all local European markets. The Internet segment is experiencing
           significant growth in demand for transmission capacity.
 
        -  Resellers.  Resellers are carriers that do not own transmission
           facilities, but obtain communications services from another carrier
           for resale to the public. Resellers are also a growing segment of the
           market and are expected to increase in conjunction with the
           liberalization of the European telecommunications market. In the
           U.S., for example, resellers were a significant factor in the
           expansion of competition.
 
         - Value Added Networks ("VANs") and other Service Providers.  VANs are
           data communications systems in which special service features enhance
           the basic data transmission facilities offered to customers. Many of
           these networks are targeted to the data transfer requirements of
           specific international customer segments such as airlines and
           financial institutions. VANs' basic network transmission requirement
           is to connect data switches or processors. VANs currently purchase
           their own international circuits and build additional resiliency into
           their network infrastructure. Hermes will allow them to meet these
           needs cost-effectively, and to extend their services to new markets
           or customers without substantial capital investment.
 
     Hermes expects that additional demand for alternative service providers
will come from increased usage of dedicated circuits for Internet access,
private lines for the deployment of wide-area networks by large corporations,
"single source" local and long distance services by small and medium-sized
businesses and emerging broad band applications such as cable TV programming
distribution (other than broadcast) to the end user.
 
     CURRENT OPERATIONS
 
     Hermes is currently operating the network on the Brussels-Amsterdam link
with additional access points in Antwerp and Rotterdam. Hermes began initial
trials of this 244 kilometer portion of the network in the third quarter of 1996
and commenced commercial service in November 1996. Hermes' Network Operations
Center located in Brussels, Belgium and its backup center located in Antwerp,
Belgium are fully operational and house network management and customer support
services which operate 24 hours a day, seven days a week. Billing and customer
service functions are also operational. Currently nine customers are under
contract for service on the Hermes network, including PTOs, a global consortium
of PTOs, Internet service providers, an international carrier, a VAN and a
reseller. Hermes provided capacity of approximately 30 E1 equivalent circuits as
of June 30, 1997.
 
     The Brussels-Amsterdam route is a relatively small part of the initial five
country network and is only a point-to-point link that does not provide the
automated redundancy and access of a complete ring network. The route does have
a spare backup fiber pair on key segments to enhance customer reliability. The
type and quality of Hermes' customers validates the concept of the Hermes
network, and illustrates the type of customers who will be attracted to the full
network. The success of this link also demonstrates the demand for cross-border
transport services.
 
     NETWORK DESIGN
 
     Network Architecture.  The network architecture is based on a highly meshed
flat topology which covers a wide geographical area with large distances between
individual network nodes. This architecture allows
 
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<PAGE>   86
 
rerouting of traffic at electronic speeds in the event of a network failure.
This approach also lowers network cost by allowing each node to be sized to
match anticipated traffic volumes rather than to a standard capacity. Individual
nodes can be configured to connect any trunk to any other in the nodes, thus
allowing efficient transmission of traffic. Each node will be connected to at
least two other nodes allowing rerouting of traffic in the event of a network
failure. Hermes believes that its network will be the first cross-border
pan-European network with such redundancy.
 
     The Hermes network has been designed to be controlled by a single network
management center and supported by advanced operational support systems. A
centralized network center can pinpoint overloaded pathways or malfunctioning
circuitry and reroute traffic much more quickly than networks controlled by
separate network centers operated by PTOs in different countries. Hermes uses a
single vendor for the supply of transmission equipment and network management
systems. Hermes' advanced operational support systems allow it to correct
network failures and isolate equipment faults with greater speed and at a lower
cost than is the case with heterogeneous multi-operator networks. Critical
elements of the network, including network maintenance and control systems, are
designed with redundancy in order to ensure a high quality of service. The
network design has several important resilience features including: multiple
paths to each node, built-in hardware redundancy and redundant power supplies.
For all network routings, there will be at least two paths. Should service
failure occur on one route, the network is designed to automatically re-route
traffic to another route. Hermes believes that these techniques will result in
performance of 99.98 percent or better for premium service customers for most
routes.
 
     Hermes expects to operate the entire network and to own substantially all
of the network equipment as well as some segments of the fiber optic cable. A
substantial part of the fiber is leased on a long-term basis. Long-term leases
for fiber are advantageous to Hermes because they reduce the capital expense
burden of building large quantities of capacity before they can be used. Where
Hermes leases dark fiber, the infrastructure provider will generally be
responsible for maintaining such fiber optic cable. Hermes has concluded an
agreement with Alcatel to supply equipment. Hermes will enter into agreements
with Alcatel and infrastructure providers and other third parties to maintain
the equipment for the Hermes network. See "Risk Factors -- Hermes Network
Roll-out."
 
     Network Capacity.  The network will consist of Synchronous Digital
Hierarchy ("SDH") STM-16 links delivered over fiber owned by Hermes and dark
fiber leased from infrastructure providers. Each line system and multiplexer
works initially at the 2.5 Gbps (STM-16) level. Systems with higher bit rates
(STM-64) are planned for introduction after 1999. The most important types of
equipment used or to be used in the network are Alcatel 1661 SM-C ADM nodes used
as Add-Drop Multiplexors ("ADMs") and regulators and a variety of optical
amplifiers for boosting optical signals. Hermes expects to size the network
through successive upgrades so that the network has at least twice the amount of
capacity it is forecast to require in any given year. Network capacity upgrades
can be accomplished optically through Wavelength Division Multiplexing ("WDM")
technology to multiply the then-existing network capacity without adding fiber
optic cable.
 
     Network Agreements.  Hermes has entered into agreements and letters of
intent with various infrastructure providers for construction and/or lease of
portions of the Hermes network. Hermes' agreements for leases of portions of the
network typically required the infrastructure provider to provide a certain
number of pairs of dark fiber and node and/or regenerator sites along the
network route commencing on certain dates provided by Hermes. The term of a
lease agreement typically ranges from 10 to 15 years. An agreement typically
contains optical specification standards for the fiber and methods of testing.
Hermes is allowed to use the cable for the transmission of messages and in other
ways, including increasing capacity. The infrastructure provider also provides
space for the location of equipment and spare parts and guarantees the provision
of power and other utilities together with environmental controls and security
to ensure the proper functioning of the equipment. The infrastructure provider
is typically responsible for maintenance of the cable and the provision of first
line maintenance to equipment and permits Hermes access to such facilities.
Access arrangements to the nodes are also provided so that connection may be
made to Hermes customers or to the rest of the network. An agreement also
provides for an annual price for the provision of fiber and for the facilities
and maintenance. The agreements typically provide for termination by the parties
only for material breach, with a 90 day cure
 
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<PAGE>   87
 
period. The agreements typically contain a transition period after termination
of the agreement to allow Hermes to continue to serve its customers until it can
reach agreement with an alternative infrastructure provider.
 
     Local Access.  Access to the Hermes network will be provided to clients
through SDH access lines including at the STM-1 or STM-4 level. However,
customers who continue to use the older PDH technology may also access the
Hermes network. In each city, as an Hermes POP is deployed, Hermes may contract
with a local access network supplier for "last mile" services to customer
locations. Hermes will not invest in building local access infrastructure but
such connectivity can be supplied on a case-by-case basis via preferred local
access partner arrangements. Currently Telfort in the Netherlands and Belgacom
in Belgium are providing local access to the operating Amsterdam-Brussels route.
In London and Paris, Hermes has contracted to connect the Hermes network to
intra-city networks in those cities. Pursuant to this agreement, Hermes can
offer its carrier customers local connectivity in those cities. Local access
network suppliers may also be interested in Hermes for the purpose of linking
the business centers in which they are active. Therefore, the Company believes
that the relationships between Hermes and local access network suppliers can
benefit both parties. Set forth below is an illustration of the connection
between the Hermes network and local access providers.
 
                                      LOGO
 
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<PAGE>   88
 
     Network Routes.  The table below sets forth the planning dates as of June
30, 1997 of the development of routes in the initial five country network.
 
<TABLE>
<CAPTION>
                                    ESTIMATED
                                   COMMERCIAL
                                     SERVICE              TOTAL ROUTE
                                  AVAILABILITY           KILOMETERS OF
FROM -------      TO -------          DATE                   FIBER
                                  -------------               ---
<S>               <C>             <C>                    <C>
Amsterdam         Brussels        Operational                 244
Amsterdam         London          January 1998                369
Brussels          London          January 1998                386
Paris             Brussels        January 1998                492
Paris             Frankfurt       April 1998                  631
Frankfurt         Dusseldorf      April 1998                  181
Dusseldorf        Amsterdam       February 1998               306
</TABLE>
 
     The Amsterdam-London, Brussels-London, Paris-Brussels and Paris-Strasbourg
fiber optic routes are currently under construction. "Under construction" means
that with respect to each of the segments that make up each of these routes, one
of the following is occurring: (i) Hermes has contracted to build or is
contracting to build the fiber optic cable segment, and (ii) Hermes has leased
or will lease such segment of fiber optic cable from a third party who has built
or is currently building such segment. For each of the Frankfurt-Dusseldorf and
Dusseldorf-Amsterdam routes, Hermes is currently negotiating construction and/or
lease contracts. For the Strasbourg-Frankfurt route, Hermes Railtel is
negotiating construction and/or lease contracts for some segments of the route
and has some segments of the route under construction. The dates set forth above
may be subject to delays due to a variety of factors, many of which are beyond
the control of the Company. See "Risk Factors -- Hermes Network Roll-Out."
 
     Hermes Railtel is deploying the network along the rights-of-way of several
shareholders as well as the rights-of-way of a variety of alternative sources,
including motorways, waterways, pipelines and utilities. The rights-of-way of
Hermes-built portions of the network will be provided pursuant to long-term
leases or other arrangements entered into with railroads, highway commissions,
pipeline owners, utilities or others. Hermes generally prefers to use the
infrastructure of its rail-based shareholders when such infrastructure is
available on a timely and commercially reasonable basis. In certain cases,
however, Hermes Railtel has not been able to reach agreement with such
shareholders for the provision of rights-of-way along their railways, which has
resulted in significant delays to the network buildout. In all cases, it is the
policy of Hermes to evaluate multiple alternative infrastructure suppliers in
order to maximize flexibility. As a result of its network development activities
to date, Hermes has gained access to infrastructure for its network routes
which, in certain cases, Hermes believes will be difficult for its competitors
to duplicate.
 
     Competition
 
     The European and international telecommunications industries are
competitive. Hermes' success depends upon its ability to compete with a variety
of other telecommunications providers offering or seeking to offer cross-border
services, including (i) the respective PTO in each country in which Hermes
operates and (ii) global alliances among some of the world's largest
telecommunications carriers. Hermes expects that some of these potential
competitors may also become its customers. Hermes believes that the ongoing
liberalization of the European telecommunications market will attract New
Entrants to the market and increase the intensity of competition. Competitors in
the market compete primarily on the basis of price and quality. Hermes intends
to focus on these factors and on service innovation as well. Hermes business
plan anticipates substantial head-to-head competition as well as indirect
competition.
 
     WorldCom, Inc. recently announced plans to construct a pan-European fiber
network, the first phase of which is expected to connect London, Amsterdam,
Brussels and Paris by early 1998. Although the Company believes that the
proposed WorldCom pan-European network is primarily intended to carry WorldCom
traffic, WorldCom has stated that any excess capacity on such network will be
used to provide a competitive carrier's carrier service.
 
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     If Hermes' competitors, many of whom possess greater technical, financial
and other resources than Hermes, devote significant resources to the provision
of pan-European, cross-border telecommunications transport services to carriers,
such action could have a material adverse effect on Hermes' business, financial
condition and results of operations. There can be no assurance that Hermes will
be able to compete successfully against such new or existing competitors. See
"Risk Factors -- Competition."
 
     Hermes Railtel Recapitalization
 
     Hermes is currently completing a recapitalization (the "Hermes
Recapitalization"), wherein Hermes extended rights to subscribe to additional
shares of Hermes to GTS-Hermes, HIT Rail and the eleven railways comprising the
HIT Rail consortium. Pursuant thereto, GTS-Hermes and two of the eleven railways
that comprise the HIT Rail consortium have exercised their subscription rights,
while HIT Rail and the other nine railways have declined to exercise their
subscription rights. Hermes has issued (i) 150,592 shares to GTS-Hermes in
exchange for the conversion of loans and additional consideration, (ii) 24,007
shares to HIT Rail in exchange for the conversion of loans, (iii) 11,424 shares
to Societe Nationale des Chemins de Fer Belges S.A. de Droit Public/Nationale
Maatschappij der Belgische Spoorwegen N.V. Van Publiek Recht (the Belgian
national railway) ("SNCB/NMBS") and (iv) 4,365 shares to AB Swed Carrier (a
wholly owned subsidiary of SJ, the Swedish national railway). As a result,
GTS-Hermes owns approximately 79%, HIT Rail owns approximately 13%, SNCB/NMBS
owns approximately 6% and AB Swed Carrier owns approximately 2% of the
outstanding Hermes shares. Pursuant to the Hermes Recapitalization, Hermes,
GTS-Hermes, HIT Rail, SNCB/NMBS and AB Swed Carrier have executed a new
Shareholders Agreement, the principal terms of which are set forth below.
 
     Under the new Shareholders Agreement, actions to be taken by shareholders
will be adopted by a simple majority vote with the exception of certain actions
which will require at least 85% of the votes cast: (i) purchase by Hermes of its
own shares and any redemption thereof, (ii) exclusion of preemptive rights in
the case of the issuance of new shares and the transfer of shares held by
Hermes, except in the event of a public listing of the shares or of new shares
or of an offering of shares or options on new shares (warrants) to professional
investors in order to obtain further funding, (iii) winding up or dissolution of
Hermes, (iv) any amendment to the articles of association other than those
pertaining to increases in the authorized capital of Hermes or to convert Hermes
into an N.V. ("Naamloze Vennootschap") to enable a public listing of shares or
new shares, (v) any amendment to the scope of Hermes' business, (vi) the
declaration of dividends and (vii) the admission of new shareholders to the
Shareholders Agreement. In addition, the Shareholders Agreement provides that
(a) if GTS-Hermes is the owner of at least 50% of the issued shares, then it
will have the right to make a binding nomination for the appointment of half of
the members of the Board of Supervisory Directors or (b) if GTS-Hermes is the
owner of at least two-thirds of the issued shares, then it will have the right
to make a binding nomination for the appointment of half of the members of the
Board of Supervisory Directors plus one additional member. As long as HIT Rail
is the owner of at least one share, HIT Rail will be entitled to make a binding
nomination for the appointment of at least one member of the Supervisory Board.
The shareholders agreement also provides that shareholders that are not
GTS-Hermes and HIT Rail with a shareholding of at least 6.8% subject to
adjustment in the discretion of the other shareholders will be entitled to make
a binding nomination for the appointment of one member of the Board of
Supervisory Directors. Shareholders other than GTS-Hermes who hold fewer than
6.8% of the issued share capital of Hermes will be entitled on a rotating basis
to make one binding nomination for the appointment of a member of the Board of
Supervisory Directors for two-year periods.
 
     Articles of Association and Shareholders Agreement
 
     Under the Articles of Association and the Shareholders Agreement, both
GTS-Hermes and HIT Rail have preemptive rights in connection with issuances of
ordinary shares and options on shares to be issued in proportion to the total
nominal value of the shares held by each of them. Preemptive rights can be
exercised for four weeks after the date the notice of the offer is received by
the shareholders.
 
     The Shareholders Agreement provides that Hermes or its designated vendor
will provide fiber capacity in its network for use by the shareholders of Hermes
on fair commercial terms, use, quantity and price to be
 
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negotiated on a bilateral basis. In the Shareholders Agreement, HIT Rail has
covenanted to (i) use its best efforts to establish such commercial agreements
between individual HIT Rail shareholders and Hermes, to obtain rights of way
from individual HIT Rail shareholders and to cooperate in obtaining such
licenses as may advance the business of Hermes, (ii) use its best efforts to
ensure that the HIT Rail shareholders cooperate in obtaining such license in
accordance with the business plan of Hermes and as may be necessary or advisable
in furtherance of Hermes' business, (iii) will not, so long as both HIT Rail and
GTS-Hermes are shareholders of Hermes and for one year after HIT Rail ceases to
be a shareholder, agree with any entity other than GTS-Hermes or Hermes to
assist or cooperate in the development of any pan-European telecommunications
operator and (iv) use its best efforts to obtain on Hermes' behalf such
materials as may be required and arrange inspection visits of selected rights of
way for the purpose of making initial cost estimates.
 
     The foregoing summary of the Shareholders Agreement does not purport to be
complete and is qualified in its entirety by reference to the Shareholders
Agreement.
 
LICENSES AND REGULATORY ISSUES
 
     A summary discussion of the regulatory framework in the countries of the
initial five country network and the next five countries into which Hermes
expects to develop the network is set forth below. This discussion is intended
to provide a general outline, rather than a comprehensive discussion, of the
more relevant regulations and current regulatory posture of the various
jurisdictions.
 
     National authorities in individual member states of the EU are responsible
for regulating the operation (and in some cases the construction) of
telecommunications infrastructure. Hermes believes that the adoption of the Full
Competition Directive and the various related Directives adopted by the European
Parliament and the Council of the EU have resulted in the removal of most
regulatory barriers to the operation of telecommunications infrastructure in the
countries of the initial five country network.
 
     Hermes requires licenses, authorizations or registrations in all countries
to operate the network. There can be no assurance that Hermes will be able to
obtain such licenses, authorizations or registrations or that Hermes' operations
will not become subject to other regulatory, authorization or registration
requirements in the countries in which it plans to operate. Licenses,
authorizations or registrations have been obtained in the United Kingdom, the
Netherlands, Belgium and Germany and a license application has been filed in
France. A draft license has been received from the French regulatory authorities
which will be the basis for the final license. However, there can be no
assurance that such license will be granted. Hermes intends to file applications
in other countries in anticipation of service launch in accordance with the
network roll-out plan.
 
     On June 28, 1990, the European Commission, in an effort to promote
competition and efficiency in the Western European telecommunications industry,
issued a directive (the "1990 Directive") requiring EU member states to
immediately liberalize all telecommunication services with the exception of
voice telephony to the general public (basic voice services provided over the
public switched voice network). This step liberalized value added services and
voice services over corporate networks and/or "closed user groups," although the
exact definitions of the terms used in the 1990 Directive were not altogether
clear.
 
     On July 22, 1993, the Council of EU agreed that all voice telephony
services in EU member states should be liberalized by January 1, 1998 subject to
additional transitional periods of up to five years to allow member states with
less developed networks to achieve the necessary adjustments. It was agreed that
such exemptions would be granted to Spain, Ireland, Greece and Portugal, subject
to formal application and satisfaction of certain requirements. Luxembourg,
because of the small size of its market, would be eligible for a special
transitional period of up to two years.
 
     In April 1995, a communication from the European Commission sought to
clarify the types of services that were liberalized by the 1990 Directive,
stating that the burden of proof as to why a service should be considered
"reserved" and therefore not open to competition should be upon the PTOs and the
regulatory authorities of member states. Along with this statement came the
threat of formal procedures under the Treaty of Rome against member states that
do not implement the 1990 Directive "within a reasonable time."
 
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<PAGE>   91
 
Procedures have been brought so far against Italy, Greece, Germany and Spain for
failing to apply the requirements of the 1990 Directive.
 
     On March 13, 1996, the European Commission adopted the Full Competition
Directive extending the 1990 Directive to all services, requiring that licensing
procedures for these services be transparent and non-discriminatory, requiring
member states to fully liberalize alternative infrastructure to allow a
competitive market for "non-reserved" services such as data, value added
services and non-public (closed-user group) switched voice services by July 1,
1996 and mandating open competition in all public telecommunications services,
including voice telephony to the general public, by January 1, 1998 (except for
countries to which grace periods were granted in accordance with the 1993
Council Resolution).
 
     On April 10, 1997, the European Parliament and the Council of Ministers
adopted a Directive on a common framework for general authorizations and
individual licenses in the field of telecommunications services, including
networks. Licenses must be awarded through open, non-discriminatory and
transparent procedures and applications will be required to be dealt with in a
timely fashion. The number of licenses may only be restricted to the extent
required to ensure the efficient use of radio frequencies or for the time
necessary to make available sufficient numbers in accordance with EC law.
 
     In the specific area of concern to Hermes, the European Commission is
seeking to establish EU level guidelines for coordinating national regulatory
frameworks to facilitate the development of pan-European networks. Hermes
believes that many European countries have revised telecommunications
regulations to comply with the 1990 Directive and the Full Competition Directive
and that such changes will enhance Hermes' ability to obtain other necessary
regulatory approvals for its operations.
 
     As a multinational telecommunications company, Hermes is subject to varying
degrees of regulation in each of the jurisdictions in which it provides its
services. Local laws and regulations and the interpretation of such laws and
regulations, differ significantly among the jurisdictions in which Hermes
operates. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on Hermes, that
domestic or international regulators or third parties will not raise material
issues with regard to Hermes' compliance or noncompliance with applicable
regulations or that regulatory activities will not have a material adverse
effect on Hermes. See "Risk Factors -- Government Regulation." The regulatory
framework in certain jurisdictions in which Hermes provides its services is
briefly described below.
 
UNITED KINGDOM
 
     Since the elimination in 1991 of the United Kingdom telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of Oftel, the United Kingdom telecommunications regulatory
authority, to create a competitive marketplace from which detailed regulation
could eventually be withdrawn. The United Kingdom has already liberalized its
market beyond the requirements of the Full Competition Directive, and most
restrictions on competition have been removed in practice as well as in law.
Hermes has received a license from the Secretary of State for Trade and Industry
which grants it the right to run a telecommunications system or systems in the
United Kingdom connected to an overseas telecommunications system and to provide
international services over such systems. Like the licenses granted to other
providers of international facilities-based services, the license granted to
Hermes on December 18, 1996 was for an initial six months' duration and
thereafter is subject to revocation on one month's notice in writing. The short
duration of these initial licenses was adopted for administrative convenience on
the opening-up of the United Kingdom market for international facilities-based
services. The Department of Trade and Industry ("DTI") has indicated that it
intends to replace the initial licenses with new licenses and that it would not
normally expect to revoke an initial license without replacing it with another
license giving an equivalent authorization. The DTI is currently discussing with
license holders the arrangements to put these new licenses into effect and
although the DTI has indicated that the new licenses are expected to be of 25
years duration, there can be no certainty that this will be the case or that the
new licenses will not contain terms or conditions unfavorable to Hermes. It is a
condition of the license that Hermes notify the DTI of certain changes in its
share ownership. In connection therewith, the DTI has been notified of the
Hermes Recapitalization.
 
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THE NETHERLANDS
 
     On July 1, 1997 the Dutch government abolished the prohibition on the use
of fixed infrastructure for the provision of public voice telephony, thereby
complying with the requirements of the Full Competition Directive six months
ahead of schedule. On August 1, 1996, Hermes was granted a license for the
installation, maintenance and use of a fixed telecommunications infrastructure.
Hermes is currently operating under its license in the Netherlands on the
Brussels-Amsterdam-route.
 
     An entirely new Telecommunications Bill was introduced to the Second
Chamber (the House of Representatives) of the Parliament on September 15, 1997.
The new Telecommunications Act is intended to confirm the full liberalization of
the telecommunications market according to European Community standards. It is
not expected that the new Telecommunications Act will detrimentally affect the
conduct of business by Hermes.
 
BELGIUM
 
     Belgium has implemented the "alternative infrastructure" provider provision
of the Full Competition Directive. Full liberalization of competition, including
the provision of voice telephony, requires further legislation which is expected
to be introduced to the legislature in the near future. Hermes has obtained,
through a wholly-owned subsidiary, a license from the Belgian regulatory
authority to provide liberalized services using alternative infrastructure and
is currently operating under its license in Belgium on the Brussels-Amsterdam
route. Hermes also has authorization to build infrastructure between major
Belgian population centers.
 
GERMANY
 
     Germany has approved legislation to implement the Full Competition
Directive and remove all remaining restrictions on competition from January
1998. Hermes was granted a license by the German regulatory authorities on July
18, 1997. The license permits Hermes to operate the portions of the network in
Germany connecting Dusseldorf, Frankfurt and Stuttgart; Dusseldorf to the Dutch
border; and Stuttgart to the French and Swiss borders. Hermes expects to file
applications to extend its license in Germany as appropriate in order to enable
it to operate the remaining portions of the network in Germany.
 
FRANCE
 
     A new regulatory agency, the Autorite de Regulation des Telecommunications
("ART"), was established in France effective January 1, 1997. In 1996, France
approved legislation to implement the Full Competition Directive and to remove
all remaining restrictions on competition from January 1998. However, since this
regulatory agency was established, no licenses for alternative networks have
been granted. To operate the network in France, the Company must receive an
authorization from the French Telecommunications Minister. Hermes filed its
application for authorization in November 1996 and received from the ART a draft
license in May 1997, which will be the basis for the final license. Hermes has
been informed that the ART has approved a recommendation to the French minister
as to the form of the authorization to be granted to Hermes and passed it on to
the responsible ministry for finalization. Upon receipt of such authorization,
Hermes will be allowed to operate the network in specific regions of France.
 
SWITZERLAND
 
     The Swiss Parliament has recently passed a new Telecommunications Law which
will enter into force on January 1, 1998. Although Switzerland is not a Member
State of the EU, the effect of the law is largely to mirror the EC
telecommunications liberalization Directives and therefore from that date
existing voice telephony monopoly will be abolished and such services will be
fully liberalized. An independent national regulatory authority has previously
been established. Hermes intends to apply for a license to provide its services
in due course.
 
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ITALY
 
     Although in the past Italy has been dilatory in implementing EC
liberalization measures, Italy enacted legislation on July 31, 1997 which
substantially completes the liberalization of services in accordance with the
Full Competition Directive. The Parliament has also approved the creation of an
independent national regulatory authority for the telecommunications and
audiovisual sectors. The most recent EC liberalization Directives relating to
licensing and interconnection remain to be implemented. Hermes intends to apply
for a license to provide its services in due course.
 
SPAIN
 
     Under the Full Competition Directive Spain was granted the right to request
a delay of up to five years in liberalizing fully its telecommunications market.
However, the Spanish government and the European Commission have agreed that
full liberalization should take place on December 1, 1998. In order to ensure
effective liberalization from that date, the Commission Decision granting the
eleven month extension sets out a timetable of interim measures leading up to
full liberalization. These measures include the passing of legislation
authorizing regional cable operators to provide telecommunications services and
the adoption of a new General Telecommunications Bill effectively transposing EC
Directives into Spanish law. Further RETEVISION, S.A. has been granted a second
national operator's license to compete with the national PTO and Spain has
agreed to grant a third national operator license in early 1998. Hermes intends
to apply for a license to provide its services in due course.
 
SWEDEN
 
     Full liberalization of the Swedish telecommunications market occurred in
1993. A new Telecommunications Act was passed this year to reinforce the powers
of the national regulatory authority, to ensure conformity with EC Directives
and to supplement the pre-existing licensing regime with a general authorization
regime for services other than telephony services, mobile services and leased
lines. Hermes intends to register to provide its services in due course.
 
DENMARK
 
     With the liberalization of infrastructure from July 1, 1997 Denmark has
fully liberalized its telecommunications markets in accordance with the
requirements of the relevant EC Directives. An independent national regulatory
authority has been established.
 
  GTS-MONACO ACCESS
 
     GTS owns a 50% interest in and manages GTS-Monaco Access, a joint venture
with the Principality of Monaco created to develop Monaco's existing
international telecommunications infrastructure into a leading international
gateway hub for transport of international traffic to European and overseas
destinations. The Principality has constructed and operates a sophisticated
international gateway infrastructure that includes an international digital
switching center and a satellite earth station to support significant amounts of
carriers' carrier traffic. Through Monaco's network, GTS-Monaco Access is linked
to approximately 170 countries worldwide. GTS believes that this partnership
provides it with the opportunity to build a strong international gateway
operator in lucrative Western European markets.
 
     GTS-Monaco Access offers competitively priced international switching and
transit services, primarily to the "wholesale" international gateway and
carrier-to-carrier portion of the international calling market, as distinguished
from "retail" services offered to end users. Basic service offerings include (i)
international switched traffic; (ii) international private lines; (iii)
facilities management, including billing, customer management and fault
reduction systems; (iv) resale distribution for Internet service providers; and
(v) prepaid calling card platform services.
 
     GTS also intends for GTS-Monaco Access to implement additional "advanced
carrier services," including global 0800 services and international free phone.
GTS believes GTS-Monaco Access is well
 
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<PAGE>   94
 
positioned to offer these services, because of Monaco's infrastructure, and
GTS-Monaco Access' low-cost structure, which results from its relatively low
initial investment in its network and its ability to obtain low-cost access in
Western Europe through its joint venture partner and, potentially, through
Hermes.
 
     With the cooperation of Monaco Telecom ("MT"), GTS-Monaco Access is
entitled to exercise the privileges of signatories to international treaties
such as the ITU, and to international satellite agreements, such as Intelsat,
Inmarsat and Eutelsat. Other signatories are generally PTOs and other
quasi-governmental telecommunications entities. GTS-Monaco Access purchases
capacity on international fiber routes at rates available only to recognized
operator which are substantially below the rates charged to other service
providers. These fiber-based facilities are an important element for GTS-Monaco
Access's core network and provide it with capacity that may be leased or resold
to customers. Monaco inaugurated its independent country code, 377, on June 21,
1996, which made it eligible for certain privileges, including special terms
(generally reserved for PTOs) in connection with transmission agreements,
transit agreements, settlements and low-cost accounting rates with select
carriers.
 
     GTS's partner in GTS-Monaco Access is an investment fund designated by the
Principality of Monaco to represent its interests. GTS-Monaco Access functions
in cooperation with MT under a commercial agreement governing, among other
things, the terms of use of existing facilities, access to and acquisition of
new international infrastructure, and sales and marketing. GTS exercises
operational control of the joint venture, and provides managerial and financial
support, international telecommunications expertise and strategic planning. The
agreement between GTS-Monaco Access and MT, by its terms, continues in operation
until 2020.
 
     BUSINESS AND MARKETING STRATEGY
 
     GTS's objective is to develop GTS-Monaco Access into a leading
international gateway hub. The Company's strategy to achieve this objective
includes the following:
 
     - Develop Advanced Carrier Services Offerings. GTS-Monaco Access intends to
       develop its "advanced carrier services" offerings to include global 0800
       services and international free phone services, which GTS believes will
       broaden customer relationships, enhance revenues and help to protect it
       from price-based competition.
 
     - Develop Relationships to Broaden Service Offerings. GTS-Monaco Access has
       begun to develop relationships to broaden its service offerings.
       GTS-Monaco Access has entered into agreements with UUNET, one of its
       gateway customers, to provide wholesale Internet access to GTS-Monaco
       Access's carrier customers in a number of Western European countries. The
       agreement allows these services to be "cobranded" with GTS's affiliates.
 
     - Pricing. Price is a critical factor in the market for international
       switching as competition increases due to expanding international
       capacity, advances in technology and falling regulatory barriers. GTS-
       Monaco Access intends to price its services competitively with the
       prevailing price for comparable inter-PTO transit and gateway services.
       GTS-Monaco Access is not bound by legacy systems, infrastructure and
       personnel levels and can, therefore, manage lower cost operations.
 
     - Leverage Non-Aligned Position. Because GTS's Western European activities
       are not allied with any of the major consortia or large Western European
       telecommunications companies, and generally focus on carriers' carrier
       services, GTS-Monaco Access will not compete with its carrier customers
       in consumer markets. This independence should make GTS-Monaco Access an
       attractive service provider for Western European carriers who may
       otherwise be reluctant to obtain services from the larger operators of
       international gateways that are often their competitors in the retail
       market.
 
     - Exploit GTS Synergies. GTS intends to support GTS-Monaco Access by
       allying it with other GTS companies in Europe and the CIS. GTS-Monaco
       Access is expected to realize significant reductions in its cost
       structure through access to low-cost pan-European transmission capacity
       through alternative infrastructure providers such as Hermes. Sovintel and
       C-Datacom International, Inc., GTS's Indian venture, already route
       international traffic through GTS-Monaco Access's gateway.
 
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<PAGE>   95
 
     - Local Points of Presence. Beginning in the first quarter of 1998,
       GTS-Monaco Access intends to establish points of presence in the United
       Kingdom, France and Germany in order to take advantage of the Hermes
       network rollout and negotiate arrangements with local customers and
       suppliers for the pick up and delivery of international traffic.
 
     CUSTOMERS
 
     Targeted customers for GTS-Monaco Access include:
 
     - Non-Aligned PTOs. While some large American and Western European PTOs and
       multinational service providers have joined together in consortia
       designed to compete in a number of large international markets, several
       PTOs have not aligned themselves with any consortium. Many of these PTOs
       lack adequate international switching and transport facilities of their
       own and are located in telecommunications markets that will be
       experiencing significant growth. GTS believes that these providers can be
       persuaded to purchase international services from GTS-Monaco Access,
       rather than from competing consortia (or the individual members of such
       consortia) who control much of the world's current international traffic.
 
     - Mobile Carriers. As regulatory reforms create more competitive Western
       European markets, GTS believes that non-PTO mobile carriers, which
       currently provide only a small percentage of Western European mobile
       telecommunications traffic, will gain increasing market share from mobile
       carriers controlled by PTOs. GTS believes that some of these non-PTO
       mobile carriers will prefer the "independent" international gateway
       service offerings of GTS-Monaco Access to those of their PTO competitors.
 
     - Internet Service Providers. Growth in Internet usage creates a
       significant opportunity for a nonaligned Internet access provider such as
       GTS-Monaco Access, since many Internet service providers will be in
       direct competition with PTO-owned services in large European markets.
 
     - Second Carriers/Resellers. Second carriers include "established" second
       carriers, some of which have established international links, and
       "emerging" second carriers, which have recently undertaken to challenge
       PTOs. Prior to deregulation of voice telephony in Europe, GTS believes
       that many companies will provide competitive services to, and become
       second carriers in, markets outside their national base and will seek to
       enter new markets quickly without investing in international switching
       capacity.
 
     - Established ("Aligned") PTOs. This customer segment will be a niche
       market for GTS-Monaco Access. For example, carriers maintain a priority
       list in their switches of transit routes to handle overflow traffic
       during peak periods. GTS-Monaco Access may have opportunities for
       incremental revenue by establishing itself as an overflow transit route
       for such carriers. As markets are deregulated and carriers become
       increasingly competitive, traditional friendly correspondent relations
       may become strained, and opportunities may emerge to leverage GTS's
       non-aligned status to route traffic between rivals or to displace
       incumbents for transit relationships.
 
     - Other GTS Companies. GTS-Monaco Access currently provides gateway
       services to Sovintel, CDI and other GTS companies that aggregate traffic
       or provide international long distance services. It may also provide
       these services to Hermes.
 
     NETWORK
 
     GTS has enhanced MT's existing technology platform of digital switching,
fiber optic transmission, satellite and submarine cable facilities by
interconnecting this existing network infrastructure to multiple terrestrial
routes covering Europe and to undersea fiber optic cables connecting the
GTS-Monaco Access network to Asia and the Americas. This network is centered
around Monaco's hubbing capabilities for the joint venture target customers and
for GTS's own traffic. GTS-Monaco Access may, in the future, offer advanced
bandwidth management solutions and GSM, paging, and emerging mobile
technologies, as part of the advanced carrier services offered to its customers.
 
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     The network infrastructure of GTS-Monaco Access is complementary with that
of Hermes, with each serving the carriers' carrier market from different
perspectives; Hermes for bandwidth services and GTS-Monaco Access for switched
call terminations and other carrier services. Beginning in the first quarter of
1998, GTS-Monaco Access intends to establish points of presence in Europe by
co-locating in certain cities served by Hermes, which will allow GTS-Monaco
Access to terminate traffic through Hermes and reduce GTS-Monaco Access's
transmission costs.
 
     LICENSES AND REGULATORY ISSUES
 
     Because it operates in coordination with MT, the licensed operator of the
Monaco public network, and in indirect partnership with the government,
GTS-Monaco Access's telecommunications activities in Monaco require no
telecommunications license.
 
     Because the Principality of Monaco is not an EU member state, GTS-Monaco
Access's telecommunications activities in the Principality are not subject to
European law. However, GTS-Monaco Access will have to comply with EU regulation
to the extent it does business in EU member states. The regulatory requirements
established by the EU create general guidelines under which the national
agencies of EU member states regulate. Accordingly, local laws and regulations
may differ significantly among these jurisdictions, and the interpretation and
enforcement of such laws and regulations may vary. Local rules are sometimes
based on the informal views of the local ministries which, in some cases, are
subject to influence by the local PTOs. In certain of the Company's existing and
target markets, there are laws and regulations which affect the number and types
of customers which the Company can address. For instance, certain countries may
and do require licenses for communication companies to interconnect to the
public network to originate traffic.
 
     In addition, one of the services provided by GTS-Monaco Access is a form of
transit service, known in the industry as "re-filing." Re-filing is the practice
of routing traffic through a third country in order to take advantage of
disparities in settlement rates between different countries, allowing traffic to
a potential country to be treated as if it originated in the third country that
enjoys lower settlement rates with the destination country, thereby resulting in
lower overall costs on an end-to-end basis. Re-filing is prevalent in the
industry even though the practice is technically in contravention of ITU
regulations. In practice, because of the widespread non-observance of these
regulations, such a contravention normally does not give rise to specific legal
problems. However, their enforceability essentially depends on the status given
to ITU obligations by Member countries' domestic laws. Accordingly, there can be
no assurance that GTS-Monaco Access's re-filing services might not be disrupted
or be the subject of legal process at some time in the future. In such event,
within the EU a defense may be available that the ITU regulations are
anti-competitive and contravene the Treaty of Rome, although there can be no
certainty that such a defense would succeed.
 
     COMPETITION
 
     GTS-Monaco Access faces competition from consortia of telecommunications
operators, large PTOs and other international telephone operators with advanced
network infrastructures, access to large quantities of long-haul capacity and
established customer bases. PTOs currently providing large amounts of
international traffic have already established direct routes, transit
arrangements and correspondent relations and many have excess capacity that they
resell in competition with GTS-Monaco Access.
 
     GTS expects that GTS-Monaco Access will be able to compete effectively in
certain identified market segments because most of its targeted customers are in
new and fast growing markets and have not established long-term relationships
with international gateway providers, and because it has equal access to
advanced infrastructure and international fiber routes, potential access to low
cost transport from Hermes and an "independent" status that allows it to service
a worldwide range of potential customers.
 
CENTRAL EUROPE
 
     In Central Europe, GTS's objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to governmental and commercial customers in
Hungary and the Czech Republic. In the Czech Republic, the Company also
 
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<PAGE>   97
 
provides outgoing voice services. Through its subsidiary GTS-Hungary, GTS
operates a VSAT network in Hungary, which GTS believes is the largest VSAT
network in Central Europe as measured by number of VSAT sites. In addition,
through its subsidiary EuroHivo, GTS operates a national paging network in
Hungary, and through its subsidiary Czech Net, operates an international gateway
and a data services network in Prague and the Czech Republic. GTS's strategy is
to expand its service offerings as the regulatory environment permits,
leveraging its existing VSAT and international gateway infrastructure where
possible and providing a broad range of services to its target markets.
 
     HUNGARY
 
     GTS-Hungary. GTS-Hungary, a 99% owned subsidiary of GTS, is a leading
provider of customized data services offering high quality, reliable virtual
private network services to customers throughout Hungary and, through other GTS
affiliates, other countries in Central Europe. GTS-Hungary provides these
services through VSATs installed at customer sites throughout the country and a
microwave-based high speed overlay network for points in the Budapest
metropolitan area. Along with these data transmission services, GTS-Hungary
provides high quality customer service including (i) significant system
integration support in the initial implementation of the customers' networks and
in on-going expansion and improvements and (ii) a unique maintenance and
technical support service, which include "rapid response" service calls and
24-hour hub service operations support, which can be backed by financial
guarantees when required.
 
     As of June 30, 1997, GTS-Hungary's VSAT network consisted of approximately
850 owned and operated VSAT sites which the Company believes makes it the
largest VSAT-based network in Central Europe. GTS believes that its choice of
VSAT technology as a way of quickly deploying a full range of business services
nationwide will allow it to capture key customers and market segments. Such
positioning, the Company believes, will enable GTS-Hungary to expand its service
offerings as the Central European market matures and as regulatory authorities
further privatize and deregulate the telecommunications industry. GTS-Hungary is
undertaking a nationwide expansion of its microwave-based Budapest overlay
network. The expansion will increase GTS-Hungary's revenue base in the region
and provide opportunities to leverage further its other service offerings. There
can be no assurance, however, that the expansion will be completed on a timely
and commercially feasible basis.
 
     The Hungarian state lottery is GTS-Hungary's largest customer, accounting
for more than 56% of GTS-Hungary's VSAT business for the six months ended June
30, 1997. GTS-Hungary has also targeted its VSAT network services to business
customers in the domestic service industry and other government organizations.
Although GTS-Hungary continues to diversify its revenue and customer base, the
loss of the Hungarian state lottery as a customer would have a material adverse
effect on GTS-Hungary's business.
 
     GTS-Hungary generally charges its data services customers a flat monthly
fee for a fixed amount of usage and usage-based fees for use above the
contractual amount. Customers are billed in Hungarian forints (indexed to US
dollars or German marks) on a monthly basis. Pricing is generally determined for
an individual client based upon the size of traffic requirements. In general,
GTS-Hungary's strategy is to minimize the initial customer investment in order
to lower the barriers to purchase, while committing customers to long-term
contracts.
 
     GTS-Hungary's major competitors include BankNet, Hungaro-DigiTel and MATAV,
the Hungarian PTO, each of which operates a network with at least 200 VSAT
sites. MATAV offers a broad range of services and has recently targeted the
business sector that GTS serves. GTS believes that, while some of its
competitors have stronger financial resources, GTS-Hungary remains the leading
VSAT service provider in Hungary in terms of number of VSAT sites, the size and
quality of its infrastructure and the quality of its service. GTS also believes
it has distinguished itself from its competition by its superior customer
service.
 
     Currently, all VSAT licenses in Hungary have been granted under temporary
telecommunications regulations. The temporary licenses prohibit connection to
public telecommunications networks or other international or domestic
data-transmitting systems. In December 1993, GTS received a temporary service
permit to provide data-transfer services utilizing a VSAT-based wireless
communications system throughout Hungary. In March 1997 the government issued
new telecommunications regulations which require all
 
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<PAGE>   98
 
operations with temporary licenses to apply for permanent licenses by the end of
April 1997. GTS-Hungary has submitted applications for the conversion of its
temporary licenses to permanent ones. While no assurances can be given, GTS
expects permanent licenses to be issued in due course. The failure to receive
such licenses would have a material adverse effect on the business of
GTS-Hungary.
 
     EuroHivo. In addition to its network and data services, GTS also provides
nationwide paging services primarily to the retail consumer market through its
70% owned joint venture, EuroHivo. EuroHivo commenced operations in February
1995 providing nationwide paging services based on the all-digital ERMES
standard, a technology deployed by many other paging providers in Europe. To
improve the results of its paging operations, GTS obtained a temporary license
from Hungarian authorities to provide the less expensive POCSAG-standard paging
services and began providing such services in October 1996. GTS has concluded
that EuroHivo is not a core business and is currently exploring alternatives to
divest all or a portion of its interests in EuroHivo.
 
     CZECH REPUBLIC
 
     Czech Net. CzechNet, a wholly owned subsidiary of GTS, offers the only
alternative international telephony service in the Czech Republic, as well as a
full range of private data services, delivered through a combination of a fully
digital microwave overlay network in Prague, an international satellite gateway
in Prague and GTS-Hungary's VSAT network. Through an intercompany arrangement
with GTS-Hungary, CzechNet provides all of the same VSAT services offered by
GTS-Hungary. In addition, CzechNet offers high-speed Internet access service and
is one of the leading Internet access providers in the Czech Republic. CzechNet
seeks to become the second carrier in the Czech Republic and is also targeting
opportunities in Slovakia, based upon the historic relationship between the
Czech and Slovak markets.
 
     The CzechNet network consists of an earth station linked to GTS-Monaco
Access and to British Telecom, a series of point-to-point and
point-to-multipoint microwave connections providing dedicated access to the
buildings served by CzechNet, and individual VSATs based on, and controlled by,
GTS-Hungary's hub in Budapest.
 
     CzechNet's target customers include real estate developers, hotels and
multinational companies which require international voice or data services or
Internet connectivity, where both GTS's own services and the services of GTS
partners are sold. CzechNet provides outgoing international voice services and
high-speed Internet access to large commercial buildings in Prague. As of June
30, 1997, CzechNet had concluded agreements with building owners to convert
PABXs in 17 buildings in Prague. International voice services are offered at
prices similar to those of the Czech PTO. The pricing reflects the premium
quality of the Company's service offering compared to the Czech PTO, offset by
the inconvenience to customers of maintaining accounts with more than one
carrier and being required to dial longer and more complex numbers. The Czech
market for VSAT services is extremely competitive, with prices at approximately
50% of those in Hungary for basic services. CzechNet plans to pursue customers
who require value-added services which may be offered at higher prices and
better margins.
 
     CzechNet is a wholly owned subsidiary of GTS. It received its operating
licenses in 1994 and began offering services in May 1995. Another business
partner, Sitel, provides CzechNet with technical services, at the Prague hub,
including installation and field support. In Slovakia, CzechNet has partnered
with Sitel to market data services based on the GTS-Hungary VSAT system. For
Internet services, CzechNet has partnered with two organizations: CESNET, a
consortium of Czech universities, and UUNET, for high-speed backbone access.
 
     CzechNet is licensed to provide international satellite and domestic
private voice and data services. The license grants permission to install and
operate up to 150 earth stations and, upon application, an additional 150 earth
stations. The license currently prohibits the provision of switched voice
services and the interconnection to public voice, telex and data networks and
telecommunications networks of other providers.
 
     CzechNet is the only alternative international telephony provider licensed
in the Czech Republic. As such, its only competitor is SPT Telecom, the Czech
PTO. Should SPT decide to compete aggressively with
 
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<PAGE>   99
 
CzechNet, it has the ability to discount prices below those which could be
easily sustained by CzechNet. In data services, Telecomspol, EuroTel Praha, ACS
Brandys, and SPT Telecom are CzechNet's four major competitors for data services
in the Czech Republic. GTS believes that Telecomspol is backed by Nortel, and is
pursuing an aggressive strategy, pricing its services at or below cost. GTS
believes that its experience in establishing VSAT services in the region and its
emphasis on integrated voice and data services provides CzechNet with a
competitive advantage. Additionally, GTS's transmission facilities and
infrastructure in Hungary and Monaco provide it with a relatively low cost
infrastructure and, as a consequence, greater pricing flexibility than its
competitors. With respect to Internet services, GTS believes that, although this
market consists of a large number of small providers and that SPT Telecom will
seek to enter this market, the dedicated, high-speed infrastructure that
CzechNet is installing will provide superior services to its customers.
 
ASIA
 
     Chinese law generally prohibits foreign investment or participation in the
operation of telecommunications services, while Indian law requires foreign
telecommunications operators to conduct certain telecommunications businesses,
including basic switched telephony and cellular services, through joint ventures
that are at least 51% owned by Indian partners. GTS believes that these
restrictive regulations will eventually be liberalized and that its early entry
into these markets and its strong relationships with influential commercial
firms and with local, regional and national-level government entities will
provide it with a strong competitive advantage over competitors that await more
explicit regulatory regimes authorizing direct telecommunications investments.
 
  China
 
     GTS participates in the nationwide tourist industry VSAT network through
GTS China Investments LLC, a company in which GTS holds a 75% interest and an
affiliate of the Soros Foundations owns a 25% interest. See "Certain Related
Party Transactions." GTS China Investments LLC holds an indirect 63% interest in
Beijing Tianmu Satellite Communications Technology Co. Ltd. ("Beijing Tianmu"),
which provides technical, operational and financial support for the VSAT
network. In addition, through Shanghai V-Tech Telecommunications Systems Co.,
Ltd. ("V-Tech"), a venture in which GTS holds a 75% interest, the Company
provides financing, operational consulting, technical and engineering services
to a Shanghai-based VSAT network operator. GTS's partner in V-Tech is Shanghai
Science & Technology Investment Corporation, an investment holding company which
was formed by the municipal government of Shanghai and several Shanghai banks
and corporations. The Company also provides management operations and financial
support to a planned cellular network in Shanghai via Shanghai Global
Intelligent TeleSystems Co., Ltd., a Chinese joint venture that is 80% owned by
GTS.
 
  India
 
     In India, GTS is following the strategy it implemented in Moscow and is
currently pursuing in the Czech Republic, in which it initially penetrates the
telecommunications market by developing satellite-based international gateway
networks to provide telecommunications services to targeted business customers.
GTS's operations in India are conducted through C-Datacom International ("CDI"),
a wholly owned subsidiary which provides digital international private line
communications to and from India for multiple applications, including data and
voice. While not permitted to provide telephony services, CDI is currently in
the process of installing an international gateway switch adjacent to GTS-Monaco
Access's international gateway for the purpose of handling international
traffic.
 
EMPLOYEES
 
     On June 30, 1997, GTS employed a total of 146 persons. On June 30, 1997,
the joint ventures in which GTS participates employed approximately 1,400
persons. The Company believes its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. The
Company believes that its relations with its employees are good.
 
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<PAGE>   100
 
     Although GTS's employees are not unionized, unions represent employees of
the Company's railroad partners in Hermes. Under the agreements contemplated
between Hermes and its railroad partners, some of these employees will be
required to construct and maintain certain portions of the Hermes network. There
can be no assurances that unionized employees of Hermes' partners will not
experience labor unrest.
 
PROPERTIES
 
     The Company's physical properties include owned and leased space for
offices, storage and equipment rooms and collocation sites. Additional equipment
rooms will be leased as networks are expanded. GTS maintains regional
headquarters offices in Moscow and Budapest, as well as facilities in McLean,
Virginia and London. Hermes is headquartered just outside of Brussels, Belgium.
 
LITIGATION
 
     In addition to routine legal proceedings incidental to the conduct of its
business, the Company and GTS-Hungary are named as defendants in an action
captioned USH Ventures and USH Telecom, L.L.C. v. Global TeleSystems Group, Inc.
and GTS-Hungaro, Inc., Civil Action No. 97C-08-86, commenced in August 1997,
which is currently pending in the Superior Court of the State of Delaware in and
for New Castle County. The complaint alleges breach of contract and interference
with a business relationship. While it is not possible at this time to make a
meaningful assessment of the outcome of this litigation, based upon information
currently available and upon consultation with counsel, the Company does not
believe that the outcome of this litigation will have a material adverse effect
upon the financial condition of the Company.
 
                                       95
<PAGE>   101
 
                                   MANAGEMENT
 
     The directors, executive officers and key employees of the Company, their
positions and their ages are as follows:
 
<TABLE>
<CAPTION>
                  Name                     Age                        Positions
                  ----                     ---                        ---------
<S>                                        <C>   <C>
Alan B. Slifka..........................   67    Chairman of the Board of Directors
Gerald W. Thames........................   50    President, Chief Executive Officer and Director
Bruno d'Avanzo..........................   55    Executive Vice President and Chief Operating
                                                 Officer
William H. Seippel......................   40    Executive Vice President of Finance and Chief
                                                 Financial Officer
Jan Loeber..............................   53    Senior Vice President -- Hermes
Raymond I. Marks........................   50    Senior Vice President -- Asia
Stewart P. Reich........................   53    Senior Vice President -- Russia
Louis T. Toth...........................   54    Senior Vice President -- Central Europe
Grier C. Raclin.........................   44    Senior Vice President and General Counsel
N.S. Molberger..........................   42    Senior Vice President -- Law and Development
Kevin Power.............................   43    Managing Director -- GTS -- Monaco Access
Harold B. Adams.........................   54    Vice President -- Operations, Engineering and
                                                 Compliance
Gary Gladstein..........................   52    Director
Michael A. Greeley......................   34    Director
Bernard McFadden........................   63    Director
Stewart J. Paperin......................   49    Director
W. James Peet...........................   42    Director
Jean Salmona............................   61    Director
Morris A. Sandler.......................   50    Director
Joel Schatz.............................   60    Director
Adam Solomon............................   44    Director
</TABLE>
 
     Biographical information on each of the foregoing officers follows:
 
     Alan B. Slifka, Chairman of the Board of Directors. Mr. Slifka has served
as a director of GTS since 1990. Mr. Slifka is a New York investment banker and
the Managing Principal of Halcyon/Alan B. Slifka and Company LLC, an equity
asset management firm specializing in nontraditional investments, specifically
corporate event investing. Previously, Mr. Slifka was a partner of L.F.
Rothschild, Unterberg, Towbin from 1961 to 1982. He is a director of Pall
Corporation and is active in other business, civic and philanthropic affairs as
founder, director or officer of numerous for-profit and not-for-profit
corporations and foundations. Mr. Slifka served as acting Chief Executive
Officer of GTS during most of 1993.
 
     Gerald W. Thames, President, Chief Executive Officer and Director. Mr.
Thames joined GTS as Chief Executive Officer in February 1994, and has served as
a director of GTS since February 1994. From 1990 to 1994, Mr. Thames was
President and Chief Executive Officer for British Telecom North America and
Syncordia, a joint venture company focused on the international outsourcing
market. Mr. Thames has spent over 18 years in senior positions with
telecommunications companies, where he was responsible for developing start-up
telecommunications companies, including 15 years with AT&T, where he rose to the
position of General Manager of Network Services for the Northeast Region of AT&T
Communications.
 
     Bruno d'Avanzo, Executive Vice President and Chief Operating Officer. Mr.
d'Avanzo joined GTS as Executive Vice President and Chief Operating Officer in
August 1996. From 1994 to 1996, Mr. d'Avanzo was Executive Vice President and
Chief Operating Officer of Intelsat, the largest telecommunications satellite
operator in the world. From 1991 to 1994, Mr. d'Avanzo was a senior executive
with Olivetti Corporation, serving as Vice President and General
Manager -- Europe and as Vice President -- U.S., Canada and South America. Mr.
d'Avanzo also spent 15 years with Digital Equipment Corporation, a diversified
computer manufacturer where his last position was Vice President -- European
Sales and Marketing.
 
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<PAGE>   102
 
     William H. Seippel, Executive Vice President of Finance and Chief Financial
Officer. Mr. Seippel joined GTS as Executive Vice President of Finance and Chief
Financial Officer in October 1996. From July 1992 to October 1996, Mr. Seippel
was Vice President -- Finance and Chief Financial Officer of Landmark Graphics.
From August 1990 to July 1992, Mr. Seippel was Director of Finance for Covia,
Inc., an affiliate of United Airlines. From April 1984 to August 1990, Mr.
Seippel held the positions of Group Business Controller (1989 to 1990), Group
Controller Sales/Marketing (1986 to 1989), and Product Line Controller (1984 to
1986) with Digital Equipment Corporation, a diversified computer manufacturer.
 
     Jan Loeber, Senior Vice President -- Hermes. Mr. Loeber joined GTS in
January 1995. From October 1992 to December 1994, Mr. Loeber was a Managing
Director of BT Securities Corporation. From April 1990 to September 1992, Mr.
Loeber held positions as Managing Director of Unitel Ltd. (now One 2 One) in the
United Kingdom, Group President of Nokia North America Inc., Vice President of
ITT Corporation, and Marketing and Product Management Director of ITT Europe.
Mr. Loeber also spent almost 10 years with AT&T, where his last position was
Executive Director, Bell Laboratories. Mr. Loeber has over 22 years of
experience in the telecommunications industry and an additional 9 years of
experience in information technology with the Pentagon, IBM and Chemical Bank of
New York.
 
     Raymond I. Marks, Senior Vice President -- Asia. Mr. Marks joined GTS as
Senior Vice President -- Asia in July 1994. From October 1986 to June 1994, Mr.
Marks served as Vice President and General Manager of GTE Spacenet Corporation,
where he had overall responsibility for strategic planning, domestic and
international business development, creation of joint ventures and international
alliances, as well as the worldwide management of the marketing, sales and
technical support organizations. Mr. Marks has also served as Vice President for
the Digital Information Group for MCI Communications Corporation. Mr. Marks has
28 years of experience in the telecommunications and computer industries.
 
     Stewart P. Reich, Senior Vice President -- Russia. Mr. Reich joined GTS as
President -- GTS Russia in September 1997. Since September 1992, Mr. Reich was
President of UTEL, a joint venture of AT&T, Deutsche Telekom, PTT Telecom
(Netherlands), and Ukrtelecom (a Ukrainian telecommunications company) which
provides international and interregional telecommunications services in Ukraine.
From 1982 to 1992, Mr. Reich held various positions at AT&T where his last
position was Financial Manager, AT&T International Communications Switched
Services. Mr. Reich was also employed for 20 years with Western Electric Company
from 1961 to 1981.
 
     Louis T. Toth, Senior Vice President -- Central Europe. Mr. Toth joined GTS
as Senior Vice President -- Central Europe in July 1993. From February 1987 to
July 1991, Mr. Toth served as President of Dynaforce Corporation and as Partner
and General Manager for the pan-European expansion of Andlinger & Company. Mr.
Toth, who is currently based in London, has 23 years of telecommunications
experience with ITT Corporation in Europe, Latin America and Asia.
 
     Grier C. Raclin, Senior Vice President and General Counsel. Mr. Raclin will
join GTS as its Senior Vice President and General Counsel on September 29, 1997.
Prior to joining GTS, Mr. Raclin served as Vice-Chairman and a Managing Partner
of the Washington, D.C. office of Gardner, Carton & Douglas, a 250-attorney,
corporate law firm based in Chicago, Illinois, where his practice was
concentrated in the area of international telecommunications. Mr. Raclin
received his undergraduate and law degrees from Northwestern University and
attended the University of Chicago School of Business Executive Program.
 
     N.S. Molberger, Senior Vice President -- Law and Development. Mr. Molberger
joined GTS as General Counsel in July 1993 and served as Vice President and
General Counsel from April 1994 to January 1997. Prior to that, Mr. Molberger
was in private law practice.
 
     Kevin Power, Managing Director -- GTS Monaco Access. Prior to joining GTS
Monaco Access in October 1995, Mr. Power was Vice President, Carrier Relations
for the Company beginning in November 1994, where he was responsible for
assisting and coordinating the carrier activities of the GTS group of companies.
In 1988, Mr. Power was one of a group of five people who started the commercial
operations of Orion Network Systems and he stayed with the company until the
launch of its first satellite in
 
                                       97
<PAGE>   103
 
1994. His last position there was Vice President of Carrier Services. Prior to
that, he held positions with INTELSAT, National Economic Research Associates
(NERA) and the U.S. Department of Commerce.
 
     Harold B. Adams, Vice President -- Operations, Engineering and
Compliance. Mr. Adams joined GTS as Vice President -- Programs and Technology in
October 1994. From 1991 to 1994, Mr. Adams served as Vice President for Programs
and Technology of GTE Spacenet Corporation, where he was responsible for all
domestic and international programs. Mr. Adams has over 29 years of experience
in the design, procurement, installation and operation of telecommunications
systems. He holds Masters degrees from the University of Southern California
(Systems Management) and Auburn University (Public Administration) and is a
graduate of Harvard's Kennedy School of Government.
 
     Biographical data on each of the directors, other than Mr. Thames, are as
follows:
 
     Gary Gladstein, Director. Mr. Gladstein has served as a director of GTS
since December 1990. Mr. Gladstein is a Managing Director of Soros Fund
Management, an investment advisory firm with which he has been associated since
1985. Mr. Gladstein is also a director of Crystal Oil, Jos. A. Bank Clothier,
Inversiones y Representaciones S.A., Cresud S.A., Emerging Dolphin Fund and
Argentina High Yield and Capital Appreciation Fund Ltd.
 
     Michael A. Greeley, Director. Mr. Greeley has served as a director of GTS
since September 1996. Mr. Greeley is the Senior Vice President of GCC
Investments, Inc., the investment group of GC Companies, Inc. From June 1989 to
July 1994, Mr. Greeley was a Vice President at Wasserstein Perella & Co., Inc.,
an international investment bank, specializing in mergers and acquisitions and
corporate finance transactions. Mr. Greeley is also a director of Teletrac,
Inc., Crescent Communications and American Capital Access Holdings, LLC. By
contractual arrangement, GCC Investments, Inc. has the right to designate one
person for nomination to the Board of Directors until such time as it holds not
less than two and one-half percent of the issued and outstanding shares of the
Common Stock on a fully diluted basis. Mr. Greeley is the designee of GCC
Investments, Inc. to the Board of Directors.
 
     Bernard McFadden, Director. Mr. McFadden has served as a director of GTS
since February 1994. Mr. McFadden currently serves as an independent consultant
for GTS and is a GTS representative on the supervisory board of Hermes. Mr.
McFadden's career in international telecommunications includes 32 years with ITT
Corporation, where he served as President and Chief Executive Officer of ITT's
Telecom International Group, and a four and one-half year assignment as
President and Chief Operating Officer of Alcatel Trade International, S.A.
 
     Stewart J. Paperin, Director. Mr. Paperin has served as a director of GTS
since March 1997. Mr. Paperin serves as Executive Vice President of The Open
Society Institute, a charitable foundation associated with George Soros. Prior
to that, Mr. Paperin was President of Brooke Group International, from 1990 to
1993 where he was responsible for investments in the former Soviet Union. Mr.
Paperin also served as Chief Financial Officer of Western Union Corporation from
1989 to 1990.
 
     W. James Peet, Director. Mr. Peet has served as a director of GTS since
January 1996. Mr. Peet has been affiliated with The Chatterjee Group, an
investment firm, since 1991. Mr. Peet is a director of three public companies:
Viatel Global Communications, Phoenix Information Systems, and Primus
Telecommunications, Inc. and several private companies. Immediately prior to
joining The Chatterjee Group, Mr. Peet spent six years with McKinsey & Company.
 
     Jean Salmona, Director. Mr. Salmona has served as a director of GTS since
March 1996. Since 1989, Mr. Salmona has been Chairman and Chief Executive
Officer of CESIA Consulting Group ("CESIA"), a consulting concern based in
France that specializes in information and communications systems and
technologies. Mr. Salmona is also Chairman and Director General, Data for
Development International Association, a nongovernmental organization with
consultative status to the United Nations Economic and Social Council; a member
of the board of directors of C-Datacom International, which is an affiliate of
GTS; and a member of the board of directors of CESYS, a joint venture between
CESIA and COGEMA, the French State company which processes nuclear waste.
 
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<PAGE>   104
 
     Morris A. Sandler, Director. Mr. Sandler has served as a director of GTS
since 1990. Mr. Sandler has been a consultant to GTS since November 1995. Prior
to that, Mr. Sandler was Executive Vice President of GTS from February 1994 to
November 1995, and acting Chief Operating Officer from April 1993 to February
1994. From August 1990 to February 1994, Mr. Sandler was an employee of Alan B.
Slifka and Company. Since November 1995, Mr. Sandler has been a principal of
Pennwood Capital Corporation, a venture capital investment and management firm.
He has served as director of Baltic International USA, Inc. since 1995.
 
     Joel Schatz, Director. Mr. Schatz has served as a director of GTS since the
inception of the Company. Mr. Schatz was a founder of the Company and served as
its President from 1985 to 1991. Mr. Schatz is presently the Chairman and Chief
Executive Officer of Datafusion, Inc., a company developing software to
accelerate knowledge synthesis.
 
     Adam Solomon, Director. Mr. Solomon has served as a director of the Company
since June 1995. Mr. Solomon is also Chairman of Shaker Investments, Inc., a
growth equity investment firm and Chairman of Signature International, L.P., a
venture/development firm whose initial focus is redeveloping existing
residential/golf communities, and a member of the board of directors of MetaSolv
Software, Inc. Prior to that, Mr. Solomon spent eleven years with E.M. Warburg,
Pincus & Co., Inc., where he was Managing Director from 1988 to 1992. While at
E.M. Warburg, Pincus & Co., Inc., Mr. Solomon served as a member of the board of
directors of LCI International, Inc., a regional long-distance carrier.
 
                  EXECUTIVE COMPENSATION AND OTHER INFORMATION
 
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
 
     Each director of GTS receives an annual director's fee of $10,000. In
addition, each director of GTS who attends any meeting of the Board of Directors
is entitled to receive a director's fee of $1,000 for each such meeting, and
each director of GTS who attends a committee meeting is entitled to a directors'
fee of $750 for each such committee meeting.
 
     For the year ended December 31, 1996, the aggregate compensation paid by
the Company to its directors and executive officers for services in all
capacities was approximately $3.1 million.
 
     GTS maintains the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan that permits directors to share in the growth of the value of
GTS through the grant and exercise of nonqualified stock options. See "-- Global
TeleSystems Group, Inc. Non-Employee Directors' Stock Option Plan."
 
GLOBAL TELESYSTEMS GROUP, INC. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
 
     The purpose of the Global TeleSystems Group, Inc. Non-Employee Directors'
Stock Option Plan (the "Directors' Plan") is to permit eligible non-employee
directors of GTS (each a "Non-Employee Director") to share in the growth of the
value of GTS through the grant and exercise of nonqualified stock options.
 
     The total number of shares of Common Stock reserved and available for
delivery under the Directors' Plan is 250,000, subject to adjustment upon
certain changes in capitalization. The Directors' Plan is administered by the
compensation committee of the Board of Directors (the "Committee"). Only
directors of GTS who are not employees of GTS or any subsidiary of GTS on the
date on which an option is to be granted are eligible to participate in the
Directors' Plan on such date.
 
     An option (a "Directors' Option") to purchase 12,000 shares of GTS Common
Stock was granted to each Non-Employee Director on the effective date of the
Directors' Plan and a Director's Option is granted to each new Non-Employee
Director when he or she is first elected or appointed to serve as a director of
GTS. Six thousand of the shares vest six months after the date of grant. An
additional 3,000 shares become exercisable on the date six months following the
first annual meeting of GTS's shareholders to occur after such date of grant,
and the remaining 3,000 shares become exercisable on the date six months
following the second annual meeting of GTS's shareholders to occur after such
date of grant. On the date of the third annual
 
                                       99
<PAGE>   105
 
meeting of GTS's shareholders following the grant of the initial Directors'
Options to any Non-Employee Director, provided that such Non-Employee Director
remains an incumbent on such date, an additional Directors' option to purchase
9,000 shares of Common Stock is granted to such Non-Employee Director. The
second Directors' Options become exercisable with respect to 3,000 shares on the
date six months after the date of grant, with respect to an additional 3,000
shares on the date six months following the first annual meeting of GTS's
shareholders to occur after such date of grant, and with respect to the final
3,000 shares on the date six months following the second annual meeting of GTS's
shareholders to occur after such date of grant.
 
     Directors' Options are nonqualified stock options which are subject to
certain terms and conditions including those summarized below. The exercise
price per share of Common Stock purchasable under a Directors' Option will be
equal to 100% of the fair market value of Common Stock on the date of grant.
Each Directors' Option will expire upon the earliest of (a) the tenth
anniversary of the date of grant, (b) one year after the Non-Employee Director
ceases to serve as a director of GTS due to death or disability, (except that,
in the case of disability, if the Non-Employee Director dies within that
one-year period, the Directors' Option is exercisable for a period of one year
from the date of death), (c) three months after the Non-Employee Director ceases
to serve as a director of GTS for any reason other than death or disability,
(except that, if the Non-Employee Director dies within that three-month period,
his or her Directors' Options are exercisable for a period of one year from the
date of such death), and (d) three months after the Non-Employee Director ceases
to be employed by GTS if such Non-Employee Director had become an employee of
GTS, (except that, if the Non-Employee Director dies within that three-month
period, his or her Directors' Options are exercisable for a period of one year
from the date of such death). Each Directors' Option may be exercised in whole
or in part by giving written notice of exercise to GTS specifying the Directors'
Option to be exercised and the number of shares to be purchased. Such notice
must be accompanied by payment in full of the exercise price in cash or by
surrender of shares of Common Stock or a combination thereof. Directors' Options
granted under the Directors' Plan may not be sold, pledged, assigned or
otherwise disposed of in any manner other than by will or by the laws of descent
and distribution.
 
     At the time of grant, the Board of Directors may provide in connection with
any grant made under the Directors' Plan that the shares of Common Stock
received as a result of such grant are subject to a right of first refusal by
GTS.
 
     The Board of Directors may amend, alter, suspend, discontinue or terminate
the Directors' Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the next annual meeting following such Board
of Directors' action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
 
                                       100
<PAGE>   106
 
EXECUTIVE COMPENSATION
 
     The following table sets forth each component of compensation paid or
awarded to, or earned by, the chief executive officer and the four most highly
compensated executive officers other than the chief executive officer serving as
of December 31, 1996 (collectively, the "Named Executive Officers") for the year
ended December 31, 1996.
 
                           SUMMARY COMPENSATION TABLE
 
                              ANNUAL COMPENSATION
 
<TABLE>
<CAPTION>
                                                                  LONG-TERM COMPENSATION
                                                                  -----------------------
                                                                          AWARDS
                                                                  -----------------------
                                                                  RESTRICTED   SECURITIES
                                          PAID     OTHER ANNUAL     STOCK      UNDERLYING    ALL OTHER
    NAME AND PRINCIPAL        SALARY     BONUS     COMPENSATION    AWARD(S)     OPTIONS     COMPENSATION
         POSITION              ($)        ($)          ($)           ($)          (#)          ($)(7)
    ------------------       --------   --------   ------------   ----------   ----------   ------------
<S>                          <C>        <C>        <C>            <C>          <C>          <C>
Gerald W. Thames...........  $325,000   $113,750            (1)          -0-     25,000(5)        9,954
Jan Loeber.................   235,000     78,608      74,642(4)     20,000(5)       3.5(6)       12,986
Raymond I. Marks...........   230,091     46,200            (1)          -0-     37,000(5)       13,788
Henry A. Radzikowski.......   208,750     42,000     226,060(2)          -0-     37,000(5)       12,986
Louis T. Toth..............   203,937     40,950      33,602(3)          -0-     29,000(5)       13,004
</TABLE>
 
- ---------------
 
(1) Perquisites and other personal benefits paid to the Named Executive Officer
    during fiscal year 1996 were less than the lesser of $50,000 and 10 percent
    of the total of annual salary and bonus reported for the Named Executive
    Officer.
 
(2) Mr. Radzikowski received a cost of living allowance totalling $96,000 during
    fiscal year 1996. In addition, GTS paid approximately $122,376 in housing
    expenses on behalf of Mr. Radzikowski. GTS also paid for Mr. Radzikowski's
    personal travel expenses. Mr. Radzikowski was replaced as Chief Executive
    Officer -- CIS and Eastern Europe Operations in January 1997 and his
    employment with the Company was terminated in the second quarter of 1997.
 
(3) These amounts represent a cost of living allowance of $27,500 and paid home
    leave of $6,102 paid to Mr. Toth during fiscal year 1996.
 
(4) Mr. Loeber received a cost of living allowance and paid home leave during
    fiscal year 1996. Hermes provided Mr. Loeber with a tax equalization that
    compensates him for the higher taxes he pays because he resides in Belgium
    instead of the United States. Furthermore, Hermes provided Mr. Loeber with a
    housing allowance equal to $31,836 per year (converted from Belgian Francs
    to U.S. Dollars at an exchange rate of BF32.0392 = $1.00). In addition,
    Hermes provides Mr. Loeber with the use of a company car.
 
(5) Stock options awarded under the 1992 Stock Option Plan.
 
(6) Stock options awarded under the Hermes Plan.
 
(7) Amounts hereunder represent premiums paid by GTS for $1,000,000 in term life
    insurance for each Named Executive Officer and contributions by GTS under
    the 401(k) Plan to each Named Executive Officer's account.
 
THE GTS 401(K) PLAN
 
     The GTS 401(k) Plan (the "401(k) Plan") is a defined contribution
retirement benefit plan that is qualified for favorable tax treatment under
Section 401 of the Code. All employees of GTS, including the Named Executive
Officers, who are at least 21 years of age and have completed the minimum
service requirement are eligible to participate in the 401(k) Plan. The 401(k)
Plan participants may defer pre-tax income by contributing to the plan up to the
maximum amount permitted by law. After-tax contributions are also permitted
under the 401(k) Plan. GTS matches 50% of each participant's pre-tax
contribution to the 401(k) Plan up to 5% of the participant's total
compensation. In addition, GTS may, in its sole discretion and in a
nondiscriminatory manner, contribute additional amounts as profit sharing to
each participant's account.
 
                                       101
<PAGE>   107
 
The amounts that are deposited into each participant's account are invested
among various investment options according to the direction of the participant.
Each participant's pre-tax and after-tax contributions are immediately vested
and nonforfeitable. GTS's matching contribution and profit sharing allocations
to each participant's account do not vest until the participant has completed
three years of service with GTS, at which time the matching contribution and
profit sharing allocations become 100% vested. Each participant is eligible to
begin receiving benefits under the 401(k) Plan on the first day of the month
coincident with or following the attainment of normal retirement age. There is
no provision for early retirement benefits under the 401(k) Plan.
 
THE SFMT, INC. EQUITY COMPENSATION PLAN
 
     The purpose of the SFMT, Inc. Equity Compensation Plan (the "Equity
Compensation Plan") is to attract, retain and motivate key employees, officers
and eligible independent contractors of GTS and to enable such individuals to
own Common Stock and to have a mutuality of interest with other shareholders of
GTS through the grant of restricted stock and other equity-based awards.
 
     The total number of shares of Common Stock that may be issued or
transferred under the Equity Compensation Plan is four percent of the total
number of shares of Common Stock outstanding at the beginning of the calendar
year, subject to certain adjustments, which are described below. This threshold
number may be increased by the number of shares (a) that were issued under the
Equity Compensation Plan with respect to which no dividends were paid and (b)
that were subsequently forfeited, in accordance with the terms of the Equity
Compensation Plan.
 
     The Equity Compensation Plan is administered by the Committee. The chief
executive officer of GTS has the authority to recommend the individuals to whom
awards will be granted, subject to approval by the Committee. The Committee has
full and binding authority to determine the fair market value of the Common
Stock and the number of shares included in any awards, to establish terms and
conditions of any award, to interpret the Equity Compensation Plan, to prescribe
rules relating to the Equity Compensation Plan and to make all other
determinations necessary to administer the Equity Compensation Plan. The
Committee may condition the vesting of restricted stock upon the attainment of
specified performance goals or such other factors as the Committee may determine
in its sole discretion. In the event that the Committee determines, in its sole
discretion, that an award of restricted stock would not be appropriate with
respect to any individual who has been recommended for an award by the chief
executive officer, the Committee has the authority to grant to any such
individual any other variety of equity-based compensation award, including, but
not limited to, phantom stock, phantom units, stock appreciation rights,
performance shares and performance units. The Committee does not, however, have
the authority to grant stock options pursuant to the Equity Compensation Plan.
 
     Grants under the Equity Compensation Plan are determined by the Committee
in its sole discretion. For this reason, it is not possible to determine the
benefits or amounts that will be received by any individual employee or group of
employees in the future. The Equity Compensation Plan will remain effective
until November 14, 2004, unless earlier terminated by GTS.
 
     During a specified period set by the Committee commencing with the date of
any restricted stock award, the participant is not permitted to sell, transfer,
pledge or otherwise encumber shares of restricted stock. Within these limits,
the Committee, in its sole discretion, may provide for the lapse of such
restrictions or may accelerate or waive such restrictions in whole or in part,
based on service, performance and such other factors. Unless the Committee
specifically determines otherwise, a restricted stock award granted under the
Equity Compensation Plan vests one-third on the second anniversary of the date
of grant, one-third on the third anniversary of the date of grant and one-third
on the fourth anniversary of the date of grant.
 
     The Committee may impose such other restrictions on shares of Common Stock
issued under the Equity Compensation Plan, including a right of first refusal by
GTS that requires the participant to offer GTS.
 
     The Equity Compensation Plan provides that, in the event of a change to the
Common Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination or
 
                                       102
<PAGE>   108
 
exchange of shares, or other change in the capital structure made without
receipt of consideration), the Board of Directors will preserve the value of
outstanding awards by making certain equitable adjustments in its discretion.
 
     The Board of Directors may amend, alter, suspend, discontinue or terminate
the Equity Compensation Plan at any time, except that any such action will be
subject to the approval of GTS shareholders at the first annual meeting
following such action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.
 
THE AMENDED AND RESTATED 1992 STOCK OPTION PLAN OF GLOBAL TELESYSTEMS GROUP,
INC.
 
     In 1992, the Board of Directors approved the adoption of the 1992 Stock
Option Plan of Global TeleSystems Group, Inc. (the "1992 Option Plan") for key
employees of GTS. The purpose of the 1992 Option Plan is to enable GTS to
attract and retain the best personnel for positions of substantial
responsibility, to provide additional incentives to employees of GTS and its
subsidiaries and to promote the success of the business of GTS and its
subsidiaries by providing certain employees with an ownership interest in the
Company.
 
     The total number of shares of Common Stock that may be subject to options
granted under the 1992 Option Plan (the "1992 Options") is generally 18.5% of
the total number of shares of Common Stock outstanding at the beginning of the
calendar year.
 
     The 1992 Option Plan is administered by the Committee, which must be
composed of not less than two members of the Board of Directors who are
"non-employee directors" within the meaning of Rule 16b-3 of the Exchange Act.
The Committee has full and binding authority to determine the fair market value
of the Common Stock, the exercise price of options to be granted, the persons to
whom and the times at which options will be granted and the number of shares to
be represented by each option. The Committee also has full and binding authority
to interpret the 1992 Option Plan, to prescribe rules relating to the 1992
Option Plan, to establish terms and conditions of each 1992 Option and to make
all other determinations necessary to administer the 1992 Option Plan.
 
     The 1992 Option Plan will remain effective until November 14, 2004, unless
earlier terminated by GTS. Grants under the 1992 Option Plan are determined by
the Committee in its sole discretion. For this reason, it is not possible to
determine the benefits or amounts that will be received by any individual
employee or group of employees in the future.
 
     The 1992 Option Plan authorizes the grant of both nonqualified options,
which are not qualified for special tax treatment, and incentive stock options
("ISOs"), which qualify for special federal income tax treatment under Section
422 of the Code. The exercise price per share of Common Stock issuable pursuant
to an ISO may not be less than 100% of the fair market value of Common Stock on
the date of grant. Unless otherwise specified in any respective option
agreement, a nonqualified 1992 Option will expire ten years and one day after
the date of grant and an ISO will expire ten years from the date of grant. Each
person granted 1992 Options shall be provided with an option agreement setting
forth the terms of each grant pursuant to the 1992 Option Plan. Unless the
Committee specifically determines otherwise, each 1992 Option vests one-third on
each of the first three anniversaries of the date of grant. The full purchase
price of the shares must be paid, either in cash, by delivery of previously
owned shares, or by withholding of shares having a fair market value equal to
the 1992 Option exercise price. Each 1992 Option expires (a) 30 days after the
option holder ceases to be an employee of GTS for any reason other than death,
disability or retirement, (b) one year from the date of death or disability of
an employee, or (c) 90 days following retirement of the employee. 1992 Options
may not be sold, pledged, assigned or otherwise disposed of in any manner other
than by will or by the laws of descent and distribution.
 
     The Committee may impose such other restrictions on shares of Common Stock
issued under the 1992 Option Plan, including a right of first refusal by GTS. In
addition, if the amount of any payment under
 
                                       103
<PAGE>   109
 
the 1992 Option Plan, either separately or in combination with any other payment
by GTS, would constitute an excess parachute payment within the meaning of
Section 280G of the Code, the total payments payable under the 1992 Option Plan
will be reduced in order to maximize the amount received by the participant
under the 1992 Option Plan in combination with other payments by GTS.
 
     The 1992 Option Plan provides that, in the event of a change to the Common
Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination of shares or exchange
of shares, or other change in the capital structure made without receipt of
consideration), the Board of Directors will, in its discretion, preserve the
value of outstanding 1992 Option Plan awards by making certain equitable
adjustments.
 
     The Board of Directors may amend, alter, suspend, discontinue, or terminate
the 1992 Option Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the first annual meeting following such
Board of Directors action if such shareholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which Common Stock may then be listed or quoted,
or if the Board of Directors determines in its discretion to seek such
shareholder approval.
 
THE GTS 1996 TOP TALENT RETENTION PROGRAM
 
     GTS implemented the GTS 1996 Top Talent Retention Program (the "Program")
which, for 1996 only, alters the terms offered to certain employees under the
1992 Option Plan. Employees who are offered participation in the Program must
sign a "retention agreement," the terms of which are described below, in order
to receive any 1992 Options during 1996. The Program has been offered to
approximately 28 employees, and it provides that any 1992 Options granted to
such participants will vest as follows: (i) one-half of any 1992 Option granted
under the Program will vest at a rate of 25% per year beginning on the first
anniversary of the initial date of grant and (ii) the remaining portion of any
1992 Option granted under the Program will vest one-quarter according to the
achievement of performance revenue levels, and one-quarter according to the
achievement of price levels of Common Stock, provided that all options will vest
on the fifth anniversary of the date of grant regardless of whether such
performance revenue and pricing levels are attained.
 
        OPTION GRANTS IN THE LAST FISCAL YEAR -- 1992 STOCK OPTION PLAN
 
<TABLE>
<CAPTION>
                                          NUMBER OF     % OF TOTAL
                                          SECURITIES     OPTIONS
                                          UNDERLYING    GRANTED TO    EXERCISE OR                 GRANT DATE
                                           OPTIONS     EMPLOYEES IN       BASE       EXPIRATION    PRESENT
                  NAME                    GRANTED(#)   FISCAL YEAR    PRICE($/SH.)      DATE       VALUE($)
                  ----                    ----------   ------------   ------------   ----------   ----------
<S>                                       <C>          <C>            <C>            <C>          <C>
Gerald W. Thames........................    75,000(1)      7.3           15.40        3-30-06     $1,155,000
Henry A. Radzikowski....................    37,000(1)      3.6           15.40        3-30-06        569,800
Louis T. Toth...........................    29,000(1)      2.8           15.40        3-30-06        446,400
Raymond I. Marks........................    37,000(1)      3.6           15.40        3-30-06        569,800
Jan Loeber..............................        --          --              --          --                --
</TABLE>
 
- ---------------
 
(1) Stock options were awarded under the 1992 Stock Option Plan. Each option
    vests one-third on each of the first three anniversaries of the date of
    grant.
 
                                       104
<PAGE>   110
 
            AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
            FISCAL YEAR-END OPTION VALUES -- 1992 STOCK OPTION PLAN
 
<TABLE>
<CAPTION>
                                           NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                                          UNDERLYING UNEXERCISED     IN-THE-MONEY OPTIONS
                                          OPTIONS AT FY-END(#)(1)      AT FY-END($)(2)
                                          -----------------------    --------------------
                                               EXERCISABLE/              EXERCISABLE/
                  NAME                         UNEXERCISABLE            UNEXERCISABLE
                  ----                         -------------            -------------
<S>                                       <C>                        <C>
Gerald W. Thames........................      383,333/191,667        5,538,540/1,103,336
Henry A. Radzikowski....................       59,867/206,733          857,883/2,679,717
Louis T. Toth...........................       124,366/81,734          1,883,386/788,677
Raymond I. Marks........................       96,664/130,336        1,301,667/1,186,033
Jan Loeber..............................                   --                         --
</TABLE>
 
- ---------------
 
(1) No options were exercised during the year ended December 31, 1996.
 
(2) Based on $20.00 per share value of Common Stock as of December 31, 1996 less
    the exercise price.
 
GTS-HERMES, INC. 1994 STOCK OPTION PLAN
 
     The GTS-Hermes, Inc. 1994 Stock Option Plan (the "Hermes Plan") was adopted
by the board of directors of GTS-Hermes, Inc. ("GTS-Hermes") in 1994 to enable
employees of GTS-Hermes and its subsidiaries, including Hermes, and affiliates
to participate in ownership of GTS-Hermes and to attract and retain key
employees of particular merit. The Hermes Plan provides for the award of
incentive stock options, nonqualified stock options and stock appreciation
rights. All employees of GTS-Hermes and its subsidiaries, including Hermes, and
affiliates are eligible to participate in the Hermes Plan.
 
     The maximum number of shares authorized with respect to grants of awards
under the Hermes Plan in each calendar year is 6.5% of the shares of common
stock, par value $0.01 per share, of GTS-Hermes issued and outstanding, and the
aggregate number of shares of stock subject to the Hermes Plan is 13% of the
total shares of stock issued and outstanding. The Hermes Plan is administered by
a committee appointed by the board of directors of GTS-Hermes, which has broad
discretion to determine who shall receive awards under the Hermes Plan and the
characteristics of any award thereunder, including the price, term and vesting
of such award. However, stock appreciation rights may not be awarded alone and
may only be awarded in tandem with an option grant.
 
     The Hermes Plan provides that in the event of a change in control, as
defined under the Hermes Plan, any stock appreciation rights outstanding for at
least six months and any stock options awarded under the Hermes Plan not
previously exercisable and vested which have been held for at least six months
from the date of grant will become fully vested and exercisable at an adjusted
price to be determined according to the highest sales price per share paid in
any transaction reported or offer made at any time during the preceding 60 days
as determined by the committee.
 
     The board of directors of GTS-Hermes may amend, alter or discontinue the
Hermes Plan at any time, provided that the rights of participants are not
impaired.
 
     Hermes intends to establish a stock option plan to replace the Hermes Plan
for the purpose of incentivizing Hermes key employees, in substantially similar
form to the Hermes Plan. The aggregate number of shares of Hermes stock subject
to the proposed plan would be approximately 13% of the total shares of Hermes
stock issued and outstanding including options. Grants under the Hermes Plan
would be converted into grants under the proposed Hermes plan. Upon
establishment of such plan, the Hermes Plan would be terminated.
 
                                       105
<PAGE>   111
 
            OPTION GRANTS IN THE LAST FISCAL YEAR -- HERMES PLAN(1)
 
<TABLE>
<CAPTION>
                                                                                                       POTENTIAL
                                                                                                  REALIZABLE VALUE AT
                                                                                                     ASSUMED ANNUAL
                                                                                                     RATES OF STOCK
                                                                                                         PRICE
                                          NUMBER OF     % OF TOTAL                                    APPRECIATION
                                          SECURITIES     OPTIONS                                       FOR OPTION
                                          UNDERLYING    GRANTED IN    EXERCISE OR                       TERM(2)
                                           OPTIONS     EMPLOYEES IN       BASE       EXPIRATION   --------------------
                  NAME                    GRANTED(#)   FISCAL YEAR    PRICE($/SH.)      DATE       5% ($)     10% ($)
                  ----                    ----------   ------------   ------------   ----------   --------   ---------
<S>                                       <C>          <C>            <C>            <C>          <C>        <C>
Jan Loeber..............................                                                              0           0
</TABLE>
 
- ---------------
 
(1) Stock options are for GTS-Hermes stock pursuant to the Hermes Plan. Each
    stock option vests one-third on each of the first three anniversaries of the
    date of grant.
 
            AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
                 FISCAL YEAR-ENDED OPTION VALUES -- HERMES PLAN
 
<TABLE>
<CAPTION>
                                            NUMBER OF SECURITIES         VALUE OF UNEXERCISED
                                           UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS
                                            OPTIONS AT FY-END(#)             AT FY-END($)
                                          -------------------------    -------------------------
                  NAME                    EXERCISABLE/UNEXERCISABLE    EXERCISABLE/UNEXERCISABLE
                  ----                    -------------------------    -------------------------
<S>                                       <C>                          <C>
Jan Loeber..............................
</TABLE>
 
EMPLOYMENT AGREEMENTS
 
     GTS has executed employment agreements (together, the "Employment
Agreements") with all the Named Executive Officers. The agreements with Messrs.
Thames, Radzikowski and Marks include a three-year term of employment commencing
on April 1, 1996. The contract with Mr. Radzikowski was terminated in the second
quarter of 1997. The agreements with Mr. Toth and Mr. Loeber include a two-year
term of employment commencing on April 1, 1996 and January 3, 1995,
respectively. All the Employment Agreements provide for the automatic renewal of
the term for additional one-year periods after the initial term unless written
notice of intent to terminate is provided by either party within a stated period
of between 120 and 180 days prior to the renewal date. The salary of each Named
Executive Officer is reviewed yearly and may be increased at the sole discretion
of the Board of Directors. In addition to salary, each Named Executive Officer
is eligible for a performance-based annual bonus, to participate in the GTS 1992
Stock Option Plan (with the exception of Mr. Loeber whose employment agreement
provides him with an option grant under the Hermes Plan), to receive standard
health and insurance benefits that are provided to executives of GTS and to be
reimbursed for all reasonable expenditures incurred in the execution of each
Named Executive Officer's respective duties. In addition, Mr. Loeber's
employment agreement provides him with 20,000 shares of restricted stock that
vest in an amount of one-third each year for three years beginning on January 1,
1997.
 
     Each Employment Agreement may be terminated by GTS by giving notice of
intent to not extend the term of employment, for cause or as a result of the
Named Executive Officer's permanent disability. In the event that the employment
relationship is terminated due to the employee's disability or death or if GTS
provides notice of its intent not to renew the term of employment, GTS shall pay
to the Named Executive Officer or to the Named Executive Officer's estate, as
the case may be, the salary and bonus for the remaining portion of the fiscal
year in which the termination of employment occurs. In addition, if the Company
provides notice of its intent not to extend the term of employment, each Named
Executive Officer will receive his salary for the greater of (a) the number of
months or days in the notice period and (b) the period during which the Named
Executive Officer remains subject to the restrictive covenants described below.
 
     Each Employment Agreement includes noncompetition and nonsolicitation
clauses that are effective during the term of employment and for a period of
from four months to one year thereafter. In addition, the Employment Agreements
include an unlimited covenant of confidentiality and nondisclosure. Any dispute
 
                                       106
<PAGE>   112
 
arising under an employment agreement must be resolved through arbitration,
except that each agreement also provides for specific performance and for a
court injunction in the event of a breach by the Named Executive Officer.
 
                       CERTAIN RELATED PARTY TRANSACTIONS
 
     Alan B. Slifka, the Chairman of the Board of Directors, owns an interest in
an office building in New York in which GTS leased office space until the
corporate headquarters were moved to McLean, Virginia on March 1, 1995. GTS
retains a small office space in New York City that is leased from Mr. Slifka on
a monthly basis, and the annual expense for 1996 was $40,600. Mr. Slifka also
has a consulting agreement with GTS pursuant to which he is paid consulting fees
of $100,000 per year.
 
     Bernard McFadden, Director, has a consulting agreement with GTS pursuant to
which he is paid $100,000 in consulting fees each year.
 
     In August and September 1997, affiliates of George Soros and Mr. Slifka
purchased 212,766 and 38,010 shares of Common Stock, respectively, in the
Company's private stock offering. In addition, affiliates of Mr. Slifka
purchased $2.9 million of Convertible Bonds in September 1997.
 
     Affiliates of Soros Fund Management purchased $40 million of notes from GTS
in 1996, in partial consideration of which (i) W. James Peet was appointed to
the Board of Directors and (ii) the affiliates received warrants to purchase
2,962,962 shares of Common Stock. Together with their prior equity interests in
GTS, these affiliates currently hold, on a fully diluted basis (excluding shares
underlying stock options), in excess of 26.6% of the Company's Common Stock. In
accordance with the terms of the warrant agreement, the exercise price of the
warrants was reduced from $15.40 per share to $14.00 per share as the
outstanding debt had not been repaid prior to December 31, 1996. In addition,
these affiliates collect a monitoring fee of $40,000 per month, which they will
continue to collect until the initial offering of the Company's securities to
the general public. Under certain agreements, these affiliates have the right to
co-invest with GTS in all of its new ventures throughout Asia, excluding
countries in the former Soviet Union, and pursuant to this right, one of these
affiliates holds a 25% interest in GTS China Investments LLC. See
"Business -- Asia -- Operations."
 
     Affiliates of Capital Research International purchased $30 million of notes
from GTS in 1996, in partial consideration of which it received warrants to
purchase 2,222,222 shares of Common Stock. In accordance with the terms of the
warrant agreement, the exercise price of the warrants was reduced from $15.40
per share to $14.00 per share as the outstanding debt had not been repaid prior
to December 31, 1996.
 
     Jean Salmona, a director of GTS, is the Chairman and Chief Executive
Officer of CESIA. CESIA also provides consultancy services for CDI and for
Hermes.
 
     Pursuant to the TCM business partnership agreement, GTS is obligated to
provide additional consideration to its partners in the form of either cash or
Common Stock based on the financial performance of TCM at the end of 1996, 1997
and 1998. On January 17, 1997, the agreement was amended such that the
consideration would only be in the form of the issuance of Common Stock. GTS is
obligated under these arrangements to issue up to a maximum of 747,760 shares of
Common Stock. Common Stock issued pursuant to the agreement must be held for a
minimum holding period. In certain circumstances, if GTS's partners are unable
to sell their shares of Common Stock, GTS is obligated to assist in locating a
purchaser for the Common Stock, and, if unable to do so, to repurchase these
shares. GTS's repurchase obligations are at the following prices: (i) if shares
of Common Stock are then being publicly traded, at the trading price of such
shares or (ii) if shares of Common Stock are not then publicly traded, at the
price shares of Common Stock were most recently offered to individual investors
in a private placement, or, if no such private placement has occurred within the
three months preceding the repurchase of such shares, at a price determined by
an independent financial institution to be agreed upon by GTS and the seller.
The Company has been credited for the issuance of 336,400 of Common Stock under
this agreement.
 
                                       107
<PAGE>   113
 
     Pursuant to the asset purchase agreement relating to the purchase by GTS of
its interest in PrimTelefone, the seller of such interest, has the right to have
some or all of its shares of Common Stock repurchased by GTS over a five-year
period at the current fair market value of such shares at the time of such
repurchase.
 
     In April 1996, GTS entered into an agreement with First NIS Regional Fund
SICAF ("Barings") to organize GTS Ukrainian TeleSystems, L.L.C. (the "LLC"), a
Delaware limited liability company 60% owned by GTS, which in turn entered into
a stock purchase agreement to acquire 49% of all the ownership interests in
Bancomsvyaz, a Ukrainian limited liability company. See "Business -- Russia and
the CIS." Such acquisition closed in May 1996. Barings funded $4.5 million to be
applied towards the LLC's purchase of the interest in Bancomsvyaz and for the
LLC's $1.5 million contribution to the registered capital of Bancomsvyaz. Prior
to March 1, 1999, Barings may put its initial investment to GTS for $4.5
million, plus accrued interest at 13.5% per annum, or, if GTS has consummated an
initial public offering of its Common Stock, may exercise an option to convert
such investment into 292,207 shares of Common Stock at an exercise price of
$15.40. In June 1997 the agreement was amended, such that Barings funded an
additional $4.1 million to be applied toward Bancomsvyaz's capital expenditure
and operating capital requirements. On September 30, 2000, Barings may put that
portion of its LLC interest represented by the additional Barings investment to
GTS for $4.1 million, or if GTS has consummated an initial public offering of
its Common Stock, may exercise an option to convert such additional investment
into 183,333 Shares of Common Stock at an exercise price of $22.50.
 
                             PRINCIPAL STOCKHOLDERS
 
     The following table sets forth certain information regarding ownership of
the Common Stock and rights to acquire Common Stock by stockholders that manage
or own, either beneficially or of record, five percent or more of the Common
Stock of the Company as of June 30, 1997.
 
<TABLE>
<CAPTION>
                                                                     June 30, 1997
                                                              ----------------------------
                                                               Number of
                                                                 Shares        Percentage
                                                              Beneficially    Beneficially
                  Name of Beneficial Owner                      Owned(1)        Owned(1)
                  ------------------------                    ------------    ------------
<S>                                                           <C>             <C>
George Soros affiliates.....................................    7,012,428(2)      26.6%
Alan B. Slifka and affiliates...............................    3,460,873(3)      14.8%
Emerging Markets Management.................................    2,119,697(4)       8.1%
Morgan Asset Management.....................................    1,495,544(5)       6.4%
Capital Research International..............................    3,565,080(6)      13.9%
Total of above..............................................   17,653,622
Total shares on a fully diluted basis:......................   28,599,736
</TABLE>
 
- ---------------
 
(1) The percentage of ownership is based upon 28,607,736 shares, comprised of
    23,422,552 shares of Common Stock issued and outstanding, and warrants to
    purchase 5,185,184 of Common Stock. Excluded from the calculation are:
    108,012 treasury shares; 20,000 shares of restricted Common Stock issued to
    one executive officer of the Company; options to purchase 3,389,820 shares
    of Common Stock issued to employees under the Company's 1992 Option Plan, of
    which 1,959,900 will be vested at December 31, 1997; 447,000 options to
    purchase shares of Common Stock issued to employees prior to the adoption of
    the Company's 1992 Option Plan and to directors and non-employees; and an
    option to convert a debt put right to 292,207 shares of Common Stock.
 
(2) Comprised of 2,049,466 shares of Common Stock held by the Soros
    Foundation-Hungary; 750,000 shares of Common Stock held by the Soros
    Charitable Foundation; 750,000 shares and warrants to purchase 2,222,222
    shares of Common Stock held by The Open Society Institute; 333,333 and
    166,667 shares of Common Stock held by Winston Partners II LDC and Winston
    Partners II LLC, respectively; warrants to purchase 246,914, 123,456 and
    370,370 shares of Common Stock held by Winston Partners II LDC, Winston
    Partners II LLC and Chatterjee Fund Management, respectively, all of which
    are affiliates of George Soros.
 
(3) Included 1,704,085 shares of Common Stock owned by Mr. Slifka and shares of
    Common Stock held in trust for a minor child; 1,675,788 shares of Common
    Stock owned by various Halcyon Partnerships which
 
                                       108
<PAGE>   114
 
    are managed by Halcyon/Alan B. Slifka Management Company LLC, of which Mr.
    Slifka is the Managing Principal and over which Mr. Slifka disclaims
    beneficial ownership; 45,000 shares of Common Stock held by GTS 1995
    Partners, LP; 3,000 shares of Common Stock held by Kevah Konner; and 33,000
    shares of Common Stock owned by Randolf Slifka, Mr. Slifka's son and a
    principal of Halcyon/ Alan B. Slifka Management Company LLC, over which Mr.
    Slifka disclaims beneficial ownership.
 
(4) Shares of Common Stock held by funds managed by Emerging Markets Management.
 
(5) Shares of Common Stock held by funds managed by Morgan Stanley Asset
    Management.
 
(6) Includes 1,342,858 shares of Common Stock and warrants to purchase 2,222,222
    shares of Common Stock held by funds managed by affiliates of Capital
    Research International.
 
                      DESCRIPTION OF CERTAIN INDEBTEDNESS
 
     In 1996, the Company issued $40 million of notes (the "Chatterjee Notes")
to the Chatterjee Group, an affiliate of George Soros. In connection with the
issuance of the Chatterjee Notes, the Chatterjee Group received warrants (the
"Chatterjee Warrants") to purchase 2,962,962 shares of Common Stock. The
Chatterjee Warrants were initially issued with an exercise price of $15.40 per
share, which exercise price was subsequently reduced to $14.00 per share in
accordance with the terms of the warrant agreement. In addition, The Chatterjee
Group was granted the right to appoint one member to the Board of Directors and
collects a monitoring fee of $40,000 per month, which it will continue to
collect until the Company completes an initial public offering of the Company's
securities. The Chatterjee Group also has the right to co-invest with GTS in all
of its new ventures throughout Asia, excluding countries in the former Soviet
Union, and pursuant to this right has invested and holds a 25% interest in GTS
China Investments LLC. See "Business -- Asia -- Operations." The Chatterjee
Notes bear interest at 10% per annum and the principal is payable in 12
quarterly installments commencing April 1, 1998.
 
     In 1996, the Company also issued $30 million of notes (the "Capital
Research Notes") to Capital Research International. In connection with the
issuance of the Capital Research Notes, Capital Research International received
warrants (the "Capital Research Warrants") to purchase 2,222,222 shares of
Common Stock. The Capital Research Warrants were initially issued with an
exercise price of $15.40 per share, which exercise price was subsequently
reduced to $14.00 per share in accordance with of the warrant agreement. The
Capital Research Notes bear interest at 10% per annum and the principal is
payable in 12 quarterly installments commencing April 1, 1998.
 
     Both the Chatterjee Notes and the Capital Research Notes impose significant
covenants on the Company which covenants, among other things, limit the ability
of the Company and its subsidiaries to incur debt and pay dividends and require
the Company to maintain certain financial ratios.
 
     The Company sold approximately $144.8 million bonds ("Convertible Bonds")
in the Convertible Bond Offering. The Convertible Bonds have a three year
maturity and are unsecured, senior subordinated obligations of the Company. The
Convertible Bonds are issued pursuant to an indenture containing certain
covenants for the benefit of the holders of the Convertible Bonds, including,
among other things, covenants limiting the incurrence of indebtedness,
restricted payments, liens, payment restrictions affecting certain subsidiaries
and joint ventures, transactions with affiliates, assets sales and mergers and
combinations. In the event of a change of control of the Company, holders of the
Convertible Bonds have the right to require GTS to purchase such holder's
Convertible Bonds at a price ranging from 106.5 per cent. of the principal
amount if the date of redemption occurs on or before June 30, 1998 to 121.0 per
cent. of the principal amount if the date of redemption occurs after June 30,
1999.
 
     Each Convertible Bond is convertible into such number of shares of Common
Stock as is equal to the principal amount of such Convertible Bond divided by
the applicable Conversion Price. The applicable Conversion Prices shall be
determined as follows: (i) where a Complying Public Equity Offering has not been
preceded since the issuance of the Convertible Bonds by a Non-Complying Equity
Offering, the Conversion Price shall equal the per share price to the public in
the Complying Public Equity Offering, provided, however, that a 7% or 15%
discount will be given to Convertible Bond holders from the per share price to
the public if
 
                                       109
<PAGE>   115
 
the Complying Public Equity Offering occurs during the second or third year,
respectively, from the date of issuance of the Bonds; (ii) where a Complying
Public Equity Offering has been preceded by one or more Non-Complying Equity
Offerings since the issuance of the Convertible Bonds, the Conversion Price
shall equal the lower of (a) the dollar-weighted average conversion price for
all of such Non-Complying Equity Offerings and the Complying Public Equity
Offering (as calculated for each such offering at the gross per share offering
price for the applicable offering, provided, however, that a 7% or 15% discount
will be included in the calculation if the closing dates of such offerings occur
during the second or third year, respectively from the date of issuance of the
Convertible Bonds) and (b) the conversion price for the Complying Public Equity
Offering (as calculated in (i) above); (iii) where a Non-Complying Public Equity
Offering of at least $50 million, which is not a Complying Public Equity
Offering solely by reason of the offering's failure to satisfy the $100,000,000
offering size condition for a Complying Public Equity Offering, has not been
preceded by a Complying Public Equity Offering since the issuance of the Bonds
and has been preceded by one or more Non-Complying Equity Offerings, the
Conversion Price shall equal the lower of (a) the dollar-weighted average
conversion price for all of such Non-Complying Equity Offerings and the
Non-Complying Public Equity Offering (as calculated for each Non-Complying
Public Equity Offering at the per share offering price for the applicable
offering, provided, however, that a 7% or 15% discount will be included in the
calculation if the closing dates of such offerings occur during the second or
third year, respectively from the date of issuance of the Convertible Bonds) and
(b) the conversion price for the Non-Complying Public Equity Offering alone or
(iv) in the case of any other Non-Complying Equity Offering not provided for in
clause (iii) above, where no Complying Public Equity Offering has occurred since
the issuance of the Convertible Bonds, the Conversion Price shall equal the
lowest conversion price calculated for each Non-Complying Equity Offering (as
calculated for each such offering at the gross per share offering price
provided, however, that a 7% or 15% discount will be included in the calculation
if the closing dates of such offerings occur during the second or third year
from the date of issuance of the Convertible Bonds).
 
     There shall be excluded from the calculation of the applicable Conversion
Price any private equity offerings of Common Stock (made pursuant to an
exemption from registration under the Securities Act) aggregating no more than
$100 million in gross proceeds if such offering or offerings are consummated on
or prior to December 31, 1997 and certain private sales of the Common Stock to a
strategic purchaser so long as there has occurred a Complying Public Equity
Offering or a Non-Complying Equity Offering.
 
     Outstanding Convertible Bonds are, subject to certain conditions,
redeemable at the option of the Company on or after the second anniversary of a
Complying Public Equity Offering, at the principal amount thereof plus accrued
interest, if any. At maturity the Convertible Bonds will be redeemed at their
principal amount plus accrued interest; however, in the event that a Complying
Public Equity Offering has not occurred, outstanding Convertible Bonds will be
redeemed at 121% of their principal amount, plus accrued interest, if any.
 
     A "Complying Public Equity Offering" means a public offering of Common
Stock where, immediately following completion thereof, (a) the following
conditions are met: (i) the Company has made public offerings of Common Stock
with a cumulative public offering price of at least $100,000,000 to an aggregate
of not less than 50 purchasers; (ii) the Common Stock has been listed or shall
be listed in connection with the offering on either the New York Stock Exchange,
the London Stock Exchange, the American Stock Exchange or the Nasdaq National
Market; and (iii) the Company shall have registered additional shares of Common
Stock from private offerings of Common Stock (made pursuant to an exemption from
registration under the Securities Act) with a market value of at least
$100,000,000 calculated using the offering price in the Complying Public Equity
Offering and (b) the aggregate number of shares of Common Stock sold thereby,
together with any Common Stock sold in any prior public offerings plus the
number of shares of Common Stock into which the Convertible Bonds may be
converted (calculated as if such conversion were to be effected on the date of
determination) does not exceed 50 percent of the total number of shares of
Common Stock outstanding on a fully diluted basis. A "Non-Complying Public
Equity Offering" means a public equity offering of Common Stock which satisfies
all of the conditions specified in (a) above, except that the cumulative public
offering price is less than $100,000,000. A "Non-Complying Equity Offering"
means
 
                                       110
<PAGE>   116
 
(i) a private offering of Common Stock or (ii) a public offering of Common Stock
that is not a Complying Public Equity Offering.
 
     Hermes sold $265 million aggregate principal amount of 11 1/2% Senior Notes
due 2007 ("Hermes Notes") in August, 1997. The Hermes Notes have a ten year
maturity and are unsecured, senior obligations of Hermes. Hermes placed
approximately $56.5 million of the net proceeds of the Offering in escrow for
the first two years' interest payments on the Hermes Notes. The Hermes Notes
were issued pursuant to an indenture containing certain covenants for the
benefit of the holders of Hermes Notes, including, among other things, covenants
limiting the incurrence of indebtedness, restricted payments, liens, payment
restrictions affecting certain subsidiaries and joint ventures, transactions
with affiliates, assets sales and mergers. The Hermes Notes are redeemable in
whole or part, at the option of Hermes at any time on or after August 15, 2002
at a price ranging from 105.75 percent to 100.0 percent of the principal amount.
 
     The Hermes Notes are also redeemable at any time or from time to time prior
to August 15, 2000 at a redemption price equal to 111.5% of the principal amount
of the Hermes Notes so redeemed, plus accrued and unpaid interest thereon, if
any, to the date of redemption with the net cash proceeds of one or more public
equity offerings or strategic equity investments resulting in aggregate gross
cash proceeds to Hermes of at least $75 million. In the event of a change of
control of Hermes, holders of the Hermes Notes have the right to require Hermes
to purchase such holder's Hermes Notes at a price equal to 101% of the aggregate
principal amount.
 
                                       111
<PAGE>   117
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The Company's authorized capital stock consists of 60,000,000 shares of
Common Stock, par value $0.0001 per share, of which 23,546,438 shares were
issued and outstanding as of June 30, 1997, and 10,000,000 shares of preferred
stock, par value $0.0001 per share (the "Preferred Stock"), none of which is
outstanding. The following is a summary of the rights, privileges, restrictions
and conditions of each of the classes of shares issued by the Company.
 
COMMON STOCK
 
     Holders of Common Stock are entitled to one vote for one share held of
record on all matters upon which shareholders have the right to vote. There are
no cumulative voting rights. All issued and outstanding shares of Common Stock
are, and the Common Stock to be sold in the Offerings, when issued and paid for,
will be, validly issued, fully paid and non-assessable. Holders of Common Stock
are entitled to such dividends as may be declared from time to time by the Board
of Directors out of funds legally available for that purpose. See "Dividend
Policy." Upon dissolution, holders of Common Stock are entitled to share pro
rata in the assets of the Company remaining after payment in full of all of its
liabilities and obligations, including payment of the liquidation preference, if
any, of any Preferred Stock then outstanding.
 
PREFERRED STOCK
 
     The Board of Directors may authorize the issuance of one or more series of
Preferred Stock having such rights, including voting, conversion and redemption
rights, and such preferences, including dividend and liquidation preferences, as
the Board may determine, without further action by the stockholders of the
Company.
 
     The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of
Preferred Stock could result in a series of securities outstanding that would
have preferences over the Common Stock with respect to dividends and in
liquidation and that could, upon conversion or otherwise, enjoy all the rights
appurtenant to the Common Stock.
 
PRIOR PURCHASE AGREEMENTS
 
     The Company and certain investors ("Prior Shareholders") have previously
entered into stock purchase agreements on (i) April 23, 1993 (the "1993 Stock
Purchase Agreement"), (ii) April 22, 1994 and June 17, 1994 (collectively, the
"1994 Stock Purchase Agreements"), (iii) a series of dates in 1995 (the "1995
Stock Purchase Agreements"), (iv) a series of dates in 1996 (the "1996 Stock
Purchase Agreements"), (v) a series of dates in 1997 (the "1997 Stock Purchase
Agreements" and, together with the 1993 Stock Purchase Agreement, the 1994 Stock
Purchase Agreements, the 1995 Stock Purchase Agreements and the 1996 Stock
Purchase Agreements, the "Prior Purchase Agreements"). The Prior Purchase
Agreements contain, among other things, certain registration and other rights
granted by the Company with respect to such Common Stock described below.
 
     Registration Rights. Pursuant to the terms of the Prior Purchase
Agreements, Prior Shareholders are entitled to certain demand registration
rights with respect to the Common Stock held by them ("Demand Registration
Rights") following the initial offering of the Company's securities to the
general public. In addition to the Demand Registration Rights, Prior
Shareholders are, subject to certain limitations, entitled to register shares of
Common Stock in connection with a registration statement prepared by the Company
to register its equity securities. Holders who purchased pursuant to the 1993
Stock Purchase Agreement may also register their shares of Common Stock in
connection with a registered sale of Common Stock by a Major Shareholder (as
that term is defined in the 1993 Stock Purchase Agreement). All of the
registration rights of the Prior Shareholders are subject to certain conditions
and limitations described in the Prior Purchase Agreements.
 
     Rights of First Refusal and Tag-Along Rights. Under the Prior Purchase
Agreements, Prior Shareholders have certain rights of first refusal to purchase
pro rata any issue of New Securities (as that term is defined
 
                                       112
<PAGE>   118
 
in the Prior Purchase Agreements) which the Company thereafter may from time to
time propose to issue and sell, other than in connection with certain types of
transactions and to certain types of excluded purchasers. Termination of such
rights will occur upon the earlier of the closing of an initial public offering
pursuant to an effective registration statement under the Act or, as to any
Prior Shareholder, when such Prior Shareholder no longer owns all the shares it
originally purchased.
 
     The Prior Purchase Agreements further provide that, in the case of a sale
by the Major Shareholders as a group of all their Major Shareholders' Shares (as
those terms are defined in the Prior Purchase Agreements), holders under the
Prior Purchase Agreements may elect to participate in that sale as well.
 
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW ("DGCL")
 
     Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", which is defined as a person who,
together with any affiliates or associates of such person, beneficially owns,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. This provision prohibits certain business combinations
(defined broadly to include mergers, consolidations, sales or other dispositions
of assets having an aggregate value in excess of 10% of the consolidated assets
of the corporation, and certain transactions that would increase the interested
stockholder's proportionate share ownership in the corporation) between an
interested stockholder and a corporation for a period of three years after the
date the interested stockholder becomes an interested stockholder, unless (i)
the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder becomes an interested stockholder,
(ii) the interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
 
                                       113
<PAGE>   119
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon the completion of the Offerings, there will be           shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and excluding 6,597,346 shares covered by vested options
and warrants outstanding at June 30, 1997. Of the outstanding shares, the
          shares registered in the Offerings and 9,055,176 additional shares
will be freely tradable without restriction under the Securities Act, except
that any shares purchased in the Offerings by "affiliates" of the Company may
generally only be resold in compliance with applicable provisions of Rule 144.
Beginning 90 days after the date of this Prospectus, an additional 15,574,496
shares will be eligible for sale in the public market, subject to compliance
with applicable provisions of Rule 144.
 
     The Company and its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to (i) grant any option to
purchase or otherwise transfer or dispose of any Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other agreement or transaction that transfers, in whole or in
part, the economic consequences of ownership of the Common Stock without the
prior written consent of Merrill Lynch for a period of 180 days after the date
of this Prospectus. See "Underwriting." The shares covered by the lock-up
agreements include approximately      shares of Common Stock that would
otherwise have become immediately eligible for resale in the public market upon
completion of the Offerings and approximately           shares of Common Stock
that would otherwise have become eligible for resale in the public market
beginning 90 days after the date of this Prospectus, subject to the requirements
of Rule 144.
 
     In general, under Rule 144 as currently in effect, beginning 25 days after
the date of this Prospectus, a person (or persons whose shares of the Company
are required to be aggregated) who has been deemed to have owned shares of an
issuer for at least one year, including an "affiliate," is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the then outstanding number of shares of such class or the
average weekly trading volume in composite trading in all national securities
exchanges during the four calendar weeks preceding the filing of the required
notice of such sale. A person (or persons whose shares of the Company are
required to be aggregated) who is not deemed an affiliate of an issuer at the
time of the sale and for at least three months prior to the sale and who has
owned shares for at least two years is entitled to sell such shares under Rule
144 without regard to the volume limitations described above. Affiliates
continue to be subject to such limitations. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, such issuer.
 
     The Offerings will constitute a Complying Public Equity Offering under the
terms of the Convertible Bonds. As a result, the Convertible Bonds will be
convertible into Common Stock at any time and from time to time following the
completion of the Offerings. Assuming a public offering price of           , the
Convertible Bonds initially will be convertible into           shares of Common
Stock. See "Description of Certain Indebtedness."
 
     The holders of approximately 20,816,527 shares of Common Stock, warrants to
purchase 5,185,184 shares of Common Stock and shares of Common Stock received by
holders of Convertible Bonds upon conversion are entitled to certain demand and
piggy-back registration rights in respect of their shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Common Stock. See "Description of Capital
Stock -- Prior Purchase Agreements -- Registration Rights."
 
     Prior to the Offerings, there has been no established market for the Common
Stock and no predictions can be made about the effect, if any, that future sales
of Common Stock or the availability of the Common Stock for sale would have on
the market price prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales could
occur, may have an adverse impact on the market price for the Common Stock.
 
                                       114
<PAGE>   120
 
                 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
                            TO NON-U.S. STOCKHOLDERS
 
     The following is a summary of the principal United States federal income
and estate tax considerations with respect to the ownership and disposition of
shares of Common Stock by "Non-U.S. Holders." This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed
Treasury regulations thereunder and administrative and judicial interpretations
thereof (all as currently in effect and all of which are subject to change,
possibly with retroactive effect). This summary does not address all United
States federal income and estate tax consequences that may be relevant to a
non-U.S. Holder in light of its particular circumstances or to certain Non-U.S.
Holders that may be subject to special treatment under United States federal
income tax laws, such as banks, insurance companies, tax-exempt entities and
certain United States expatriates. Furthermore, the following discussion does
not discuss any aspects of foreign, state or local taxation. As used herein, the
term "Non-U.S. Holder" means a holder of Common Stock that for U.S. federal
income tax purposes is not (i) a citizen or individual resident of the United
States; (ii) a corporation or partnership created or organized in or under the
laws of the United States or any political subdivision thereof; (iii) an estate
the income of which is subject to United States federal income tax regardless of
its source; or (iv) a trust if both: (A) a court within the United States is
able to exercise primary supervision over the administration of the trust and
(B) one or more United States persons have the authority to control all
substantial decisions of the trust. EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO
CONSULT ITS OWN TAX ADVISER WITH RESPECT TO THE UNITED STATES FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF OWNING AND DISPOSING OF SHARES OF COMMON STOCK, AS
WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER
TAXING JURISDICTION.
 
DIVIDENDS
 
     Dividends that are paid by a U.S. corporation to a Non-U.S. Holder and that
are not effectively connected with a trade or business carried on by such
Non-U.S. Holder in the United States (or, if certain tax treaties apply,
attributable to a permanent establishment therein maintained by the Non-U.S.
Holder) generally are subject to a 30% U.S. withholding tax. Relief from such
withholding exists with respect to dividends paid to Non-U.S. Holders by a U.S.
corporation (an "80/20 company") if at least 80% of the gross income derived by
such corporation (either directly or through certain of its subsidiaries) during
the applicable testing period is "active foreign business income," as defined in
section 861 of the Code. Under the provisions of the Code applicable to 80/20
companies, the proportion of an 80/20 company's dividends equal to such
company's total gross income from foreign sources over its total gross income is
exempt from U.S. withholding tax. At present, the Company believes that it
qualifies as an 80/20 company. However, the 80% active foreign business income
test is applied on a periodic basis, and operations and business plans of the
Company may change in subsequent taxable years. Therefore, no assurances can be
made regarding the Company's future status as an 80/20 company. If, for any
period or periods, the Company fails to satisfy the requirements applicable to
an 80/20 company, the withholding agent generally would be required to withhold
tax from all distributions paid on the Common Stock regardless of the Company's
earnings and profits. Holders could, however, apply for refunds if such Common
Stock's share of the Company's earnings and profits is less than the amount of
the distributions. Additionally, the rate of withholding may be reduced to the
extent provided by a tax treaty between the United States and the country of
which the Non-U.S. Holder is a resident for tax purposes.
 
     Dividends effectively connected with a trade or business carried out in the
United States by such Non-U.S. Holders or attributable to a permanent
establishment in the United States of such Non-U.S. Holder generally will not be
subject to U.S. withholding tax and generally will be subject to United States
federal income tax on a net income basis in the same manner as if the Non-U.S.
Holder were a resident of the United States. A Non-U.S. Holder that is a
corporation may be subject to an additional branch profits tax at a rate of 30%
(or such lower rate as may be specified by an applicable treaty). A Non-U.S.
Holder of Common Stock may be required to comply with certain certification and
disclosure requirements in order to claim an exemption from or a reduction of
withholding under the rules described herein.
 
                                       115
<PAGE>   121
 
GAIN ON DISPOSITION
 
     A Non-U.S. Holder generally will not be subject to United States federal
income tax (and no tax will generally be withheld) on any gain recognized upon
the disposition of Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States of the Non-U.S.
Holder and, if certain tax treaties apply, attributable to a permanent
establishment maintained within the United States by the Non-U.S. Holder; (ii)in
the case of a Non-U.S. Holder who is a nonresident alien individual and who
holds shares as capital assets, such individual is present in the United States
for 183 days or more in the taxable year of the disposition and certain other
conditions are satisfied; or (iii) the Company is or has been a "U.S. real
property holding corporation" for United States federal income tax purposes
(which the Company does not believe that it has been, or is likely to become).
 
BACKUP WITHHOLDING
 
     Payments in respect of Common Stock may be subject to a 31% U.S. backup
withholding tax. Backup withholding will not apply, however, to a holder who
furnishes a correct taxpayer identification number or certificate of foreign
status and makes any other required certification or who is otherwise exempt
from backup withholding. Backup withholding is not an additional tax and may be
claimed as a credit against the U.S. federal income tax liability, if any, of a
Non-U.S. Holder, provided that the required information is furnished to the U.S.
Internal Revenue Service.
 
FEDERAL ESTATE TAX
 
     Shares of Common Stock owned or treated as owned by an individual who is
not a citizen or resident (as defined for United States federal estate tax
purposes) of the United States at the time of death will be includable in the
individual's gross estate for United States federal estate tax purposes unless
an applicable estate tax treaty provides otherwise and, therefore, may be
subject to United States federal estate tax.
 
                                       116
<PAGE>   122
 
                                  UNDERWRITING
 
     Subject to the terms and conditions set forth in a U.S. purchase agreement
(the "U.S. Purchase Agreement") among the Company and each of the underwriters
named below (the "U.S. Underwriters") and concurrently with the sale of
          shares of Common Stock to the International Managers (as defined
below), the Company has agreed to sell to each of the U.S. Underwriters, and
each of the U.S. Underwriters for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette Securities
Corporation, UBS Securities LLC, Lehman Brothers Inc. and Furman Selz LLC are
acting as representatives (the "U.S. Representatives"), has severally agreed to
purchase from the Company, the number of shares of Common Stock set forth
opposite its name below.
 
<TABLE>
<CAPTION>
                                                               NUMBER
                     U.S. UNDERWRITERS                        OF SHARES
                     -----------------                        ---------
<S>                                                           <C>
Merrill Lynch, Pierce, Fenner & Smith
             Incorporated...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
UBS Securities LLC..........................................
Lehman Brothers Inc.........................................
Furman Selz LLC.............................................
 
              Total.........................................
</TABLE>
 
     The Company has also entered into an international purchase agreement (the
"International Purchase Agreement" and, together with the U.S. Purchase
Agreement, the "Purchase Agreements") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International, UBS
Limited, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers
and ING Bank N.V. are acting as representatives (the "International
Representatives"). Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of
shares of Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase
Agreement, the Company has agreed to sell to the International Managers, and the
International Managers severally have agreed to purchase, an aggregate of
       shares of Common Stock. The initial public offering price per share and
the underwriting discount per share of Common Stock are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.
 
     In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers, respectively have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all the shares of
Common Stock offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated. The sale of Common Stock to the U.S.
Underwriters is conditioned upon the sale of shares of Common Stock to the
International Managers, and vice versa.
 
     The Company has appointed Merrill Lynch & Co. as Global Coordinator and UBS
Securities LLC as Co-Global Coordinator of the Offerings. Merrill Lynch & Co. is
the bookrunner of the Offerings.
 
     The U.S. Underwriters and the International Managers have entered into an
Intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price set forth on the cover
 
                                       117
<PAGE>   123
 
page of this Prospectus, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell shares of Common Stock will not offer to sell or sell
shares of Common Stock to persons who are non-U.S. or non-Canadian persons or to
persons they believe intend to resell to persons who are non-U.S. or
non-Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. persons or Canadian persons, except, in each case, for
transactions pursuant to the Intersyndicate Agreement.
 
     The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $          per share of Common Stock. The U.S. Underwriters may allow, and
such dealers may reallow, a discount not in excess of $          per share of
Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
 
     The Company, its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any Common Stock or any
securities convertible into or exchangeable or exercisable for any shares of
Common Stock or request the filing of any registration statement under the
Securities Act, with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly the economic consequence of ownership of Common Stock,
whether any such swap transaction is to be settled by delivery of the Common
Stock or other securities, in cash or otherwise without the prior written
consent of Merrill Lynch, on behalf of the Underwriters, for a period of 180
days after the date of this Prospectus. In addition, all existing stockholders
have agreed not to make any demand for or exercise any rights with respect to
the registration of Common Stock and have waived all rights (including demand
and "piggyback" registration rights) to register securities owned by them for
such 180 day period and rights to purchase additional shares of Common Stock in
connection with the Offerings. See "Shares Eligible for Future Sale."
 
     The Company has granted an option to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
          additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting discount.
The U.S. Underwriters may exercise this option only to cover over-allotments, if
any, made on the sale of the Common Stock offered hereby. To the extent that the
U.S. Underwriters exercise this option, each U.S. Underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of
Common Stock proportionate to such U.S. Underwriter's initial amount reflected
in the foregoing table. The Company has also granted an option to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an additional           shares of Common Stock to
cover over-allotments, if any, on terms similar to those granted to U.S.
Underwriters.
 
     Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined through negotiations between the Company and the U.S.
Representatives. Among the factors considered in determining the initial public
offering price, in addition to prevailing market conditions, are the financial
and operating history and condition of the Company, an assessment of the
Company's business and financial prospects, the Company's management, the
prospects for the industry in which the Company operates and the recent market
prices of securities of companies in industries similar to that of the Company.
The initial public offering price set forth on the cover page of this Prospectus
should not, however, be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. There can be no assurance that 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 made hereby at or above the initial public
offering price.
 
                                       118
<PAGE>   124
 
     The Company has agreed to indemnify the several U.S. Underwriters and the
International Managers against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
 
     The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
 
     Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the U.S.
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
 
     If the Underwriters create a short position in the Common Stock in
connection with the Offerings, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
 
     The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offering.
 
     In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
 
     Neither the Company nor any of the Underwriters makes any representation or
prediction, however, as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives will engage in such transaction or
that such transactions, once commenced, will not be discontinued without notice.
 
     Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol "GTSG" and for listing on the              Stock
Exchange.
 
     Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform financial advisory and other investment
banking services to the Company and its affiliates. In connection with rendering
such services in the past, such Underwriters have received customary
compensation, including reimbursement of related expenses.
 
                                 LEGAL MATTERS
 
     The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shearman & Sterling, New York, New York and for the
Underwriters by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.
 
                                    EXPERTS
 
     The consolidated financial statements of Global TeleSystems Group, Inc. as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, included in this Prospectus appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young, LLP,
independent auditors, as set forth in their report appearing elsewhere herein
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
 
                                       119
<PAGE>   125
 
     The consolidated financial statements of EDN Sovintel as of December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, included in this Prospectus appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young (CIS) Ltd., independent auditors
as set forth in their report appearing elsewhere herein and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
 
     The consolidated financial statements of Hermes Europe Railtel B.V. as of
December 31, 1996 and 1995, and for each of the two years in the period ended
December 31, 1996, included in this Prospectus appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young Reviseurs
d'Entreprises S.C.C., independent auditors, as set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
 
                                       120
<PAGE>   126
 
                         INDEX TO FINANCIAL STATEMENTS
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                         YEAR END FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                           <C>
Report of Ernst & Young LLP, Independent Auditors...........  F-2
Consolidated Balance Sheets as of December 31, 1995 and
  1996......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 1994, 1995, and 1996.........................  F-4
Consolidated Statements of Cash Flows for the years ended
  December 31, 1994, 1995, and 1996.........................  F-5
Consolidated Statements of Shareholders' Equity for the
  years ended December 31, 1994, 1995, and 1996.............  F-6
Notes to Consolidated Financial Statements..................  F-7
 
               SECOND QUARTER FINANCIAL STATEMENTS
 
Condensed, Consolidated Balance Sheets as of December 31,
  1996 and June 30, 1997....................................  F-25
Condensed, Consolidated Statements of Operations for the six
  months ended June 30, 1996 and 1997.......................  F-26
Condensed, Consolidated Statements of Cash Flows for the six
  months ended June 30, 1996 and 1997.......................  F-27
Notes to Condensed, Consolidated Financial Statements.......  F-28
</TABLE>
 
                           EDN SOVINTEL
                  YEAR END FINANCIAL STATEMENTS
 
Report of Ernst & Young (CIS) Limited, Independent
  Auditors..................................................  F-33
Balance Sheets as of December 31, 1996 and 1995.............  F-34
Statements of Income and Retained Earnings for the years
  ended December 31, 1996, 1995, and 1994...................  F-35
Statements of Cash Flows for the years ended December 31,
  1996, 1995, and 1994......................................  F-36
Notes to Financial Statements...............................  F-37
 
               SECOND QUARTER FINANCIAL STATEMENTS
 
Condensed Balance Sheets as of December 31, 1996 and June
  30, 1997..................................................  F-46
Condensed Statements of Operations for the six months ended
  June 30, 1996 and 1997....................................  F-47
Condensed Statements of Cash Flows for the six months ended
  June 30, 1996 and 1997....................................  F-48
Notes to Condensed Financial Statements.....................  F-49
 
                                       F-1
<PAGE>   127
                    HERMES EUROPE RAILTEL B.V.
                  YEAR END FINANCIAL STATEMENTS
Report of Ernst & Young Reviseurs d'Entreprises S.C.C.,
  Independent Auditors......................................  F-53
Consolidated Balance Sheets as of December 31, 1995 and
  1996......................................................  F-54
Consolidated Statements of Operations for the years ended
  December 31, 1994, 1995 and 1996 and from inception (July
  6, 1993) to December 31, 1996.............................  F-55
Consolidated Statements of Cash Flows for the years ended
  December 31, 1994, 1995 and 1996 and from inception (July
  6, 1993) to December 31, 1996.............................  F-56
Consolidated Statements of Shareholders' Equity from
  inception (July 6, 1993) to December 31, 1993 and for the
  years ended December 31, 1994, 1995 and 1996..............  F-57
Notes to Consolidated Financial Statements..................  F-58
 
               SECOND QUARTER FINANCIAL STATEMENTS
Condensed, Consolidated Balance Sheets as of December 31,
  1996 and June 30, 1997....................................  F-67
Condensed, Consolidated Statements of Operations for the six
  months ended June 30, 1996 and 1997.......................  F-68
Condensed, Consolidated Statements of Cash Flows for the six
  months ended June 30, 1996 and 1997.......................  F-69
Notes to the Condensed Consolidated Financial Statements....  F-70
 
                                       F-2
<PAGE>   128
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors
Global TeleSystems Group, Inc.
 
     We have audited the accompanying consolidated balance sheets of Global
TeleSystems Group, Inc. as of December 31, 1995 and 1996, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global
TeleSystems Group, Inc. at December 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
 
                                            /s/ ERNST & YOUNG LLP
 
Washington, D.C.
March 31, 1997
 
                                       F-3
<PAGE>   129
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1995        1996
                                                              --------    ---------
                                                                 (IN THOUSANDS,
                                                               EXCEPT SHARE DATA)
<S>                                                           <C>         <C>
Current assets
  Cash and cash equivalents.................................  $  9,044    $  57,874
  Accounts receivable, less allowance for doubtful accounts
     of $30 and $782 at December 31, 1995 and 1996..........     2,972        8,920
  Restricted cash...........................................        --       13,627
  Prepaid expenses..........................................     1,932        2,537
  Other assets..............................................     4,189        2,187
                                                              --------    ---------
          Total current assets..............................    18,137       85,145
Notes receivable............................................        84          209
Property and equipment, net.................................    29,523       35,463
Investments in and advances to ventures.....................    56,153      104,459
Goodwill and intangible assets, net of accumulated
  amortization of $1,983 and $3,916 at December 31, 1995 and
  1996......................................................     8,681        9,548
Restricted cash.............................................     3,043        2,554
                                                              --------    ---------
          TOTAL ASSETS......................................  $115,621    $ 237,378
                                                              ========    =========
 
                       LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities
  Accounts payable..........................................  $  8,705    $   6,761
  Accrued compensation......................................     2,339        3,151
  Other accrued expenses....................................     6,029        5,299
  Debt maturing within one year.............................    14,580       27,437
  Other current liabilities.................................       957        2,040
                                                              --------    ---------
          Total current liabilities.........................    32,610       44,688
Long-term debt, less current portion........................    12,874       58,110
Taxes and other non-current liabilities.....................     9,542       14,664
                                                              --------    ---------
          TOTAL LIABILITIES.................................    55,026      117,462
Commitments and contingencies
Minority interest...........................................     1,936        1,915
Common stock, subject to repurchase (216,667 shares
  outstanding)..............................................     3,337        4,333
                               SHAREHOLDERS' EQUITY
 
Preferred stock, $0.0001 par value (10,000,000 shares
  authorized; none issued and outstanding)..................        --           --
Common stock, $0.0001 par value (40,000,000 and 60,000,000
  shares authorized; 17,469,839 and 23,059,404 shares issued
  and outstanding, net of 50,000 and 77,759 shares of
  treasury stock at December 31, 1995 and 1996).............         2            2
Additional paid-in capital..................................   114,762      241,725
Cumulative translation adjustment...........................    (1,535)      (2,161)
Accumulated deficit.........................................   (57,907)    (125,898)
                                                              --------    ---------
          TOTAL SHAREHOLDERS' EQUITY........................    55,322      113,668
                                                              --------    ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........  $115,621    $ 237,378
                                                              ========    =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-4
<PAGE>   130
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1994        1995        1996
                                                             --------    --------    --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
Revenues, net:
  Telecommunication and other services.....................  $  1,295    $  5,979    $ 19,210
  Equipment sales..........................................     1,173       2,433       4,907
                                                             --------    --------    --------
                                                                2,468       8,412      24,117
                                                             --------    --------    --------
Operating costs and expenses:
  Cost of revenues:
     Telecommunication and other services..................     1,474       8,150      14,741
     Equipment sales.......................................       971         246       4,200
  Selling, general and administrative......................    12,863      41,014      52,928
  Equity in losses of ventures.............................       135       7,871      10,150
                                                             --------    --------    --------
                                                               15,443      57,281      82,019
                                                             --------    --------    --------
Loss from operations.......................................   (12,975)    (48,869)    (57,902)
Other income/(expense):
  Other non-operating income...............................        --      10,270          --
  Interest income..........................................     1,189       2,177       3,569
  Interest expense.........................................      (100)       (728)    (11,122)
  Foreign currency losses..................................       (99)       (685)     (1,176)
                                                             --------    --------    --------
                                                                  990      11,034      (8,729)
                                                             --------    --------    --------
Net loss before income taxes...............................   (11,985)    (37,835)    (66,631)
Income taxes...............................................        --       2,565       1,360
                                                             --------    --------    --------
Net loss...................................................  $(11,985)   $(40,400)   $(67,991)
                                                             ========    ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-5
<PAGE>   131
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1994        1995        1996
                                                             --------    --------    --------
                                                                      (IN THOUSANDS)
<S>                                                          <C>         <C>         <C>
OPERATING ACTIVITIES
Net loss...................................................  $(11,985)   $(40,400)   $(67,991)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization............................       576       3,721       7,444
  Amortization of discount on note payable.................        --          --       3,598
  Equity in losses of ventures, net of dividends
     received..............................................       135       7,871      11,123
  Other non-operating income...............................        --     (10,270)         --
  Deferred interest........................................        --          --       6,583
  Other....................................................         8       1,960         729
  Changes in assets and liabilities, excluding effects of
     acquisitions and ventures:
     Accounts receivable...................................       (15)     (1,396)     (6,698)
     Prepaid expenses......................................        --        (438)       (605)
     Accounts payable and accrued expenses.................     4,184      12,647      (1,862)
     Other changes in assets and liabilities...............    (7,615)     19,744       8,207
                                                             --------    --------    --------
Net cash used in operating activities......................   (14,712)     (6,561)    (39,472)
INVESTING ACTIVITIES
  Investments in and advances to ventures..................   (14,213)    (45,102)    (54,932)
  Purchases of property and equipment......................    (6,375)    (23,084)    (10,987)
  Restricted cash..........................................      (500)     (2,543)    (13,138)
  Acquisitions, net of cash acquired.......................        --      (1,871)         --
  Goodwill and other intangibles...........................        --      (6,960)     (3,264)
  Other investing activities...............................        --       2,069        (125)
                                                             --------    --------    --------
Net cash used in investing activities......................   (21,088)    (77,491)    (82,446)
FINANCING ACTIVITIES
  Proceeds from debt.......................................        --      23,325      63,599
  Net proceeds from issuance of common stock...............    62,108      42,175     107,775
  Other financing activities...............................      (190)       (750)         --
                                                             --------    --------    --------
Net cash provided by financing activities..................    61,918      64,750     171,374
Effect of exchange rate changes on cash and cash
  equivalents..............................................      (124)     (1,289)       (626)
                                                             --------    --------    --------
Net increase (decrease) in cash and cash equivalents.......    25,994     (20,591)     48,830
Cash and cash equivalents at beginning of year.............     3,641      29,635       9,044
                                                             --------    --------    --------
Cash and cash equivalents at end of year...................  $ 29,635    $  9,044    $ 57,874
                                                             ========    ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-6
<PAGE>   132
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
<TABLE>
<CAPTION>
                                         COMMON STOCK     ADDITIONAL   CUMULATIVE                      TOTAL
                                        ---------------    PAID-IN     TRANSLATION   ACCUMULATED   SHAREHOLDERS'
                                        SHARES   AMOUNT    CAPITAL     ADJUSTMENT      DEFICIT        EQUITY
                                        ------   ------   ----------   -----------   -----------   -------------
                                                                     (IN THOUSANDS)
<S>                                     <C>      <C>      <C>          <C>           <C>           <C>
Balance at December 31, 1993..........   6,153    $  1     $ 10,328      $  (122)     $  (5,522)     $  4,685
  Proceeds from the sale of common
     stock, net of expense of
     $3,649...........................   7,667      --       62,082           --             --        62,082
  Other...............................      34      --           26           --             --            26
  Translation adjustment..............      --      --           --         (124)            --          (124)
  Net loss............................      --      --           --           --        (11,985)      (11,985)
                                        ------    ----     --------      -------      ---------      --------
Balance at December 31, 1994..........  13,854       1       72,436         (246)       (17,507)       54,684
  Proceeds from the sale of common
     stock, net of expenses of
     $3,680...........................   3,394       1       42,137           --             --        42,138
  Issuance of 370 warrants in
     connection with debt financing...      --      --          564           --             --           564
  Issuance of common stock, subject to
     repurchase.......................     267      --           --           --             --            --
  Accretion of common stock, subject
     to repurchase....................      --      --         (412)          --             --          (412)
  Other...............................     (45)     --           37           --             --            37
  Translation adjustment..............      --      --           --       (1,289)            --        (1,289)
  Net loss............................      --      --           --           --        (40,400)      (40,400)
                                        ------    ----     --------      -------      ---------      --------
Balance at December 31, 1995..........  17,470       2      114,762       (1,535)       (57,907)       55,322
  Proceeds from the sale of common
     stock, net of expenses of
     $3,567...........................   5,566      --      107,744           --             --       107,744
  Net issuance of 4,815 warrants in
     connection with debt financing...      --      --       20,184           --             --        20,184
  Accretion of common stock, subject
     to repurchase....................      --      --         (996)          --             --          (996)
  Other...............................      23      --           31           --             --            31
  Translation adjustment..............      --      --           --         (626)            --          (626)
  Net loss............................      --      --           --           --        (67,991)      (67,991)
                                        ------    ----     --------      -------      ---------      --------
Balance at December 31, 1996..........  23,059    $  2     $241,725      $(2,161)     $(125,898)     $113,668
                                        ======    ====     ========      =======      =========      ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-7
<PAGE>   133
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1:  NATURE OF BUSINESS OPERATIONS
 
     Global TeleSystems Group, Inc. ("GTS" or the "Company"), is a provider of a
broad range of telecommunications services to businesses, other
telecommunications service providers and consumers through its operation of
voice and data networks, international gateways, local access and cellular
networks and the provision of various value-added services in the Commonwealth
of Independent States ("CIS"), primarily Russia, Central Europe, and India and
China ("Asia"). The Company, through two of its ventures, is also building a new
infrastructure for transporting international voice, data and video traffic for
other carriers throughout Western Europe and for worldwide international voice,
data and video traffic that either originates or terminates in, or transits
through, Western Europe. See further discussion of the Company's business
operations within Note 3, "Investments In and Advances to Ventures," and Note
13, "Segment Information and Certain Geographical Data."
 
     Certain of the Company's ventures are in the early stages of operations in
the telecommunications industry. The Company's businesses are developing
rapidly; some in countries with an emerging economy which by nature have an
uncertain economic, political and regulatory environment. The general risks of
operating businesses in the CIS and other developing countries include the
possibility for rapid change in government policies, economic conditions, the
tax regime and foreign currency regulations.
 
     The ultimate recoverability of the Company's investments in and advances to
ventures is dependent on many factors including, but not limited to, the
economies of the countries in which it does business; the ability of the Company
to maintain the necessary telecommunications licenses; and the ability of the
Company to obtain sufficient financing to continue to meet its capital and
operational commitments.
 
     The Company had a working deficit of approximately $14.5 million and
working capital of approximately $40.5 million as of December 31, 1995 and 1996,
respectively. The Company has an accumulated deficit of $125.9 million as of
December 31, 1996, including a net loss of approximately $68.0 million for the
year then ended. During 1997, the Company expects to incur substantial
expenditures to fund the working capital requirements of its ventures, to
provide for capital equipment for certain of its ventures, and to engage in new
development and acquisitions. The Company's working capital at December 31,
1996, plus its anticipated cash flows from operations for 1997, will not be
sufficient to meet such objectives as presently planned.
 
     Management recognizes that the Company must generate additional capital
resources in order to continue its operations and meet its new development
initiatives. The Company is pursuing other equity and debt financing sources and
has entered into substantive negotiations with various financial institutions in
order to obtain further debt and/or equity financing. The Company has also
retained independent consultants to assist it in identifying other entities
interested in entering into strategic partnerships relative to its
telecommunications properties and new development initiatives. If the Company is
not successful in closing debt or equity financing, the Company will be required
to curtail new development initiatives, sell certain assets or a combination of
these actions.
 
     The financial statements have been prepared on the basis of accounting
principles applicable to a going concern which assumes that the Company will
continue operations in the foreseeable future and will be able to realize its
assets and discharge its liabilities in the normal course of operations. If the
going concern assumptions were not appropriate for these financial statements,
then adjustments would have been necessary in the carrying value of assets and
liabilities and the reported revenues and expenses.
 
NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation
 
     Wholly-owned subsidiaries and majority owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does
 
                                       F-8
<PAGE>   134
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not exercise unilateral operating and financial control are accounted for by the
equity method. The Company has certain majority-owned investments that are
accounted for by the equity method as a result of super majority voting
conditions or other governmentally imposed uncertainties so severe that they
prevent the Company from obtaining unilateral control of the venture. If the
Company has little ability to exercise significant influence over a venture, the
venture is accounted for by the cost method. All significant intercompany
accounts and transactions are eliminated upon consolidation.
 
     The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recognized have been recovered.
 
  Reclassifications
 
     Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements in order to conform to the 1996 presentation.
 
  Cash and Cash Equivalents
 
     The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The Company
had $3.0 million and $16.2 million of restricted cash at December 31, 1995 and
1996, respectively. The restricted cash is primarily related to required
collateral on debt obligations for equipment purchases (see Note 5, "Debt
Obligations").
 
  Property and Equipment
 
     Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the estimated lives ranging from five to seven years
for telecommunications equipment and three to five years for furniture, fixtures
and equipment and other property. Construction in process reflects amounts
incurred for the configuration and build-out of telecommunications equipment and
telecommunications equipment not yet placed into service. Maintenance and
repairs are charged to expense as incurred.
 
  Goodwill and Intangible Assets
 
     Goodwill represents the excess of acquisition costs over the fair market
value of the net assets of acquired businesses and is being amortized on a
straight-line basis over their estimated useful lives ranging from three to ten
years. Intangible assets, principally telecommunications service contracts,
licenses and deferred financing costs, are amortized on a straight-line basis
over their estimated useful lives, generally three to fifteen years. In
accordance with APB 17, "Intangible Assets," the Company continues to evaluate
the amortization period to determine whether events or circumstances warrant
revised amortization periods. Additionally, the Company considers whether the
carrying value of such assets should be reduced based on the future benefits of
its intangible assets.
 
  Long-Lived Assets
 
     Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance
with SFAS No. 121, long-lived assets to be held and used by the Company are
reviewed to determine whether any events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For long-lived
assets to be held and used, the Company bases its evaluation
 
                                       F-9
<PAGE>   135
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on such impairment indicators as the nature of the assets, the future economic
benefit of the assets, any historical or future profitability measurements, as
well as other external market conditions or factors that may be present. If such
impairment indicators are present or other factors exist that indicate that the
carrying amount of the asset may not be recoverable, the Company determines
whether an impairment has occurred through the use of an undiscounted cash flows
analysis of assets at the lowest level for which identifiable cash flows exist.
If an impairment has occurred, the Company recognizes a loss for the difference
between the carrying amount and the estimated value of the asset. The fair value
of the asset is measured using quoted market prices or, in the absence of quoted
market prices, fair value is based on an estimate of discounted cash flow
analysis. During the years ended December 31, 1995 and 1996, the Company's
analyses indicated that there was not an impairment of its long-lived assets.
 
  Income Taxes
 
     The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements. The Company does not provide for deferred taxes on the undistributed
earnings of its foreign companies, as such earnings are intended to be
permanently reinvested in those operations.
 
  Foreign Currency Translation
 
     The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation." In most instances, the local currency is
considered the functional currency for the Company's subsidiaries and ventures,
except for operations in the CIS where the U.S. dollar has been designated as
the functional currency. Assets and liabilities of these subsidiaries and
ventures are translated at the rates of exchange at the balance sheet date.
Income and expense accounts are translated at average monthly rates of exchange.
The resultant translation adjustments are included in the cumulative translation
adjustment, a separate component of shareholders' equity. Gains and losses from
foreign currency transactions of these subsidiaries and ventures are included in
the operations of the subsidiary or venture.
 
     For those ventures operating in the CIS, the temporal method for
translating assets and liabilities is used. Accordingly, monetary assets and
liabilities are translated at current exchange rates while non-monetary assets
and liabilities are translated at their historical rates. Income and expense
accounts are translated at average monthly rates of exchange. The resultant
translation adjustments are included in the operations of the subsidiaries and
ventures.
 
  Revenue Recognition
 
     The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic which will be neither billed nor collected.
Revenue from service or consulting contracts is accounted for when the services
are provided. Equipment sales revenue is generally recognized upon shipment of
the equipment.
 
  Fair Value of Financial Instruments
 
     The Company believes that the carrying amount of its assets and liabilities
reported in the balance sheets approximates their fair value.
 
                                      F-10
<PAGE>   136
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Off Balance Sheet Risk and Concentration of Credit Risk
 
     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and accounts and
notes receivable. The Company maintains most of its cash and cash equivalents in
one high-quality U.S. financial institution. The Company extends credit to
various customers and establishes an allowance for doubtful accounts for
specific customers that it determines to have significant credit risk. The
Company provides allowances for potential credit losses when necessary.
 
     The Company does not now hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results from operations could be adversely affected by
fluctuations in foreign currency exchange rates.
 
  Stock Based Compensation
 
     SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and is recognized over the
service period. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions of
APB 25. The Company will continue accounting for its stock-based compensation in
accordance with the provisions of APB 25 and will present pro forma disclosures
of net loss as if the fair value method has been adopted.
 
  Uses Of Estimates In Preparation Of Financial Statements
 
     The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
NOTE 3:  INVESTMENTS IN AND ADVANCES TO VENTURES
 
     The Company has various investments in ventures that are accounted for by
the equity method (see Note 2, "Summary of Significant Accounting Policies").
The Company's ownership percentages in its equity method investments range from
49% to 80%. The Company has no investments in ventures that are accounted for by
the cost method.
 
     The components of the Company's investments in and advances to ventures are
as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                               1995        1996
                                                              -------    --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Equity in net assets acquired...............................  $18,664    $ 41,105
Excess of investment cost over equity in net assets
  acquired, net of amortization on $1.7 million and $4.3
  million at December 31, 1995 and 1996, respectively.......    8,577      11,288
Accumulated losses recognized...............................   (6,267)    (13,840)
Dividends...................................................       --        (973)
Cash advances and other.....................................   35,179      66,879
                                                              -------    --------
          Total investments in and advances to ventures.....  $56,153    $104,459
                                                              =======    ========
</TABLE>
 
                                      F-11
<PAGE>   137
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 3:  INVESTMENTS IN AND ADVANCES TO VENTURES (CONTINUED)
     In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 2, "Summary of Significant Accounting Policies." The
Company periodically evaluates the recoverability of their equity investments
and if a circumstance arises where a loss in value is considered to be other
than temporary, the Company will record a write-down of excess investment cost.
 
     In addition, the Company has financed the operating and investing cash flow
requirements of several of its ventures, in the form of cash advances. The
Company anticipates that these ventures will generate sufficient cash inflows
for the repayment of the cash advances, as their businesses mature. Also, due to
the long-term nature of anticipated repayment period and the potential risk
associated with the repatriation of the cash advances, the Company has
aggregated its investments in and cash advances to the ventures.
 
     Further, the Company's share of the venture's foreign currency translation
adjustments is reflected in the investment accounts.
 
     Changes in the investments in and advances to ventures are as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                               1995        1996
                                                              -------    --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Balance, at beginning of year...............................  $13,841    $ 56,153
                                                              -------    --------
Equity in net assets acquired...............................   13,888      22,441
Excess of investment cost over equity in net assets
  acquired..................................................    5,646       5,288
Dividends...................................................                 (973)
Cash advances and other.....................................   30,649      31,700
                                                              -------    --------
                                                               50,183      58,456
Equity ownership in losses..................................   (4,224)     (3,122)
Excess losses recognized over amount attributable to
  ownership interest........................................   (2,709)     (4,451)
Amortization of excess of investment cost over equity in net
  assets acquired...........................................     (938)     (2,577)
                                                              -------    --------
                                                               (7,871)    (10,150)
                                                              -------    --------
Balance, at end of year.....................................  $56,153    $104,459
                                                              =======    ========
</TABLE>
 
     Associated with the Company's investment in new business ventures during
1995, the Company is obligated to pay additional consideration, a maximum of
$6.0 million in either cash or in the Company's common stock, if the venture
achieves specific financial performance objectives subsequent to 1995. The
Company will recognize any additional consideration paid under this agreement as
goodwill, as the amount would represent incremental excess of investment cost
over equity in net assets of the underlying investment venture. As of December
31, 1996, the maximum amount of the Company's common stock that would be issued
pursuant to this agreement is 149,920 shares. This agreement was amended
subsequent to year end (see Note 5, "Debt Obligations," and Note 14, "Subsequent
Events").
 
     Additionally, one of the venture agreements that the Company entered into
during 1995 provided that the Company's partner had a put right with regard to
its ownership interest in the investment venture. The put right becomes
effective in 1997 and stipulates a fair value amount that is determined
utilizing a formula based on the financial performance of the venture.
 
                                      F-12
<PAGE>   138
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 3:  INVESTMENTS IN AND ADVANCES TO VENTURES (CONTINUED)
     The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 1995 and 1996. See further financial information of the
Company's business operations within Note 13, "Segment Information and Certain
Geographical Data."
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31, 1995
                                     ----------------------------------------------------------
                                     MAJORITY OWNED    50% OR LESS OWNED    TOTAL EQUITY METHOD
     EQUITY METHOD ENTITIES             VENTURES           VENTURES              VENTURES
     ----------------------          --------------    -----------------    -------------------
                                                           (IN THOUSANDS)
<S>                                  <C>               <C>                  <C>
Revenue..........................       $ 4,966             $49,085               $54,051
Gross margin.....................         1,096              19,944                21,040
Net loss.........................        (5,156)             (1,224)               (6,380)
Equity in net losses.............        (5,136)             (1,797)               (6,933)
Current assets...................         5,188              27,074                32,262
Total assets.....................        17,343              79,486                96,829
Current liabilities..............         9,214              38,411                47,625
Total liabilities................        14,395              54,734                69,129
Net assets.......................         2,948              24,752                27,700
Ownership interest in equity in
  net assets.....................         2,595              12,511                15,106
</TABLE>
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31, 1996
                                     ----------------------------------------------------------
                                     MAJORITY OWNED    50% OR LESS OWNED    TOTAL EQUITY METHOD
      EQUITY METHOD ENTITIES            VENTURES           VENTURES              VENTURES
      ----------------------         --------------    -----------------    -------------------
                                                           (IN THOUSANDS)
<S>                                  <C>               <C>                  <C>
Revenue............................     $36,202            $107,270              $143,472
Gross margin.......................      17,109              45,937                63,046
Net loss...........................      (1,178)             (8,460)               (9,638)
Equity in net losses...............      (1,091)             (6,482)               (7,573)
Current assets.....................      27,293              50,689                77,982
Total assets.......................      48,174             146,483               194,657
Current liabilities................      19,416              68,474                87,890
Total liabilities..................      24,987             102,332               127,319
Net assets.........................      23,187              44,151                67,338
Ownership interest in equity in net
  assets...........................      14,912              19,513                34,425
</TABLE>
 
                                      F-13
<PAGE>   139
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 4:  SUPPLEMENTAL BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1995       1996
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Accounts receivable consists of:
  Trade accounts receivable.................................  $ 1,026    $ 6,769
  Value added taxes receivable..............................    1,082      1,971
  Other receivables.........................................      894        962
                                                              -------    -------
                                                                3,002      9,702
  Less: allowance for doubtful accounts.....................       30        782
                                                              -------    -------
          Total accounts receivable, net....................  $ 2,972    $ 8,920
                                                              =======    =======
Property and equipment, net consists of:
  Telecommunications equipment..............................  $ 9,296    $28,302
  Furniture, fixtures and equipment.........................    4,111      5,877
  Other property............................................      658        837
  Construction in process...................................   17,555      7,009
                                                              -------    -------
                                                               31,620     42,025
  Less: accumulated depreciation............................    2,097      6,562
                                                              -------    -------
          Total property and equipment, net.................  $29,523    $35,463
                                                              =======    =======
</TABLE>
 
NOTE 5:  DEBT OBLIGATIONS
 
     Company debt consists of:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1995       1996
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Debt obligations, with principal payments beginning April 1,
  1998 and maturing on March 31, 2001 at 10% interest, net
  of unamortized discount for 5,185 warrants issued.........  $    --    $59,079
Promissory notes, due on demand at 10% interest.............    9,941      7,887
Interim financing, due June 6, 1996 at 10% interest, net of
  unamortized discount for 370 warrants issued..............    9,481         --
Notes payable, acquisition..................................    2,406      5,201
Other financing agreements (interest at 7% to 13.5% as of
  December 31, 1996)........................................    5,626     13,380
                                                              -------    -------
                                                               27,454     85,547
  Less: debt maturing within one year.......................   14,580     27,437
                                                              -------    -------
          Total long-term debt..............................  $12,874    $58,110
                                                              =======    =======
</TABLE>
 
     In 1996, the Company entered into long-term obligations ("Debt
Obligations"), totaling $70.0 million, with lenders (the "Lenders"). The Lenders
are affiliated with and are considered related parties to the Company, as a
result of their ownership of the Company's common stock (see Note 12, "Related
Party Transactions," for further discussion). The Debt Obligations require
principal payments beginning in the third year, to maturity in the fifth year.
The Debt Obligations bear an interest rate of 10.0% and require interest
payments beginning in the first fiscal quarter subsequent to the date of
issuance. At the discretion of the Company, the interest payments can be
deferred until the time the Company is obligated to begin making the principal
payments. Further, in connection with the Debt Obligations, the Company issued
5,185,184
 
                                      F-14
<PAGE>   140
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5: DEBT OBLIGATIONS (CONTINUED)
warrants, valued at $20.7 million, to purchase the Company's common stock. In
accordance with the terms of the warrant agreement, the exercise price of the
warrants was reduced from $15.40 per share to $14.00 per share, as the
outstanding debt had not been repaid prior to December 31, 1996. The warrants
may be exercised up to six years after the date of the relevant agreements. Upon
the consummation of these Debt Obligations, the Company repaid in full the
outstanding $9.5 million interim financing ("Interim Financing") balance
outstanding at December 31, 1995, and the 370,370 warrants associated with the
interim financing were canceled. The Company entered into the $10.0 million
Interim Financing in December 1995 in order to provide the Company sufficient
working capital to meet its contractual obligations, until a larger dollar
amount and longer-term maturity debt could be finalized between the Company and
the Lenders. The Company is subject to certain restrictive covenants pursuant to
these Debt Obligations, including restrictions on the payment of dividends and
indebtedness to affiliated ventures.
 
     In contemplation of securing more permanent financing, the Company entered
into a series of short-term promissory notes, totaling $9.9 million as of
December 31, 1995, with a network equipment provider. In 1996, a wholly-owned
subsidiary of the Company entered into a credit agreement ("Credit Agreement")
totaling $30.7 million with a bank which will provide loans to eleven cellular
ventures within the CIS region for the purchase of certain equipment and
services. Funding under this facility is currently awaiting the finalization of
certain conditions precedent. As a result of the delays in funding under the
Credit Agreement, the Company was required to pay down $2.0 million of the $9.9
million indebtedness. In addition, the Company issued a Letter of Credit for
$12.2 million as collateral for the existing indebtedness and for future
procurements of equipment from the network equipment provider. This letter of
credit was utilized for drawdown purposes upon expiration at March 31, 1997, due
to the continued delays in finalizing the conditions precedent.
 
     In connection with a purchase of a venture during 1995, the Company is
required to pay additional consideration through 1998, either in cash or shares
of the Company's common stock, based upon the actual earnings of the venture. As
of December 31, 1996, the Company determined that additional purchase payments
of $4.5 million would be payable in 1997 as a result of the venture's operating
results for the year ended December 31, 1996. Consequently, the total amount
outstanding is $5.2 million based on the venture's 1995 and 1996 operating
results. The purchase agreement related to acquiring this venture was amended
subsequent to year end, resulting in the note payable being replaced with shares
of the Company's common stock (see Note 14, "Subsequent Events," for further
discussion).
 
     Certain of the Company's consolidated ventures maintain credit facilities
for their local operations. Borrowings under such credit facilities bear
interest at prevailing negotiated market rates.
 
     During 1996, the Company entered into a financing agreement for $4.5
million. The outstanding amount accrues interest at a rate of 13.5% per annum
and is payable upon demand. The outstanding amount may be converted into 292,207
shares of the Company's common stock upon completion of an initial public
offering of the Company's common stock. The outstanding amount has been included
in "Other financing agreements."
 
     Aggregate maturities of long-term debt, as of December 31, 1996, are as
follows: 1997 -- $27.4 million, 1998 -- $19.3 million, 1999 -- $25.0 million,
2000 -- $24.6 million and $6.4 million thereafter.
 
     The Company paid interest of $0.1 million, $0.7 million and $0.2 million in
1994, 1995 and 1996, respectively.
 
     The Company is pursuing other equity and debt financing sources to
refinance all or a portion of its indebtedness and expansion through sales of
additional debt or equity securities of the Company.
 
     The Company's non-cash financing activities for the year ended December 31,
1996, included the following: $6.2 million of accrued interest rolled into a
note payable with principal payments beginning April 1, 1998 and maturing on
March 31, 2001 and $3.6 million of amortization on the discount of a note
payable with
 
                                      F-15
<PAGE>   141
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5: DEBT OBLIGATIONS (CONTINUED)
principal payments beginning April 1, 1998 and maturing on March 31, 2001. No
significant non-cash financing activities were incurred for the years ended
December 31, 1994 and 1995.
 
NOTE 6:  SHAREHOLDERS' EQUITY
 
  Common Stock
 
     The following table summarizes the Company's equity private placements:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                               --------------------------------------------
                                               SHARES ISSUED    SHARE PRICE    NET PROCEEDS
                                               -------------    -----------    ------------
                                                    (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                            <C>              <C>            <C>
1994.........................................    7,666,579      $7.00-10.00      $ 62,082
1995.........................................    3,393,917            13.50        42,138
1996.........................................    5,565,688            20.00       107,744
</TABLE>
 
     During 1995, the Company issued 266,667 shares of common stock to an
independent third party in connection with the purchase of an interest in a
venture within the CIS region. At the discretion of the holder of these shares,
the Company is obligated to repurchase these shares at the prevailing fair
market value of the Company's common stock on the date of repurchase. During
1995, the Company repurchased 50,000 shares at $15.00 per share and the
repurchased shares became treasury stock. Additionally, the Company has accreted
the value of the outstanding common stock subject to repurchase (216,667 shares
on December 31, 1995 and 1996), to the fair value of the Company's common stock
as of December 31, 1995 and 1996 ($15.40 and $20.00 per share, respectively).
 
     During 1996, the Company entered into the Debt Obligations totaling $70.0
million with the Lenders. In connection with the Debt Obligations, the Company
issued 5,185,184 warrants to purchase common stock at $15.40 per share. The
exercise price of the warrants was automatically reduced to $14.00 per share as
of December 31, 1996, because the Debt Obligations remained outstanding. The
warrants expire during the first and second quarters of 2002.
 
     The Company does not intend to pay dividends on common stock in the
foreseeable future. In addition, certain of the Company's financing agreements
include covenant restrictions precluding the payment of dividends by the
Company.
 
     The Company has reserved 9,049,632 shares of common stock for issuance upon
conversion of the exercise of outstanding and future stock options, warrants and
common stock put rights.
 
  Preferred Stock
 
     As of December 31, 1995 and 1996, there were 10,000,000 shares of $0.0001
par value preferred stock authorized, with rights and preferences to be
determined by the Board of Directors. As of December 31, 1995 and 1996, no
shares of preferred stock had been issued.
 
NOTE 7:  STOCK OPTION PLANS
 
  Employee Stock Options
 
     The Company applies the provisions of APB 25 in accounting for its stock
option incentive plans. The effect of applying SFAS No. 123 on the net loss as
reported is not representative of the effects on reported net loss for future
years due to the vesting period of the stock options and the fair value of
additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss in 1995 and 1996 would have been approximately $40.9 million and
 
                                      F-16
<PAGE>   142
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 7:  STOCK OPTION PLANS (CONTINUED)
$69.4 million, respectively. The fair value of options granted during 1995 and
1996 are estimated as $3.28 and $4.39 per share, respectively, on the date of
grant using the minimum value option pricing model with the following
assumptions: dividend yield 0%, risk free interest rate of 5.50% for 1995 and
6.13% for 1996, and an expected life of five years.
 
     The Company maintains the 1992 Stock Option Plan and the Non-Employee
Directors Stock Option Plan ("the Option Plans"). As of December 31, 1996, the
maximum number of shares of common stock available for grant under the Option
Plans were 4,515,990. All options granted under the Option Plans are at exercise
prices that are at least equal to the fair market value of common stock at the
date of grant. Generally, all options granted under the Option Plans vest over a
three year period from the date of grant and expire ten years from the date of
grant.
 
     Additional information with respect to Stock Option activity is summarized
as follows:
 
<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                            ---------------------------------------------------------------------
                                    1994                    1995                    1996
                            ---------------------   ---------------------   ---------------------
                                        WEIGHTED-               WEIGHTED-               WEIGHTED-
                                         AVERAGE                 AVERAGE                 AVERAGE
                                        EXERCISE                EXERCISE                EXERCISE
                             SHARES       PRICE      SHARES       PRICE      SHARES       PRICE
                            ---------   ---------   ---------   ---------   ---------   ---------
<S>                         <C>         <C>         <C>         <C>         <C>         <C>
Outstanding at beginning
  of year.................    278,000     $3.37     1,621,200    $ 5.47     2,261,600    $ 6.38
Options granted...........  1,343,200      5.91       787,200     13.63     1,070,308     16.60
Options exercised.........                            (18,667)     6.69       (37,665)    10.04
Options canceled or
  expired.................                           (128,133)     5.36       (73,002)    13.09
                            ---------               ---------               ---------
Outstanding at end of
  year....................  1,621,200      5.47     2,261,600      6.38     3,221,241     10.94
                            =========               =========               =========
Options exercisable at
  year-end................    269,684     $3.60       656,962    $ 5.02     1,292,155    $ 6.77
                            =========               =========               =========
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1996:
 
<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                      ------------------------------------   ----------------------
                                                     WEIGHTED
                                                      AVERAGE
                                                     REMAINING    WEIGHTED                 WEIGHTED
                                                    CONTRACTUAL   AVERAGE                  AVERAGE
                                        NUMBER         LIFE       EXERCISE     NUMBER      EXERCISE
      RANGE OF EXERCISE PRICE         OUTSTANDING   (IN YEARS)     PRICE     EXERCISABLE    PRICE
      -----------------------         -----------   -----------   --------   -----------   --------
<S>                                   <C>           <C>           <C>        <C>           <C>
$2.125 to $4.125....................   1,085,667         7         $ 4.02       822,331     $ 3.99
$7.00 to $13.50.....................     892,966         8          11.77       412,431      11.14
$15.00 to $20.00....................   1,242,608         9          16.39        57,393      15.07
                                       ---------                              ---------
                                       3,221,241         8         $10.94     1,292,155     $ 6.77
                                       =========                              =========
</TABLE>
 
     In addition, prior to the establishment of the Option Plans, certain
options were granted in 1991 to certain key employees and former employees to
purchase 781,500 shares of the Company's common stock at an exercise price of
$0.80 per share. All options were granted at an exercise price equal to the fair
value of the underlying common stock at the date of grant. The options vested in
equal increments over a three year period. During 1993, 402,000 of the options
were canceled and in 1994, 33,500 options were exercised, leaving 346,000 fully
vested options outstanding at December 31, 1995 and 1996.
 
                                      F-17
<PAGE>   143
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 7:  STOCK OPTION PLANS (CONTINUED)
     During 1996, the Company issued 5,000 options to an individual that is
neither an employee nor a director, outside of the Option Plans. The options
were granted at an exercise price equal to the fair value of the underlying
common stock at the date of grant, $15.40 per share. The options are fully
vested, and as such, can be exercised at any time subject to a four-year
expiration from the grant date.
 
     Certain of the Company's ventures have stock option plans, or similar
agreements, in place or in the process of being implemented for key officers and
employees. No significant amounts of compensation expense have been recognized
or are contemplated under these plans, nor is the ownership dilution caused by
such plans expected to be significant.
 
  Equity Compensation Plan
 
     In November 1994, the GTS Equity Compensation Plan ("Equity Compensation
Plan") was approved by the Board of Directors to award officers, key employees
and eligible independent contractors of the Company, grants of restricted stock
or other equity based awards. Under the Equity Compensation Plan, up to 4.0% of
the total number of shares of the Company's common stock outstanding at the
beginning of the year are available for granting purposes. As of January 1,
1997, 698,794 represents the maximum number of Company common shares that are
available for grant under the Equity Compensation plan. A committee selected by
the Board of Directors shall establish, within the provisions of the Equity
Compensation Plan, the number of shares to be awarded, the terms and conditions
of the restricted stock, and the purchase price for the restricted stock. As of
December 31, 1996, there were options outstanding to purchase 20,000 shares of
restricted stock at $10.00 per share.
 
NOTE 8:  EMPLOYEE BENEFIT PLAN
 
     The Company has a 401(k) retirement savings plan (the "Savings Plan")
covering all U.S. citizen employees. The Savings Plan qualifies under section
401(k) of the Internal Revenue Code and as such, participants may defer pretax
income in accordance with federal income tax limitations. The Company provides a
50.0% matching contribution on the first 5.0% contributed by the employee. The
Company may also, at its discretion, make non-matching contributions. Both
matching and non-matching contributions by the Company vest 100% after three
years of service. The Company's expense under the Savings Plan was less than
$0.1 million, $0.1 million, and $0.2 million for the years ended December 31,
1994, 1995 and 1996, respectively. The Company made no discretionary
(non-matching) contributions in 1994, 1995 or 1996.
 
NOTE 9:  OTHER NON-OPERATING INCOME
 
     Favorably affecting the 1995 results was the non-recurring $10.3 million
gain the Company recognized as a result of its settlement of certain claims with
a third party.
 
NOTE 10:  INCOME TAXES
 
     The components of loss before income taxes and minority interest were as
follows:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1994        1995        1996
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Pretax loss:
  Domestic.........................................  $ (8,996)   $(22,398)   $(41,554)
  Foreign..........................................    (2,989)    (15,437)    (25,077)
                                                     --------    --------    --------
                                                     $(11,985)   $(37,835)   $(66,631)
                                                     ========    ========    ========
</TABLE>
 
                                      F-18
<PAGE>   144
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 10:  INCOME TAXES (CONTINUED)
     In 1995 and 1996, the Company recorded $2.6 million and $1.4 million,
respectively, in income tax expense that related exclusively to its current
provision for foreign taxes. The Company did not have income tax expense for
1994.
 
     The reconciliation of the U.S. statutory federal tax rate of 34.0% to the
Company's effective tax rate is as follows:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                ----------------------------------------
                                                       1995                  1996
                                                ------------------    ------------------
                                                 AMOUNT    PERCENT     AMOUNT    PERCENT
                                                --------   -------    --------   -------
                                                             (IN THOUSANDS)
<S>                                             <C>        <C>        <C>        <C>
Taxes at U.S. statutory rates.................  $(12,865)    34.0%    $(22,655)    34.0%
Foreign operating losses generating no tax
  benefit.....................................     6,550    (17.3)       8,526    (12.8)
Domestic operating losses generating no tax
  benefit.....................................     6,315    (16.7)      14,129    (21.2)
Other -- net..................................     2,565     (6.8)       1,360     (2.1)
                                                --------    -----     --------    -----
                                                $  2,565     (6.8)%   $  1,360     (2.1)%
                                                ========    =====     ========    =====
</TABLE>
 
     Deferred tax assets and liabilities are recorded based on temporary
differences between earnings as reported in the financial statements and
earnings for income tax purposes. The following table summarizes major
components of the Company's deferred tax assets and liabilities:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                               1995        1996
                                                              -------    --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $10,106    $ 20,720
  Other deferred tax assets.................................      245       1,326
                                                              -------    --------
          Total deferred tax asset..........................   10,351      22,046
                                                              -------    --------
Deferred tax liabilities:
  Depreciation..............................................       34         358
  Other deferred tax liabilities............................      690         803
                                                              -------    --------
          Total deferred tax liability......................      724       1,161
                                                              -------    --------
Net deferred tax asset......................................    9,627      20,885
  Less: valuation allowance.................................   (9,627)    (20,885)
                                                              -------    --------
          Total.............................................  $    --    $     --
                                                              =======    ========
</TABLE>
 
     As of December 31, 1996, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $60.9 million expiring in
fiscal years 2003 through 2011. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carryforwards will be subject to an annual limitation.
 
     The Company's investment in EDN Sovintel is treated for U.S. tax purposes
as a partnership and, therefore, the Company's share of EDN Sovintel's income or
loss flows through to the Company's consolidated federal income tax return on a
current basis. Undistributed earnings of the Company's other foreign investments
are considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes, or foreign withholding taxes has been made.
Upon distribution of those earnings, the Company would be subject to foreign
withholding taxes and U.S. income taxes (subject to reduction for foreign tax
credits).
 
                                      F-19
<PAGE>   145
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 10:  INCOME TAXES (CONTINUED)
     Certain ventures in the CIS and Hungary are operating under tax holidays
granted by the local governments. Tax holidays are for periods ranging from up
to five years to several years after achieving profitability under local tax
regulations. In addition to these tax holidays, certain of the Company's foreign
ventures have foreign tax loss carryforwards in excess of $25.0 million. The
Company's financial statements do not reflect any provision for benefits that
might be associated with such loss carryforwards.
 
NOTE 11:  COMMITMENTS AND CONTINGENCIES
 
  Operating Leases
 
     Operating lease commitments are primarily for office space and equipment.
Rental expense aggregated $0.7 million, $2.0 million and $2.2 million for the
years ended December 31, 1994, 1995 and 1996, respectively.
 
     Future minimum lease payments under these non-cancelable operating leases
with terms of one year or more, as of December 31, 1996, are as follows:
1997 -- $2.0 million, 1998 -- $1.4 million, 1999 -- $1.3 million, 2000 -- $0.3
million and $1.1 million thereafter.
 
  Other Commitments and Contingencies
 
     The Company has made commitments to certain of its ventures for future
contract obligations amounting to $8.8 million.
 
     In the ordinary course of business, the Company has issued financial
guarantees on debt and equities for the benefit of certain of its
non-consolidated ventures. The total amount guaranteed at December 31, 1996 was
approximately $3.0 million. In addition, certain ventures are currently
negotiating other financing instruments in which the Company will guarantee upon
perfection of the obligations.
 
     See Note 5, "Debt Obligations," for additional disclosures associated with
the Company's 1996 transactions with its financing activities.
 
  Major Customers
 
     The Company had one major customer in Central Europe in 1995, representing
$2.7 million in revenue or 32.1% of total revenue. The Company had two major
customers in Central Europe and the CIS in 1996, representing $6.4 million in
revenue or 26.6% of total revenue.
 
  Tax Matters
 
     The taxation system in Russia ("Russian Taxes") is evolving as the central
government transforms itself from a command to a market oriented economy. The
Russian Federation has introduced and continues to introduce new tax and royalty
laws and related regulations. These laws and regulations are not always clearly
written and their interpretation is subject to the opinions of the local tax
inspectors, Central Bank officials and the Ministry of Finance. Instances of
inconsistent opinions between local, regional and federal tax authorities and
between the Central Bank and Ministry of Finance are not unusual.
 
     The Company's policy is to accrue for contingencies in the accounting
period in which a liability is deemed probable and the amount is reasonably
determinable. In this regard, because of the uncertainties associated with the
Russian Taxes, the Company's Russian Taxes may be in excess of the estimated
amount expensed to date and accrued at December 31, 1995 and 1996. It is the
opinion of management that the ultimate resolution of the Company's Russian Tax
liability, to the extent not previously provided for, will not have a material
effect on the financial condition of the Company. However, depending on the
amount and
 
                                      F-20
<PAGE>   146
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 11:  COMMITMENTS AND CONTINGENCIES (CONTINUED)
timing of an unfavorable resolution of this contingency, it is possible that the
Company's future results of operations or cash flows could be materially
affected in a particular period.
 
     In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is obligated to pay additional amounts of VAT. In
the opinion of management, any additional VAT the Company may be obligated to
pay would not be material.
 
  Other Matters
 
     In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which the
Company operates. In the opinion of management, the Company's liability, if any,
in all pending litigation, other legal proceeding or other matter other than
what is discussed above, will not have a material effect upon the financial
condition, results of operations or liquidity of the Company.
 
NOTE 12:  RELATED PARTY TRANSACTIONS
 
     As discussed within Note 5, "Debt Obligations," the Company entered into an
Interim Financing agreement and Debt Obligations during 1995 and 1996,
respectively, with the Lenders. The Lenders are shareholders of the Company. As
part of these transactions, the Company provided one of the Lenders with the
opportunity, at its discretion, to co-invest with the Company in all of the
Company's new ventures within the Asia region.
 
     The Company has entered into certain consulting agreements with directors
of the Company and paid $0.1 million, $0.2 million and $0.2 million in 1994,
1995 and 1996, respectively, pursuant to those agreements.
 
     The Company had notes receivable due from employees aggregating $0.2
million and $0.1 million in 1995 and 1996, respectively, with no single amount
due from any individual in excess of $0.1 million.
 
     The Company derived revenue from affiliates of $3.3 million in 1996. There
was no significant revenue earned from affiliate sales in 1995 and 1994.
 
                                      F-21
<PAGE>   147
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 13:  SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA
 
     The Company operates predominantly in a single industry segment, the
telecommunications industry. The industry consists of a wide range of
telecommunications services to international business customers, including long
distance voice and data services and electronic messaging services.
 
     The following tables present combined financial information by geographic
area for investments accounted for by the consolidation and equity method of
accounting for 1994, 1995 and 1996. In addition, the Company has contractual
agreements with its partners that provide the Company with operational and
management control over virtually all of its ventures. In this regard, the
Company has presented combined financial information for those entities under
its operational and management control. Under this method, revenues and expenses
of the Company and its subsidiaries and ventures are combined, as are the
assets, liabilities and equity. Transfers between geographic areas and
eliminations between the investment types for purposes of presenting the
combined operational results were not considered material for disclosure
purposes.
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1994
                                    ------------------------------------------------------------------
                                                                                CORPORATE
                                    WESTERN               CENTRAL                OFFICE &
                                     EUROPE      CIS       EUROPE     ASIA     ELIMINATIONS    TOTAL
                                    --------   --------   --------   -------   ------------   --------
                                                              (IN THOUSANDS)
<S>                                 <C>        <C>        <C>        <C>       <C>            <C>
Consolidated Method Entities
  Total revenue...................  $     --   $     --   $  1,295   $    --     $  1,173     $  2,468
  Gross margin....................        --         --       (179)       --          202           23
  Operating loss..................      (546)    (1,802)    (1,122)       --       (9,505)     (12,975)
  Net loss........................      (423)      (939)    (1,661)       --       (8,962)     (11,985)
  Identifiable assets.............     2,173     15,423      9,297        --       35,064       61,957
  Liabilities.....................        --      3,921      6,501        --       (3,157)       7,265
  Net assets......................     2,173     11,502      2,796        --       38,221       54,692
Combined
  Total revenue...................        --     23,986      1,295        --        1,173       26,454
  Gross margin....................        --     10,007       (304)       --       (1,059)       8,644
  Operating (loss)/income.........      (186)       840     (1,722)       --      (10,141)     (11,209)
  Net loss........................      (423)      (939)    (1,661)       --       (8,962)     (11,985)
  Identifiable assets.............     2,670     37,817     10,658        --       29,480       80,625
  Liabilities.....................         8     20,636      7,748        --      (10,175)      18,217
  Net assets......................     2,662     17,181      2,910        --       39,655       62,408
</TABLE>
 
                                      F-22
<PAGE>   148
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 13:  SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA (CONTINUED)
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1995
                                    ------------------------------------------------------------------
                                                                                CORPORATE
                                    WESTERN               CENTRAL                OFFICE &
                                     EUROPE      CIS       EUROPE     ASIA     ELIMINATIONS    TOTAL
                                    --------   --------   --------   -------   ------------   --------
                                                              (IN THOUSANDS)
<S>                                 <C>        <C>        <C>        <C>       <C>            <C>
Consolidated Method Entities
  Total revenue...................  $    179   $  3,838   $  4,361   $   140     $   (106)    $  8,412
  Gross margin....................      (318)      (949)     1,380         9         (106)          16
  Operating loss..................    (5,469)   (16,681)    (6,312)   (4,831)     (15,576)     (48,869)
  Net loss........................    (5,452)   (19,415)    (7,091)   (4,771)      (3,671)     (40,400)
  Identifiable assets.............     5,898     73,816     15,639     9,167       11,101      115,621
  Liabilities.....................    11,766     78,440     26,834    13,936      (75,950)      55,026
  Net (liabilities)/assets........    (5,868)    (4,624)   (11,195)   (4,769)      87,051       60,595
Combined
  Total revenue...................       179     55,993      4,523       140         (642)      60,193
  Gross margin....................      (318)    20,576        948         9         (214)      21,001
  Operating loss..................    (8,854)    (8,398)    (6,088)   (4,900)     (15,637)     (43,877)
  Net loss........................    (5,452)   (19,415)    (7,091)   (4,771)      (3,671)     (40,400)
  Identifiable assets.............    14,911    109,153     17,187    10,435       10,633      162,319
  Liabilities.....................    16,378     97,919     28,507    13,577      (76,413)      79,968
  Net (liabilities)/assets........    (1,467)    11,234    (11,320)   (3,142)      87,046       82,351
</TABLE>
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31, 1996
                                    ------------------------------------------------------------------
                                                                                CORPORATE
                                    WESTERN               CENTRAL                OFFICE &
                                     EUROPE      CIS       EUROPE     ASIA     ELIMINATIONS    TOTAL
                                    --------   --------   --------   -------   ------------   --------
                                                              (IN THOUSANDS)
<S>                                 <C>        <C>        <C>        <C>       <C>            <C>
Consolidated Method Entities
  Total revenue...................  $     --   $ 12,696   $  9,355   $ 1,561     $    505     $ 24,117
  Gross margin....................        --        811      3,292       652          421        5,176
  Operating loss..................   (10,679)   (14,608)    (4,651)   (5,057)     (22,907)     (57,902)
  Net loss........................   (10,700)   (15,572)    (5,295)   (4,951)     (31,473)     (67,991)
  Identifiable assets.............    19,607     96,773     17,339    14,973       88,686      237,378
  Liabilities.....................    35,728    116,961     33,826    24,753      (93,806)     117,462
  Net (liabilities)/assets........   (16,121)   (20,188)   (16,487)   (9,780)     182,492      119,916
Combined
  Total revenue...................     3,985    130,250      9,731     8,582         (343)     152,205
  Gross margin....................      (667)    62,756      2,551     1,338          421       66,399
  Operating (loss)/income.........   (19,247)     9,481     (4,387)   (5,263)     (24,226)     (43,642)
  Net loss........................   (10,700)   (15,572)    (5,295)   (4,951)     (31,473)     (67,991)
  Identifiable assets.............    37,992    171,402     20,541    30,371       69,083      329,389
  Liabilities.....................    50,533    155,211     36,143    25,308      (98,826)     168,369
  Net (liabilities)/assets........   (12,541)    16,191    (15,602)    5,063      167,909      161,020
</TABLE>
 
NOTE 14:  SUBSEQUENT EVENTS
 
  Equity Transactions
 
     As previously discussed in Note 5, "Debt Obligations," in connection with a
purchase of a venture during 1995, the Company may be required to pay additional
consideration through 1998, either in cash or shares of the Company's common
stock, based on the actual earnings of the venture. On January 17, 1997, the
purchase
 
                                      F-23
<PAGE>   149
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 14:  SUBSEQUENT EVENTS (CONTINUED)
agreement related to acquiring this venture was amended. As a result, the
consideration associated with the 1996 performance was modified and the notes
payable of $5.2 million was replaced and additional consideration was paid by
the issuance of 336,400 shares of the Company's common stock valued at $20.00
per share.
 
     As previously discussed in Note 6, "Shareholders' Equity," the Company
issued, as additional consideration, 266,667 shares of the Company's common
stock to an independent third party as a result of the Company's investment in a
venture within the CIS region. On March 13, 1997, the Company repurchased 21,667
shares at $20.00 per share and these repurchased shares became treasury shares.
The Company will be required to repurchase the remaining shares on an equal
basis over the next three years.
 
     As a result of a share offering of one of the Company's equity method
business ventures in early 1997, the Company's investment in the business
venture may increase from 50.0% to between 52.0% and 77.0%, depending on the
equity subscribed for by the other investors. The share offering is expected to
be completed in the second quarter of 1997. In addition, effective January 1,
1997, the Company will recognize 100% of the losses of this venture due to the
Company's becoming the financing partner. The Company would have recognized
additional losses of $3.3 million and $8.2 million in 1995 and 1996,
respectively, had the Company been considered the financing partner. There would
not have been significant additional losses in 1994.
 
                                      F-24
<PAGE>   150
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                  CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
                         FOR THE SECOND QUARTER OF 1997
                                   UNAUDITED
 
                                      F-25
<PAGE>   151
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                     CONDENSED, CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,    JUNE 30,
                                                                  1996          1997
                                                              ------------    ---------
                                                                   (IN THOUSANDS,
                                                                 EXCEPT SHARE DATA)
<S>                                                           <C>             <C>
                                        ASSETS
Current assets
  Cash and cash equivalents.................................   $  57,874      $  14,587
  Accounts receivable, less allowance for doubtful accounts
     of $782 and $1,366 at December 31, 1996 and June 30,
     1997...................................................       8,920         11,216
  Restricted cash...........................................      13,627          1,469
  Prepaid expenses..........................................       2,537          3,155
  Finished goods, net.......................................         949          1,813
  Other assets..............................................       1,238          1,475
                                                               ---------      ---------
          Total current assets..............................      85,145         33,715
Notes receivable............................................         209            376
Property and equipment, net of accumulated depreciation of
  $6,562 and $9,198 at December 31, 1996 and June 30,
  1997......................................................      35,463         35,415
Investments in and advances to ventures.....................     104,459        117,123
Goodwill and intangible assets, net of accumulated
  amortization of $3,916 and $5,975 at December 31, 1996 and
  June 30, 1997.............................................       9,548          9,506
Restricted cash.............................................       2,554          2,205
                                                               ---------      ---------
          TOTAL ASSETS......................................   $ 237,378      $ 198,340
                                                               =========      =========
 
                         LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Accounts payable..........................................   $   6,761      $   4,067
  Accrued expenses..........................................       8,450          7,820
  Debt maturing within one year.............................      27,437         19,665
  Other current liabilities.................................       2,040          1,541
                                                               ---------      ---------
          Total current liabilities.........................      44,688         33,093
Long-term debt, less current portion........................      58,110         64,425
Taxes and other non-current liabilities.....................      14,664         18,067
                                                               ---------      ---------
          TOTAL LIABILITIES.................................     117,462        115,585
Commitments and contingencies
Minority interest...........................................       1,915          1,894
Common stock, subject to repurchase (216,667 and 195,000
  shares outstanding at December 31, 1996 and June 30,
  1997).....................................................       4,333          4,583
 
                                 SHAREHOLDERS' EQUITY
Preferred stock, $0.0001 par value (10,000,000 shares
  authorized; none issued and outstanding)..................          --             --
Common stock, $0.0001 par value (60,000,000 shares
  authorized; 23,059,404 and 23,546,438 issued and
  outstanding, net of 77,759 and 123,184 shares of treasury
  stock at December 31, 1996 and June 30, 1997).............           2              2
Additional paid-in capital..................................     241,725        246,720
Cumulative translation adjustment...........................      (2,161)        (4,859)
Accumulated deficit.........................................    (125,898)      (165,585)
                                                               ---------      ---------
          TOTAL SHAREHOLDERS' EQUITY........................     113,668         76,278
                                                               ---------      ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........   $ 237,378      $ 198,340
                                                               =========      =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-26
<PAGE>   152
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Revenues, net:
  Telecommunication and other services......................  $  7,212    $ 15,856
  Equipment sales...........................................     1,503       1,439
                                                              --------    --------
                                                                 8,715      17,295
Cost of revenues:
  Telecommunication and other services......................     6,730      11,808
  Equipment sales...........................................     1,110       1,155
                                                              --------    --------
          Total cost of revenues............................     7,840      12,963
                                                              --------    --------
Gross margin................................................       875       4,332
Operating expenses:
  Selling, general and administrative.......................    19,096      23,749
  Depreciation and amortization.............................     3,478       2,326
  Non-income taxes..........................................       616       1,000
                                                              --------    --------
          Total operating expenses..........................    23,190      27,075
Equity in losses of ventures................................     5,433      10,167
                                                              --------    --------
Loss from operations........................................   (27,748)    (32,910)
Other income/(expense):
  Interest income...........................................       795       2,162
  Interest expense..........................................    (3,971)     (7,163)
  Foreign currency losses...................................      (613)       (959)
                                                              --------    --------
                                                                (3,789)     (5,960)
Net loss before taxes.......................................   (31,537)    (38,870)
Income taxes................................................       662         817
                                                              --------    --------
Net loss....................................................  $(32,199)   $(39,687)
                                                              ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-27
<PAGE>   153
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
OPERATING ACTIVITIES
Net loss....................................................  $(32,199)   $(39,687)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization.............................     4,015       4,478
  Amortization of discount on note payable..................     1,463       2,377
  Equity in losses of ventures..............................     5,433      10,167
  Deferred interest.........................................     2,636       3,869
  Other.....................................................       537         563
  Changes in assets and liabilities:
     Accounts receivable....................................    (3,944)     (2,880)
     Prepaid expenses.......................................    (1,045)       (618)
     Finished goods.........................................      (902)       (864)
     Accounts payable and accrued expenses..................    (5,219)     (3,324)
     Other changes in assets and liabilities................     3,262       2,667
                                                              --------    --------
Net cash used in operating activities.......................   (25,963)    (23,252)
INVESTING ACTIVITIES
  Investments in and advances to ventures...................   (17,215)    (12,873)
  Purchases of property and equipment.......................    (6,630)     (3,127)
  Restricted cash...........................................      (762)        315
  Goodwill and other intangibles............................    (2,116)     (1,261)
  Other investing activities................................      (999)       (167)
                                                              --------    --------
Net cash used in investing activities.......................   (27,722)    (17,113)
FINANCING ACTIVITIES
  Proceeds from debt........................................    61,571         308
  Common stock repurchased for treasury.....................        --        (433)
  Other financing activities................................       127         (99)
                                                              --------    --------
Net cash provided by (used in) financing activities.........    61,698        (224)
Effect of exchange rate changes on cash and cash
  equivalents...............................................       (70)     (2,698)
                                                              --------    --------
Net increase (decrease) in cash and cash equivalents........     7,943     (43,287)
Cash and cash equivalents at beginning of period............     9,044      57,874
                                                              --------    --------
Cash and cash equivalents at end of period..................  $ 16,987    $ 14,587
                                                              ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-28
<PAGE>   154
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
             NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
1. FINANCIAL PRESENTATION AND DISCLOSURES
 
     In the opinion of management, the accompanying unaudited condensed,
consolidated financial statements of Global TeleSystems Group, Inc. (the
"Company") contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the Company's financial position as of
December 31, 1996, June 30, 1997 and pro forma at June 30, 1997 (see Note 5,
"Subsequent Events"), and the results of operations and cash flows for the
periods indicated.
 
     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material intercompany affiliate account
transactions have been eliminated; however, other adjustments may have been
required had an audit been performed. It is suggested that these financial
statements be read in conjunction with the Company's 1996 audited consolidated
financial statements and the notes related thereto. The results of operations
for the six months ended June 30, 1997, may not be indicative of the operating
results for the full year.
 
     The Company's operations are carried out through alliances with strategic
local partners in the form of venture arrangements. Wholly-owned subsidiaries
and majority-owned ventures where the Company has unilateral operating and
financial control are consolidated within the Company's financial results and
operations. Those ventures where the Company exercises significant influence,
but does not exercise unilateral operating and financial control, are accounted
for by the equity method. The Company has certain majority-owned investments
that are accounted for by the equity method as a result of super-majority voting
conditions or other governmentally imposed uncertainties so severe that they
prevent the Company from obtaining unilateral control of the venture. If the
Company has little ability to exercise significant influence over the ventures,
those ventures are accounted for by the cost method.
 
     The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recorded have been recovered. As a result of this
policy, the Company recognized excess losses of $2.1 million, and $7.8 million
in its results of operations for the six months ended June 30, 1996 and 1997,
respectively. In addition, effective January 1, 1997, the Company recognizes
100% of the losses of one of its ventures which is accounted for by the equity
method, Hermes Europe Railtel, B.V. ("Hermes"), due to the Company becoming the
financing partner. As a result, the Company recognized additional losses of $5.0
million for the six months ended June 30, 1997. The Company would have
recognized additional losses of $3.5 million for the six months ended June 30,
1996, had the Company been considered the financing partner. Moreover,
subsequent to June 30, 1997, as a result of a recapitalization initiated by
Hermes (the "Hermes Recapitalization"), the Company's ownership of Hermes
increased from 50.0% to 86.2% (see Note 14, "Subsequent Events").
 
2. DEBT OBLIGATIONS
 
     During 1996, in connection with a purchase agreement involving a venture in
the CIS region, the Company agreed to buy-out the other partner's interest in
this venture. The initial capital infusion by both partners in 1996 was for $4.5
million each. The Company's obligation to pay the other partner was payable upon
demand. In June 1997, an additional $4.1 million was contributed by each partner
and the Company was obligated to pay the other partner $4.1 million by September
30, 2000. Included in the buy-out agreement, the outstanding obligation of $8.6
million may be converted into 475,540 shares of the Company's stock upon
completion of an initial public offering of the Company's common stock.
 
                                      F-29
<PAGE>   155
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
 
2. DEBT OBLIGATIONS (CONTINUED)
     In connection with a purchase of a venture during 1995, the Company is
required to pay additional consideration through 1998, either in cash or shares
of the Company's common stock, based upon the actual earnings of the venture.
During the first quarter of 1997, the purchase agreement related to acquiring
this venture was amended and the notes payable of $5.2 million were replaced and
additional consideration was paid by the issuance of 336,400 shares of the
Company's common stock valued at $20.00 per share.
 
3. EQUITY TRANSACTIONS
 
     At December 31, 1996, the Company had 216,667 shares of common stock
subject to repurchase, valued at $20.00 per common share. These shares were
originally issued in 1995 by the Company in connection with the acquisition of
an interest in a venture. In March 1997, the Company repurchased 21,667 shares
at $20.00 per share, and these shares became treasury stock. The Company will be
required to repurchase the remaining shares on an equal basis over the next
three years unless the Company has completed a complying public equity offering.
At June 30, 1997, the remaining 195,000 shares of common stock subject to
repurchase was valued at $23.50 per common share, reflecting the accretion in
the Company's stock value since December 31, 1996.
 
4. COMBINED SELECTED FINANCIAL DATA
 
     The combined financial data included herewith was prepared to reflect the
combined financial results of operations and financial condition of ventures
over which the Company has significant operational and management control.
Management believes that this financial data more clearly reflects the financial
results of operations and financial condition of businesses within the GTS
group. Under this method, revenues and expenses of the Company and its ventures
are combined, as are the assets, liabilities and equity.
 
  Income Statement Data:
 
<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Revenues....................................................  $ 59,901    $109,178
Operating loss..............................................   (21,423)    (14,130)
Interest expense, net.......................................    (5,335)     (7,065)
Net loss before minority interest...........................   (31,324)    (31,983)
Minority interest...........................................      (875)     (7,704)
Net loss after minority interest............................   (32,199)    (39,687)
</TABLE>
 
  Balance Sheet Data:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,    JUNE 30,
                                                                  1996          1997
                                                              ------------    --------
                                                                   (IN THOUSANDS)
<S>                                                           <C>             <C>
Cash and cash equivalents...................................    $ 72,870      $ 31,262
Current assets..............................................     156,709       114,890
Property and equipment, net.................................     125,672       143,028
Total assets................................................     329,389       314,071
Total debt..................................................      93,403        90,193
Total liabilities...........................................     168,369       177,801
Net assets..................................................     161,020       136,270
</TABLE>
 
                                      F-30
<PAGE>   156
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
 
5. SUBSEQUENT EVENTS
 
  Financing Transactions
 
     In July 1997, the Company issued $144.8 million senior subordinated
convertible bonds (the "Bonds") due June 30, 2000. The Bonds constitute direct,
unsecured senior subordinated obligations of the Company and rank senior in
right of payment to all subordinated indebtedness after existing debt of $84.1
million. Upon completion of a complying public equity offering as defined in the
Bond agreement (an "Offering") or in certain other circumstances as defined in
the Bond agreement, the Bonds may be converted at the option of the holders from
time to time, in whole or in part, prior to the close of business on June 30,
2000, into shares of the Company's common stock, par value $0.0001 per share, at
the applicable conversion price as defined in the Bond agreement. The Bonds bear
interest payable semiannually at a rate of 8.75% for the first year, 9.25% for
the second year and 9.75% for the final year. In the event of an Offering, the
interest rate will remain at the interest rate prevailing at the time of the
Offering until maturity. In the event that an Offering has not occurred by the
maturity date, the Bonds will be redeemed at 121 percent of their principal
amount.
 
     Subsequent to June 30, 1997, Hermes initiated a debt offering that is
expected to raise $265 million through a series of senior notes due August 15,
2007 ("Senior Notes"). The Senior Notes will be general unsecured obligations of
Hermes, with interest payable semi-annually at a rate of 11.5%. Approximately
$56.5 million of the net proceeds of the offering will be held in escrow for the
first four semi-annual interest payments commencing in 1998. The offering was
completed August 15, 1997.
 
  Hermes Recapitalization
 
     As of June 30, 1997, Hermes is 50% owned by a wholly-owned subsidiary of
the Company and 50% owned by HIT Rail B.V. ("HIT Rail"), a consortium of eleven
European railway companies. In an effort to increase its equity by means of the
contribution of fiber optic cable leases and/or cash by the Company, HIT Rail,
and the individual shareholders of HIT Rail, Hermes initiated the Hermes
Recapitalization, which is expected to be completed by the end of August, 1997.
The first phase of the Hermes Recapitalization was completed on July 7, 1997 and
resulted in the Company receiving shares of Hermes' common stock in exchange for
the conversion of approximately $28.4 million of loans and the contribution of
ECU 46.0 million (approximately $51.1 million), which will be paid by the
Company to Hermes by September 30, 1997. HIT Rail received shares of Hermes'
common stock in exchange for the conversion of approximately $14.0 million of
loans. As a result of the completion of the first phase of the Hermes
Recapitalization, the Company owns 86.2% of Hermes and HIT Rail owns 13.8%.
 
     Additional phases of the Hermes Recapitalization are expected to include
the conversion of loans of approximately $6.1 million advanced to Hermes by two
of the individual railways of the HIT Rail consortium, as well as the
contribution of fiber optic cable leases. If all parties participate in the
Hermes Recapitalization as currently expected, the Company will own 79.1% of
Hermes and the two exercising railways (collectively) and HIT Rail will own 8.3%
and 12.6% of Hermes, respectively. In accordance with Statement of Financial
Accounting Standards No. 94, "Consolidation of All Majority-Owned Subsidiaries,"
Hermes will be consolidated into the Company's financial statements upon
finalization of the Hermes Recapitalization and execution of a new shareholders
agreement.
 
  Equity Transactions
 
     The Company completed a private placement offering in September 1997 and
issued approximately 1,672,000 shares of the Company's common stock at
approximately $23.50 per share, for aggregate gross proceeds of $39.3 million.
 
                                      F-31
<PAGE>   157
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
 
5. SUBSEQUENT EVENTS (CONTINUED)
 
  Pro Forma Financial Information
 
     Presented below is an unaudited balance sheet which sets forth historical
information as adjusted to give effect to the financing transactions, Hermes
Recapitalization, and equity transactions discussed above, including the effect
of consolidating Hermes. The adjustments assume that these transactions occurred
on June 30, 1997.
 
<TABLE>
<CAPTION>
                        UNAUDITED                           REPORTED    ADJUSTMENTS    PRO FORMA
                        ---------                           --------    -----------    ---------
                                                                       (IN THOUSANDS)
<S>                                                         <C>         <C>            <C>
Cash and cash equivalents.................................  $ 14,587     $369,659      $384,246
Other current assets......................................    19,128       36,137        55,265
Other assets..............................................   164,625       66,602       231,227
                                                            --------     --------      --------
          Total assets....................................  $198,340     $472,398      $670,738
                                                            ========     ========      ========
Current liabilities.......................................  $ 33,093     $ 10,008      $ 43,101
Long-term debt, less current portion......................    64,425      410,239       474,664
Other liabilities.........................................    18,067            8        18,075
                                                            --------     --------      --------
          Total liabilities...............................   115,585      420,255       535,840
Mezzanine debt............................................        --        6,142         6,142
Minority interest.........................................     1,894       10,083        11,977
Common stock, subject to repurchase.......................     4,583           --         4,583
Shareholders' equity......................................    76,278       35,918       112,196
                                                            --------     --------      --------
          Total liabilities and shareholders' equity......  $198,340     $472,398      $670,738
                                                            ========     ========      ========
</TABLE>
 
                                      F-32
<PAGE>   158
 
                                  EDN SOVINTEL
 
                              FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
                                      F-33
<PAGE>   159
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Owners
EDN Sovintel
 
     We have audited the accompanying balance sheets of EDN Sovintel as of
December 31, 1996 and 1995, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 financial statements referred to above present fairly,
in all material respects, the financial position of EDN Sovintel at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in period ended December 31, 1996, in conformity with accounting
principles generally accepted in the United States of America.
 
     We have also audited the financial statements of the Company at December
31, 1996, 1995 and 1994 and for each of the three years ended December 31, 1996,
not presented herewith, prepared in compliance with the regulations for
bookkeeping and accounting for income tax and statutory reporting purposes in
the Russian Federation on which we expect to report separately for the 1996
audited financial statements and have reported separately for the 1995 and 1994
financial statements. The significant differences between the accounting
principles applied for preparing the statutory financial statements and
accounting principles generally accepted in the United States of America are
summarized in Note 2, "Basis of Presentation."
 
                                            Ernst & Young (CIS) Ltd.
 
February 21, 1997
 
                                      F-34
<PAGE>   160
 
                                  EDN SOVINTEL
 
                                 BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1996       1995
                                                              -------    -------
                                                               (IN THOUSANDS OF
                                                                 US DOLLARS)
<S>                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................  $ 3,606    $ 3,094
  Cash deposit with related party...........................      476
  Accounts receivable, net of allowances....................   15,329      7,400
  Due from affiliates.......................................    1,879      1,196
  Inventories...............................................    1,749        938
  Prepaid expenses and other assets.........................    2,328      1,540
                                                              -------    -------
          Total current assets..............................   25,367     14,168
Property and equipment, net.................................   27,709     21,349
Deferred expenses...........................................    1,080      1,215
                                                              -------    -------
          Total assets......................................  $54,156    $36,732
                                                              =======    =======
 
                      LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
  Note due shareholder......................................  $ 5,700    $ 5,500
  Trade payables............................................    8,382      8,761
  Accrued liabilities and other payables....................    1,130        701
  Taxes accrued or payable..................................    1,086      1,019
  Amounts due to shareholder and affiliates.................    5,703      2,664
  Current portion of amount due to partner in commercial
     venture................................................    1,350
  Current portion of long-term debt.........................                 694
                                                              -------    -------
          Total current liabilities.........................   23,351     19,339
Amount due to partner in commercial venture.................               1,350
Commitments and contingencies
Shareholders' equity:
  Capital contributions.....................................    2,000      2,000
  Retained earnings.........................................   28,805     14,043
                                                              -------    -------
          Total shareholders' equity........................   30,805     16,043
                                                              -------    -------
          Total liabilities and shareholders' equity........  $54,156    $36,732
                                                              =======    =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-35
<PAGE>   161
 
                                  EDN SOVINTEL
 
                   STATEMENTS OF INCOME AND RETAINED EARNINGS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1996       1995       1994
                                                              -------    -------    -------
                                                              (IN THOUSANDS OF US DOLLARS)
<S>                                                           <C>        <C>        <C>
Net revenues................................................  $75,040    $44,292    $20,728
Cost of revenues............................................   43,910     26,247     12,519
                                                              -------    -------    -------
Gross profit................................................   31,130     18,045      8,209
Selling, general and administrative expenses................   10,291      7,145      4,644
Interest expense............................................      638        703        612
Interest income.............................................      (87)       (59)       (24)
Other loss (income).........................................      120        (98)      (113)
Foreign exchange loss on net monetary items.................      252        112        467
                                                              -------    -------    -------
Income before taxes.........................................   19,916     10,242      2,623
Income taxes................................................    5,154      2,594
                                                              -------    -------    -------
Net income..................................................   14,762      7,648      2,623
Retained earnings, beginning of year........................   14,043      6,395      3,772
                                                              -------    -------    -------
Retained earnings, end of year..............................  $28,805    $14,043    $ 6,395
                                                              =======    =======    =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-36
<PAGE>   162
 
                                  EDN SOVINTEL
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1996       1995       1994
                                                              --------    -------    -------
                                                               (IN THOUSANDS OF US DOLLARS)
<S>                                                           <C>         <C>        <C>
Operating activities
  Net income................................................  $ 14,762    $ 7,648    $ 2,623
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................     3,638      2,448      1,929
     Provision for doubtful accounts........................       678        132        303
     Write-off of accounts receivable.......................      (147)      (492)
     Write-down of network equipment and inventories........       100        196        170
     Foreign exchange loss..................................       252        112        467
  Changes in operating assets and liabilities:
     Accounts receivable, net of allowances.................    (8,460)    (2,759)      (358)
     Due from affiliates....................................      (683)    (1,011)      (172)
     Inventories............................................      (911)      (309)        77
     Advances to related party..............................                            (376)
     Prepaid expenses and other assets......................    (1,054)      (307)      (712)
     Trade payables.........................................      (193)     2,983      2,176
     Accrued liabilities and other payables.................       429        586       (591)
     Taxes accrued or payable...............................       207        876
     Amounts due to shareholder and affiliates..............     3,039      2,165        499
     Other..................................................                            (132)
                                                              --------    -------    -------
          Net cash provided by operating activities.........    11,657     12,268      5,903
Investing activities -- Purchases of and advances for
  property and equipment....................................    (9,863)    (9,259)    (5,729)
Financing activities
  Borrowings from shareholder...............................    11,300     11,888      2,883
  Repayments to shareholder.................................   (11,100)    (9,271)
  Repayments of long-term debt..............................      (694)    (3,979)    (3,979)
  Increase in cash deposited with related party.............      (476)
                                                              --------    -------    -------
          Net cash used in financing activities.............      (970)    (1,362)    (1,096)
Effect of exchange rate changes on cash and cash
  equivalents...............................................      (312)                 (220)
                                                              --------    -------    -------
Net increase (decrease) in cash and cash equivalents........       512      1,647     (1,142)
Cash and cash equivalents at beginning of year..............     3,094      1,447      2,589
                                                              --------    -------    -------
Cash and cash equivalents at end of year....................  $  3,606    $ 3,094    $ 1,447
                                                              ========    =======    =======
</TABLE>
 
                            See accompanying notes.
 
                                      F-37
<PAGE>   163
 
                                  EDN SOVINTEL
 
                         NOTES TO FINANCIAL STATEMENTS
              (US DOLLAR AMOUNTS IN TABLES EXPRESSED IN THOUSANDS)
 
1. DESCRIPTION OF BUSINESS
 
     EDN Sovintel (the "Company") was created in August 1990 to design,
construct, and operate a telecommunications network in Moscow. This network
provides worldwide communications services, principally to major hotels,
business offices and mobile communication companies. Telecommunications services
are subject to local licensing. The Company's license for international,
intercity and local calls was most recently renewed on November 4, 1996 and is
valid until January 5, 2000. The Company received a license for leased lines on
September 20, 1996 valid for 5 years. The Company began operating in December
1991, providing services under long-term contracts payable in US dollars.
 
     The Company initially registered as a limited liability Russian-American
joint venture. The venture re-registered as a limited liability Russian company
in October 1992. The Company is fifty-percent owned by Open Joint Stock Company
"Rostelecom", an intercity and long-distance carrier which is 51% owned by the
Russian Government, and fifty-percent owned by Sovinet, a US general
partnership, owned by two wholly-owned Global TeleSystems Group, Inc. ("GTS")
subsidiaries.
 
2. BASIS OF PRESENTATION
 
     The Company maintains its records and prepares its financial statements in
Russian roubles in accordance with the requirements of Russian accounting and
tax legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's books, which are appropriate to
present the financial position, results of operations and cash flows in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP"). The principal adjustments are related to foreign currency
translation, and depreciation and valuation of property and equipment.
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Use of Estimates
 
     The preparation of financial statements, in conformity with US GAAP,
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
 
  Foreign Currency Translation
 
     The Company's functional currency is the US dollar because the majority of
its revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Accordingly, transactions and balances not already measured in US
dollars (primarily Russian roubles) have been remeasured into US dollars in
accordance with the relevant provisions of US Financial Accounting Standard
("FAS") No. 52, "Foreign Currency Translation".
 
     Under FAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from remeasurement of monetary assets and liabilities that are not denominated
in US dollars are credited or charged to operations.
 
     The rouble is not a convertible currency outside the territory of Russia.
Within Russia its official exchange rates were determined principally through
trading on Moscow Interbank Currency Exchange ("MICEX") until May 17, 1996.
Although MICEX rates did occasionally diverge from market rates, they were
generally considered to be a reasonable approximation. Beginning May 17, 1996,
official exchange rates
 
                                      F-38
<PAGE>   164
 
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
were determined daily by the Central Bank of Russia ("CBR") and are generally
considered to be a reasonable approximation of market rates. The translation of
rouble denominated assets and liabilities into US dollars for the purpose of
these financial statements does not indicate that the Company could realize or
settle in US dollars the reported values of the assets and liabilities.
Likewise, it does not indicate that the Company could return or distribute the
reported US dollar values of capital and retained earnings to its shareholders.
 
     The exchange rate used for translation purposes is the CBR rate as of
December 31, 1996 and the MICEX rate as of December 31, 1995 and 1994. The rates
at December 31, 1996, 1995 and 1994 for one US dollar were RUR 5,560, RUR 4,640
and RUR 3,550, respectively. At February 21, 1997, the CBR rate had changed to
RUR 5,665. The effect of this devaluation of the rouble on monetary assets and
liabilities has not been determined.
 
  Cash and Cash Equivalents
 
     Cash and cash equivalents consist of cash on hand and in the bank.
 
  Accounts Receivable
 
     Accounts receivable are shown at their net realizable value which
approximates their fair value. Accounts receivable are shown in the balance
sheet net of an allowance for uncollectible accounts of $900,000 and $369,000 at
December 31, 1996 and 1995, respectively.
 
  Inventories
 
     Inventories consist of telecommunications equipment held for resale and are
stated at the lower of cost or market. Cost is computed on a weighted average
basis.
 
  Property and Equipment
 
     Property and equipment are recorded at their historical cost. Depreciation
and amortization are provided on the straight-line method over the following
estimated useful lives:
 
<TABLE>
<S>                                                         <C>
Network equipment.......................................     10 years
Other property and equipment............................    3-5 years
</TABLE>
 
     There is no depreciation charge for construction-in-progress. Depreciation
commences upon completion of the related project.
 
  Deferred Expenses
 
     Deferred expenses represent the Company's interest in the historical cost
of network equipment owned by MTU Inform, a partner in a commercial venture
(Note 8). These expenses are amortized over the equipment's useful life of 10
years.
 
  Revenue Recognition and Taxes on Revenue
 
     Revenues from telecommunication traffic are recognized in the period in
which the traffic occurs. Revenues from product sales, connection fees, and
other services are recognized in the period in which the products are sold,
connections made, and services rendered. Revenues are stated net of any
value-added taxes ("VAT") charged to customers. Certain other taxes on revenues
were charged at rates ranging from 1.5% to 4.0% over the three year period
ending December 31, 1996 and amounted to $2,792,000, $1,166,000 and $336,000 in
1996, 1995 and 1994, respectively, and are charged to selling, general and
administrative expenses.
 
                                      F-39
<PAGE>   165
 
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
  Advertising
 
     The Company expenses the cost of advertising as incurred. Advertising
expenses for the years ended December 31, 1996, 1995 and 1994 were $512,000,
$395,000 and $270,000, respectively, and are included in selling, general and
administrative expenses.
 
  Investment Incentive Deductions
 
     Russian legislation allows for certain additional tax deductions related to
new asset investments. These deductions are accounted for as a reduction to
current income taxes in the year in which they arise.
 
  Income Taxes
 
     The Company computes and records income taxes in accordance with FAS No.
109, "Accounting for Income Taxes".
 
  Government Pension Funds
 
     The Company contributes to the Russian Federation state pension fund,
social fund, medical insurance fund, unemployment charters and transport fund on
behalf of all its Russian employees. Contributions were 40.5%, 41.0% and 40.0%
for 1996, 1995 and 1994, respectively.
 
  Fair Value of Financial Instruments
 
     The fair value of financial instruments included in current assets and
liabilities is considered to be the carrying value.
 
  Comparative figures
 
     Certain of the 1995 comparative figures have been reclassified to conform
to the presentation adopted in the current year.
 
4. PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following as of December 31:
 
<TABLE>
<CAPTION>
                                                               1996       1995
                                                              -------    -------
<S>                                                           <C>        <C>
Network equipment...........................................  $31,251    $20,875
Other property and equipment................................    3,108      2,740
                                                              -------    -------
                                                               34,359     23,615
Accumulated depreciation and amortization...................   (9,380)    (5,877)
Construction-in-progress....................................    1,796      1,539
Network equipment and advances for network equipment not yet
  in service................................................      934      2,072
                                                              -------    -------
Net book value..............................................  $27,709    $21,349
                                                              =======    =======
</TABLE>
 
     Total depreciation and amortization expense on property and equipment for
1996, 1995 and 1994 was $3,503,000, $2,253,000 and $1,720,000, respectively.
 
                                      F-40
<PAGE>   166
 
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
5. INCOME TAXES
 
     The Russian Federation was the only tax jurisdiction in which the Company's
income was taxed. The income tax expense reported in the accompanying statements
of operations for the years ended December 31, 1996, 1995 and 1994 represents
the provision for taxes currently payable.
 
     The following is a reconciliation of the tax basis and book basis of the
taxable income reported in the Russian statutory financial statements to the
income before taxes reported in the accompanying financial statements presented
in accordance with US GAAP for the years ended December 31:
 
<TABLE>
<CAPTION>
                                           1996      1995      1994
                                          -------   -------   ------
<S>                                       <C>       <C>       <C>
Taxable income (loss) reported for
  Russian tax purposes..................  $14,726   $ 7,411   $
  Investment incentive deductions.......    9,030     7,220
  Tax loss carry-forwards utilized......      113
  Net permanent difference related to
     revenues and expenses incurred in
     the ordinary course of business
     which are not assessable or
     deductible for Russian tax
     purposes...........................   (1,174)   (2,595)    (948)
                                          -------   -------   ------
Russian income (loss) before taxes......   22,695    12,036     (948)
Adjustments to present financial
  statements in accordance with US GAAP:
  Reversal of excess depreciation due to
     statutory revaluations.............   (1,497)     (293)    (285)
  Depreciation rate differences.........     (424)     (236)     (98)
  Allowances for uncollectible
     accounts...........................      369      (132)    (129)
  Inventory allowance...................     (100)     (249)     (29)
  Accrual of deductible expenses........   (2,437)   (1,339)    (659)
  Accrual of revenue....................    1,093        19
  Foreign exchange differences..........      280     1,425    5,665
  Other non-deductible accruals.........      (63)     (989)    (894)
                                          -------   -------   ------
Income before taxes under US GAAP.......  $19,916   $10,242   $2,623
                                          =======   =======   ======
</TABLE>
 
     The Company operated under a two-year income tax holiday in 1994 and 1993.
As such, no Russian tax calculations or tax filings were made or reported.
 
     A reconciliation between the statutory rate and the effective income tax
rate is as follows for the years ended December 31:
 
<TABLE>
<CAPTION>
                                           1996      1995      1994
                                          -------   -------   -------
<S>                                       <C>       <C>       <C>
Income tax expense computed on financial
  income taxes at statutory tax rate of
  35% for 1996 and 1995 and 38% for
  1994..................................  $ 6,970   $ 3,585   $   997
Tax effect of permanent differences:
  Investment incentive deductions.......   (3,161)   (2,594)
  Tax loss carryforwards utilized.......      (40)
  Other permanent differences...........      411       805       360
  Adjustments made to compute income
     before taxes for US GAAP financial
     reporting..........................      813       555    (1,548)
Temporary differences not recognised as
  measured by the change in the
  valuation allowance...................      161       243       191
                                          -------   -------   -------
Income tax expense reported in the
  financial statements..................  $ 5,154   $ 2,594   $
                                          =======   =======   =======
</TABLE>
 
                                      F-41
<PAGE>   167
 
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
5. INCOME TAXES -- (CONTINUED)
     The deferred tax balances are calculated by applying the statutory tax
rates in effect at the respective balance sheet dates to the temporary
differences between the tax basis of assets and liabilities and the amount
reported in the accompanying financial statements, and consist of the following
at December 31:
 
<TABLE>
<CAPTION>
                                                              1996     1995    1994
                                                             -------   -----   -----
<S>                                                          <C>       <C>     <C>
Deferred tax assets (liabilities):
  Depreciation.............................................  $   300   $ 151   $  74
  Inventory write-downs and allowances.....................      235     147      11
  Accrual of expenses......................................      898     469     284
  Accrual of revenue.......................................     (383)     (7)
  Allowance for uncollectible accounts.....................              129     277
                                                             -------   -----   -----
Deferred tax assets........................................    1,050     889     646
Valuation allowance for deferred tax assets................   (1,050)   (889)   (646)
                                                             -------   -----   -----
Net deferred tax assets....................................  $    --   $  --   $  --
                                                             =======   =====   =====
</TABLE>
 
     For financial reporting purposes, a valuation allowance has been recognised
to reflect management's estimate of the deferred tax assets that are less likely
than not to be realized.
 
     Unexpired tax loss carryforwards at December 31, 1996 amount to $113,000
and is available in and expires in 1997.
 
     The Company paid Russian profits tax of $5,849,000 and $2,660,000 in 1996
and 1995, respectively, and no taxes in 1994.
 
6. NOTE DUE TO SHAREHOLDER AND LONG-TERM DEBT
 
     In October 1995, the Company entered into a $5,000,000 credit facility with
Sovinet, one of the Company's shareholders. It was subsequently increased to
$7,000,000. In January of 1997, this facility was repaid and on January 16,
1997, a new six-month facility was established with GTS Finance, Inc. for
$7,000,000. The loan bears interest at a rate equal to the then current six
month LIBOR rate (5.6% as of December 31, 1996) plus 5.0 percent per annum. As
of December 31, 1996 and 1995, the outstanding borrowings under this agreement
were $5,700,000 and $5,500,000, respectively.
 
     In April 1991, the Company entered into a $5,300,000 credit facility with
Barclays Bank PLC and International Moscow Bank. This loan was fully repaid
during 1996.
 
     The Company believes that the carrying value of the above loans approximate
their fair values.
 
     The Company paid interest of $403,000, $576,000 and $472,000 in 1996, 1995
and 1994, respectively.
 
                                      F-42
<PAGE>   168
 
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
7. SHAREHOLDERS' EQUITY
 
     The Company's capital structure as specified in its charter capital
document as of December 31 is as follows:
 
<TABLE>
<CAPTION>
                                             1996          1995
                                          ----------    ----------
<S>                                       <C>           <C>
Registered capital in Russian roubles:
  Rostelecom............................     600,000       600,000
  Sovinet...............................     600,000       600,000
                                          ----------    ----------
                                           1,200,000     1,200,000
                                          ==========    ==========
Historical value of the Company's
  capital in US dollars.................  $    2,000    $    2,000
                                          ==========    ==========
</TABLE>
 
     As a Russian limited liability company, the Company has no capital stock;
rather, it has only contributed and locally registered capital in accordance
with its charter. As such, no earnings per share data are presented in these
financial statements.
 
     Retained earnings available for distribution at December 31, 1996 amounted
to 84 billion roubles or approximately $15,108,000 at applicable year-end
exchange rates.
 
8. RELATED PARTY TRANSACTIONS
 
     Transactions and balances with Rostelecom (one of the Company's
shareholders) and its affiliates were, as of and for the years ending December
31, as follows:
 
<TABLE>
<CAPTION>
                                           1996      1995     1994
                                          ------    ------    ----
<S>                                       <C>       <C>       <C>
Sales...................................  $1,525    $   62
Telecommunication lease and traffic
  costs.................................   4,586     1,506    $410
Amounts due to shareholder and
  affiliates............................     656       460
Cash deposit with related party.........     476
</TABLE>
 
     At the request of Rostelecom, a shareholder, the Company placed a deposit
of 2.65 billion roubles in August 1996 with a Russian bank related to this
shareholder. The bank deposit agreement states a deposit term of one year. The
deposit earns interest quarterly at a rate of 15% per annum plus any devaluation
losses against the US dollar up to a maximum of 4.8% per quarter. Management is
aware that the deposited amount collateralizes certain obligations of the
shareholder.
 
     Transactions and balances with Sovinet (one of the Company's shareholders),
GTS and affiliates were, as of and for the years ending December 31, as follows:
 
<TABLE>
<CAPTION>
                                           1996      1995      1994
                                          ------    ------    ------
<S>                                       <C>       <C>       <C>
Sales...................................  $3,115    $1,041    $  172
Management service fees and
  reimbursements of expenses of
  expatriate staff......................     927     2,062       499
Balances due under credit facility......   5,700     5,500     2,883
Interest expense........................     626       461        65
Amounts due from affiliates.............   1,879     1,196       185
Amounts due to shareholder and
  affiliates............................   5,047     2,204       499
</TABLE>
 
                                      F-43
<PAGE>   169
 
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
     Transactions and balances with MTU Inform, an entity with which the Company
entered into a commercial agreement to co-develop and operate a "258" phone
exchange were, as of and for the years ending December 31, as follows:
 
<TABLE>
<CAPTION>
                                           1996       1995      1994
                                          -------    -------    ----
<S>                                       <C>        <C>        <C>
Telecommunication settlement and rent
  expense...............................  $15,889    $10,491
Balances in trade payables..............    1,237      2,184
Balance of amount due to partner in
  commercial venture....................    1,350      1,350
Balances in prepaid expenses and other
  assets................................                        $376
</TABLE>
 
     The Company also has an interest in the cost of the related network
equipment owned by MTU Inform, which is reflected in the balance sheet as
deferred expenses.
 
9. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
 
     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash deposits and trade accounts
receivables. The Company deposits its available cash with several Russian
financial institutions. The Company's sales and accounts receivable are made to
and due from a variety of international and Russian business customers. As of
December 31, 1996, two customers accounted for 17% and 16% of revenues and 25%
and 10% of accounts receivable, respectively. As of December 31, 1995, these
same two customers accounted for 1% and 14% of revenues and 10% and 11% of
accounts receivable, respectively. The Company did not have significant
activities with these customers during 1994. However, during 1994, a different
customer accounted for 14% of revenues. The Company has no other significant
concentrations of credit risk.
 
10. COMMITMENTS
 
     The Company has several cancelable operating leases for office and
warehouse space and telecommunications lines with terms ranging from one to five
years.
 
     Total rent expense for 1996, 1995 and 1994 was $2,123,000, $1,068,000 and
$1,058,000, respectively.
 
11. CONTINGENCIES
 
     The tax and legal systems in Russia are evolving as Russia and its central
government transform from a command to a market oriented economy. The Russian
Federation has and continues to introduce laws, decrees and related regulations.
These laws, decrees and regulations are not always clearly written and are, at
times, conflicting. In addition, their interpretation is subject to the opinions
of a variety of local, regional and federal tax inspectors, Central Bank
officials and the Ministry of Finance. Instances of inconsistent opinions among
and between these authorities are not unusual.
 
     The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amount expensed to date and accrued at December
31, 1996. It is the opinion of management, that the ultimate resolution of the
Company's Russian tax liability and potential loss contingencies, to the extent
not previously provided for, will not have a material effect on the financial
condition of the Company. However, depending on the amount and timing of an
unfavorable resolution of this contingency, it is possible that the Company's
future results of operations or cash flows could be materially affected in a
particular period.
 
                                      F-44
<PAGE>   170
 
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
11. CONTINGENCIES -- (CONTINUED)
     The Company's operations and financial position will continue to be
affected by Russian political developments including the application of existing
and future legislation, tax regulations, cancellations or non-renewal of license
rights, and expropriation of property. The Company does not believe that these
contingencies, as related to its operations, are any more significant than those
of similar enterprises in Russia.
 
                                      F-45
<PAGE>   171
 
                                  EDN SOVINTEL
 
                         CONDENSED FINANCIAL STATEMENTS
                         FOR THE SECOND QUARTER OF 1997
                                   UNAUDITED
 
                                      F-46
<PAGE>   172
 
                                  EDN SOVINTEL
 
                            CONDENSED BALANCE SHEETS
                                  (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,    JUNE 30,
                                                                  1996          1997
                                                              ------------    --------
                                                                   (IN THOUSANDS)
<S>                                                           <C>             <C>
Current assets
  Cash and cash equivalents.................................    $ 3,606        $ 3,160
  Accounts receivable, less allowance for doubtful accounts
     of $900 and $1,252 at December 31, 1996 and June 30,
     1997...................................................     15,329         22,400
  Restricted cash...........................................        476            498
  Due from affiliated companies.............................      1,879          2,256
  Inventory.................................................      1,749          1,871
  Prepaid expenses and other assets.........................      2,328          3,857
                                                                -------        -------
          Total current assets..............................     25,367         34,042
Property and equipment, net of accumulated depreciation of
  $9,380 and $11,718 at December 31, 1996 and June 30,
  1997......................................................     27,709         34,105
Deferred expenses...........................................      1,080          1,013
                                                                -------        -------
          TOTAL ASSETS......................................    $54,156        $69,160
                                                                =======        =======
 
                         LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable............................................    $ 8,382        $11,291
Accrued expenses............................................      2,216          3,430
Due to affiliated companies.................................      5,703          7,583
Note payable to shareholder.................................      5,700          4,972
Taxes and other liabilities.................................      1,350          1,350
                                                                -------        -------
          TOTAL LIABILITIES.................................     23,351         28,626
Commitments and contingencies
 
                                 SHAREHOLDERS' EQUITY
Contributed capital.........................................      2,000          2,000
Retained earnings...........................................     28,805         38,534
                                                                -------        -------
          TOTAL SHAREHOLDERS' EQUITY........................     30,805         40,534
                                                                -------        -------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........    $54,156        $69,160
                                                                =======        =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-47
<PAGE>   173
 
                                  EDN SOVINTEL
 
                       CONDENSED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                               1996       1997
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Revenues, net:
  Telecommunication and other services......................  $31,211    $52,311
  Equipment sales...........................................      782      1,828
                                                              -------    -------
                                                               31,993     54,139
Cost of revenues:
  Telecommunication and other services......................   18,362     31,543
  Equipment sales...........................................      647      1,293
                                                              -------    -------
  Total cost of revenues....................................   19,009     32,836
                                                              -------    -------
Gross margin................................................   12,984     21,303
Operating Expenses:
  Selling, general and administrative.......................    3,029      5,435
  Depreciation and amortization.............................      204        213
  Non-income taxes..........................................    1,368      2,467
                                                              -------    -------
  Total operating expenses..................................    4,601      8,115
Income from operations......................................    8,383     13,188
Other income/(expense):
  Other non-operating income, net...........................      213         45
  Interest income...........................................       18        104
  Interest expense..........................................     (177)      (319)
  Foreign currency gains (losses)...........................     (243)       (69)
                                                              -------    -------
                                                                 (189)      (239)
Net income before taxes.....................................    8,194     12,949
Income taxes................................................    2,143      3,220
                                                              -------    -------
Net income..................................................  $ 6,051    $ 9,729
                                                              =======    =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-48
<PAGE>   174
 
                                  EDN SOVINTEL
 
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                               1996       1997
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
OPERATING ACTIVITIES
Net income..................................................  $ 6,051    $ 9,729
Adjustments to reconcile net income to net cash provided by
  operating activities:
Depreciation and amortization...............................    1,586      2,227
Provision for doubtful accounts.............................     (400)      (352)
Changes in assets and liabilities:
Accounts receivable.........................................   (3,046)    (6,719)
Inventory...................................................     (166)      (122)
Prepaid expenses and other
  assets....................................................     (200)    (1,529)
Accounts payable and accrued expenses.......................      682      4,123
                                                              -------    -------
Net cash provided by operating activities...................    4,507      7,357
INVESTING ACTIVITIES
Purchases of property and equipment.........................   (4,236)    (8,556)
Restricted cash.............................................      (40)       (22)
                                                              -------    -------
Net cash used in investing activities.......................   (4,276)    (8,578)
FINANCING ACTIVITIES
Borrowing on (repayment of)
  shareholder note, net.....................................      100       (728)
Repayment of debt...........................................     (694)        --
Due to affiliated companies, net............................      526      1,503
                                                              -------    -------
Net cash (used in) provided by financing activities.........      (68)       775
                                                              -------    -------
Net increase(decrease) in cash and cash equivalents.........      163       (446)
Cash and cash equivalents at beginning of period............    3,094      3,606
                                                              -------    -------
Cash and cash equivalents at end of period..................  $ 3,257    $ 3,160
                                                              =======    =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-49
<PAGE>   175
 
                                  EDN SOVINTEL
 
                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
1. FINANCIAL PRESENTATION AND DISCLOSURES
 
     In the opinion of management, the accompanying unaudited condensed
financial statements of EDN Sovintel (the "Company") contain all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Company's financial position as of December 31, 1996 and June 30, 1997, and the
results of operations and cash flows for the periods indicated.
 
     The Company was established in August 1990 to design, construct and operate
a telecommunications network in Moscow. This network provides worldwide
communications services, principally to major hotels, business offices and
mobile communication companies. Telecommunications services are subject to local
licensing. The Company's license for international, intercity and local calls
was most recently renewed on November 4, 1996 and is valid until January 5,
2000. The Company began operating in December 1991, providing services under
long-term contracts payable in U.S. dollars.
 
     The Company initially registered as a limited liability Russian-American
joint venture. The venture re-registered as a limited liability Russian company
in October 1992. The Company is 50.0% owned by Sovinet, a U.S. general
partnership that is owned by two wholly-owned subsidiaries of Global TeleSystems
Group, Inc. ("GTS"); and the Company is 50.0% owned by Open Joint Stock Company
"Rostelecom," an intercity and long-distance carrier that is 51.0% owned by the
Russian Government.
 
     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material accruals have been recorded; however,
other adjustments may have been required had an audit been performed. It is
suggested that these financial statements be read in conjunction with the
Company's 1996 audited financial statements and the notes related thereto. The
results of operations for the three months and six months ended June 30, 1997
may not be indicative of the operating results for the full year.
 
     The Company maintains its records and prepares its financial statements in
Russian roubles in accordance with the requirements of Russian accounting and
tax legislation. The accompanying financial statements differ from the financial
statements used for statutory purposes in Russia in that they reflect certain
adjustments, not recorded on the Company's books, which are appropriate to
present the financial position, results of operations and cash flows in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP"). The principal adjustments are related to foreign currency
translation, and depreciation and valuation of property and equipment.
 
2. DEBT OBLIGATIONS
 
     In October 1995, the Company entered into a $5.0 million credit facility
with Sovinet, one of the Company's shareholders. It was subsequently increased
to $7.0 million. In January 1997, this facility was repaid, and on January 16,
1997 a new six-month facility was established with GTS Finance, Inc., a wholly-
owned subsidiary of GTS, for $5.8 million. The loan bears interest at a rate
equal to the then current six-month LIBOR rate, approximately 5.6%, plus 5.0%
per annum.
 
3. CONTINGENCIES
 
     The tax and legal system in Russia are evolving as Russia and its central
government transform from a command to a market-oriented economy. The Russian
Federation has and continues to introduce laws, decrees and related regulations.
These laws, decrees and regulations are not always clearly written and are, at
times, conflicting. In addition, their interpretation is subject to the opinions
of a variety of local, regional and federal tax inspectors, Central Bank
officials and the Ministry of Finance. Instances of inconsistent opinions among
and between these authorities are not unusual.
 
                                      F-50
<PAGE>   176
 
                                  EDN SOVINTEL
 
             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company's policy is to accrue contingencies in the accounting period in
which a loss is deemed probable and the amount is reasonably determinable. In
this regard, because of the uncertainties associated with the Russian tax and
legal systems, the ultimate taxes as well as penalties and interest, if any,
assessed may be in excess of the amount expensed to date and accrued at June 30,
1997. It is the opinion of management that the ultimate resolution of the
Company's Russian tax liability and potential loss contingencies, to the extent
not previously provided for, will not have a material effect on the financial
condition of the Company. However, depending on the amount and timing of an
unfavorable resolution of this contingency, it is possible that the Company's
future results of operations or cash flows could be materially affected in a
particular period.
 
     The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation, tax regulations, cancellations or non-renewal
of license rights, and expropriation of property. The Company does not believe
that these contingencies, as related to its operations, are any more significant
than those of similar enterprises in Russia.
 
                                      F-51
<PAGE>   177
 
                           HERMES EUROPE RAILTEL B.V.
 
                              FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
 
                                      F-52
<PAGE>   178
 
                 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
 
To the Board of Directors and
the Shareholders of
Hermes Europe Railtel B.V.
 
     We have audited the accompanying consolidated balance sheets of Hermes
Europe Railtel B.V. (a development stage company) as of December 31, 1995 and
1996, and the related consolidated statements of operations, cash flows, and
shareholders' equity for the years ended December 31, 1995 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hermes Europe
Railtel B.V. at December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with United
States generally accepted accounting principles.
 
June 11, 1997 except for Note 9, which
is as of July 15, 1997
 
Ernst & Young Reviseurs d'Entreprises S.C.C.
 
Represented by
 
L. SWOLFS
Partner
 
                                      F-53
<PAGE>   179
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                          PRO FORMA AT
                                                                                          DECEMBER 31,
                                                            DECEMBER 31,   DECEMBER 31,       1996
                                                                1995           1996       (UNAUDITED)
                                                            ------------   ------------   ------------
                                                                (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                         <C>            <C>            <C>
                          ASSETS
Current assets
  Cash and cash equivalents...............................    $ 5,784        $  2,013       $  1,125
  Restricted cash.........................................         --           3,840          3,840
  Accounts receivable.....................................         --              84             84
  Due from affiliated companies...........................         67             491            491
  Other assets............................................        579           1,100          1,100
                                                              -------        --------       --------
          Total current assets............................      6,430           7,528          6,640
Property and equipment, net...............................      4,671          20,303         20,303
                                                              -------        --------       --------
          Total Assets....................................    $11,101        $ 27,831       $ 26,943
                                                              =======        ========       ========
 
           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Accounts payable and accrued expenses...................    $ 4,659        $  8,476       $  8,476
  Due to affiliated companies.............................      2,117           3,344          3,344
  Debt maturing within one year...........................          9              63             63
  Other current liabilities...............................         --              24             24
                                                              -------        --------       --------
          Total current liabilities.......................      6,785          11,907         11,907
Long-term debt, less current portion......................         10             499            499
Pension obligation........................................         --               8              8
                                                              -------        --------       --------
          Total Liabilities...............................      6,795          12,414         12,414
Commitments and contingencies
Shareholders' loans.......................................      8,353          34,863             --
SHAREHOLDERS' EQUITY
  Common stock, 1,000 Dutch guilders par value (305 shares
     authorized and 80 shares issued and outstanding at
     December 31, 1995 and 1996; 297,000 shares authorized
     and 174,679 shares issued and outstanding on a pro
     forma basis at December 31, 1996)....................         45              45         88,829
  Additional paid-in capital..............................      2,884           2,884          6,612
  Shareholder receivable..................................         --              --        (58,537)
  Cumulative translation adjustment.......................       (254)            316            316
  Deficit accumulated during the development stage........     (6,722)        (22,691)       (22,691)
                                                              -------        --------       --------
          Total Shareholders' Equity......................     (4,047)        (19,446)        14,529
                                                              -------        --------       --------
          Total Liabilities and Shareholders' Equity......    $11,101        $ 27,831       $ 26,943
                                                              =======        ========       ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-54
<PAGE>   180
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                             ACTIVITY FROM
                                                                YEAR ENDED                     INCEPTION
                                                ------------------------------------------     (JULY 6,
                                                DECEMBER 31,                                   1993) TO
                                                    1994       DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                (UNAUDITED)        1995           1996           1996
                                                ------------   ------------   ------------   -------------
                                                                      (IN THOUSANDS)
<S>                                             <C>            <C>            <C>            <C>
Revenues......................................     $  --         $     --       $     48        $     48
Operating costs and expenses:
  Cost of revenues............................        --               --          4,694           4,694
  Selling, general and administrative.........       183            6,637         10,552          17,372
                                                   -----         --------       --------        --------
                                                     183            6,637         15,246          22,066
                                                   -----         --------       --------        --------
Loss from operations..........................      (183)          (6,637)       (15,198)        (22,018)
Other income/(expense):
  Interest income.............................        18              125            508             651
  Interest expense............................        --               (9)          (153)           (162)
  Foreign currency (losses) gains.............       (55)              19         (1,126)         (1,162)
                                                   -----         --------       --------        --------
                                                     (37)             135           (771)           (673)
                                                   -----         --------       --------        --------
Loss before income taxes......................      (220)        $ (6,502)      $(15,969)       $(22,691)
Income taxes..................................        --               --             --              --
                                                   -----         --------       --------        --------
Net Loss......................................     $(220)        $ (6,502)      $(15,969)       $(22,691)
                                                   =====         ========       ========        ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-55
<PAGE>   181
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED                     ACTIVITY FROM
                                             ------------------------------------------       INCEPTION
                                             DECEMBER 31,                                 (JULY 6, 1993) TO
                                                 1994       DECEMBER 31,   DECEMBER 31,     DECEMBER 31,
                                             (UNAUDITED)        1995           1996             1996
                                             ------------   ------------   ------------   -----------------
                                                                     (IN THOUSANDS)
<S>                                          <C>            <C>            <C>            <C>
OPERATING ACTIVITIES
  Net loss.................................    $  (220)       $ (6,502)      $(15,969)        $(22,691)
  Adjustments to reconcile net loss to net
     cash used in operating activities:
     Depreciation and amortization.........          5              11            658              674
     Deferred interest.....................         --              --            125              125
     Changes in assets and liabilities:
       Accounts receivable.................         --              --            (84)             (84)
       Deposits............................         --             (17)          (589)            (606)
       Accounts payable and accrued
          expenses.........................         89           4,570          3,817            8,476
       Other changes in assets and
          liabilities......................        (41)           (521)           100             (462)
                                               -------        --------       --------         --------
          Net cash used in operating
            activities.....................       (167)         (2,459)       (11,942)         (14,568)
INVESTING ACTIVITIES
  Purchases of property and equipment......        (52)         (4,635)       (16,290)         (20,977)
  Restricted cash..........................         --              --         (3,840)          (3,840)
                                               -------        --------       --------         --------
          Net cash used in investing
            activities.....................        (52)         (4,635)       (20,130)         (24,817)
FINANCING ACTIVITIES
  Proceeds from debt.......................         --              19            543              562
  Net proceeds from issuance of common
     stock.................................      1,028           1,901             --            2,929
  Proceeds from shareholders' loans........         --           8,353         26,385           34,738
  Due to affiliated companies, net.........         --           2,050            803            2,853
                                               -------        --------       --------         --------
          Net cash provided by financing
            activities.....................      1,028          12,323         27,731           41,082
Effect of exchange rate changes on cash and
  cash equivalents.........................         58            (312)           570              316
                                               -------        --------       --------         --------
Net increase (decrease) in cash and cash
  equivalents..............................        867           4,917         (3,771)           2,013
Cash and cash equivalents at beginning of
  period...................................         --             867          5,784               --
                                               -------        --------       --------         --------
Cash and cash equivalents at end of
  period...................................    $   867        $  5,784       $  2,013         $  2,013
                                               =======        ========       ========         ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-56
<PAGE>   182
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
     For the period from July 6, 1993 (date of inception) to December 31, 1993
and the years ended December 31, 1994, 1995 and 1996:
 
<TABLE>
<CAPTION>
                                                                                                DEFICIT
                                                                                              ACCUMULATED
                                                  COMMON STOCK     ADDITIONAL   CUMULATIVE     DURING THE        TOTAL
                                                 ---------------    PAID-IN     TRANSLATION   DEVELOPMENT    SHAREHOLDERS'
                                                 SHARES   AMOUNT    CAPITAL     ADJUSTMENT       STAGE          EQUITY
                                                 ------   ------   ----------   -----------   ------------   -------------
                                                                     (IN THOUSANDS EXCEPT SHARE DATA)
<S>                                              <C>      <C>      <C>          <C>           <C>            <C>
Issuance of shares on July 6, 1993 (date of
  inception)...................................    40      $21       $   --       $   --        $     --       $     21
                                                   --      ---       ------       ------        --------       --------
BALANCE AT DECEMBER 31, 1993...................    40       21           --           --              --             21
Proceeds from the sale of common stock.........    21       11          996           --              --          1,007
Translation adjustment.........................    --       --           --           58              --             58
Net loss.......................................    --       --           --           --            (220)          (220)
                                                   --      ---       ------       ------        --------       --------
BALANCE AT DECEMBER 31, 1994...................    61       32          996           58            (220)           866
Proceeds from the sale of common stock.........    19       13        1,888           --              --          1,901
Translation adjustment.........................    --       --           --         (312)             --           (312)
Net loss.......................................    --       --           --           --          (6,502)        (6,502)
                                                   --      ---       ------       ------        --------       --------
BALANCE AT DECEMBER 31, 1995...................    80       45        2,884         (254)         (6,722)        (4,047)
Translation adjustment.........................    --       --           --          570              --            570
Net loss.......................................    --       --           --           --         (15,969)       (15,969)
                                                   --      ---       ------       ------        --------       --------
BALANCE AT DECEMBER 31, 1996...................    80      $45       $2,884       $  316        $(22,691)      $(19,446)
                                                   ==      ===       ======       ======        ========       ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-57
<PAGE>   183
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1:  NATURE OF BUSINESS OPERATIONS
 
     Hermes Europe Railtel B.V. (the "Company") intends to become the leading
pan-European carriers' carrier by constructing and operating a managed,
seamless, fiber optic, pan-European network, and providing high-quality
trans-border transmission services to telecommunications carriers across Europe.
 
     The Company is 50% owned by HIT Rail B.V.("HIT Rail"), a consortium of
eleven European railway companies and 50% owned by GTS-Hermes,
Inc.("GTS-Hermes"), a U.S. holding company that is a wholly-owned subsidiary of
Global TeleSystems Group, Inc., a provider of a broad range of
telecommunications services to businesses, other telecommunications service
providers and consumers through its operations of voice and data networks,
international gateways, local access and cellular networks and the provision of
various value added services in markets outside of the United States.
 
     The Company is still a development stage enterprise, as currently the
telecommunications network is being configured. The buildout of the network
started in 1996; full commercial services are anticipated to commence in the
first half of 1998.
 
     The Company had working deficits of approximately $4.4 million and $0.4
million as of December 31, 1996 and 1995, respectively. The Company had an
accumulated deficit of $22.7 million as of December 31, 1996, including a net
loss of approximately $16.0 million for the year then ended. During 1997, the
Company expects to incur substantial expenditures for working capital and
capital expenditure requirements. The Company's working capital at December 31,
1996, plus its anticipated cash flows from operations for 1997, will not be
sufficient to meet such objectives as presently planned.
 
     Management recognizes that the Company must generate additional capital
resources in order to continue its buildout of the network. The Company is
pursuing other equity and debt financing sources and has entered into
substantive negotiations with various financial institutions in order to obtain
further debt financing and is expecting to complete a recapitalization (the
"Recapitalization") by the end of August, 1997 (see Note 9, "Subsequent Events
and Pro Forma Adjustments").
 
     The financial statements have been prepared on the basis of accounting
principles applicable to a going concern, which assumes that the Company will
continue in the foreseeable future and will be able to realize its assets and
discharge its liabilities in the normal course of business. If the going concern
assumptions were not appropriate for these financial statements, then
adjustments would have been necessary in the carrying value of assets and
liabilities and the reported revenues and expenses.
 
NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
     The financial statements include the accounts of Hermes Europe Railtel
B.V., its Belgian branch and of Hermes Europe Railtel N.V. All significant
intercompany accounts and transactions are eliminated upon consolidation.
 
RECLASSIFICATIONS
 
     Certain reclassifications have been made to the 1995 consolidated financial
statements in order to conform to the 1996 presentation.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The Company
had $3.8 million of restricted cash at December 31, 1996.
 
                                      F-58
<PAGE>   184
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The restricted cash is primarily related to cash held in escrow in compliance
with an agreement with a major vendor.
 
PROPERTY AND EQUIPMENT
 
     Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the estimated lives ranging from five to seven years
for telecommunications equipment and three to ten years for furniture, fixtures
and equipment and other property. A substantial part of the costs includes
construction in process, which is currently related to the configuration and
build-out of the network, and these costs primarily consist of labor. These
costs are transferred to telecommunications equipment in service as construction
is completed and/or equipment is placed into service. Depreciation is recorded
commencing with the first full month that the assets are in service. Maintenance
and repairs are charged to expense as incurred.
 
     The Company intends to capitalize material interest costs associated with
the construction of telecommunications equipment; however, no interest costs
have been capitalized as of December 31, 1996.
 
LONG-LIVED ASSETS
 
     Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance
with SFAS No. 121, long-lived assets to be held and used by the Company are
reviewed to determine whether any events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For long-lived
assets to be held and used, the Company bases its evaluation on such impairment
indicators as the nature of the assets, the future economic benefit of the
assets, any historical or future profitability measurements, as well as other
external market conditions or factors that may be present. If such impairment
indicators are present or other factors exist that indicate that the carrying
amount of the asset may not be recoverable, the Company determines whether an
impairment has occurred through the use of an undiscounted cash flow analysis of
assets at the lowest level for which identifiable cash flows exist. If an
impairment has occurred, the Company recognizes a loss for the difference
between the carrying amount and the estimated value of the asset. The fair value
of the asset is measured using quoted market prices or, in the absence of quoted
market prices, fair value is based on an estimate of discounted cash flow
analysis. During the years ended December 31, 1995 and 1996, the Company's
analyses indicated that there was not an impairment of its long-lived assets.
 
INCOME TAXES
 
     The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements.
 
FOREIGN CURRENCY TRANSLATION
 
     The accounting records of the Dutch B.V. company are maintained in Dutch
guilders. The accounting records of the Belgian branch and the Belgian N.V.
company are maintained in Belgian francs. The functional currency for the
Company has been determined to be the Belgian franc. Therefore, the Dutch
guilder statements have been remeasured into Belgian franc equivalents,
consolidated with the Belgian branch and Belgian N.V. statements and then
translated into U.S. dollar equivalents for the purpose of preparing the
accompanying financial statements, in accordance with accounting principles
generally accepted in the United States.
 
                                      F-59
<PAGE>   185
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 2:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
     The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation." Assets and liabilities are translated at the
rates of exchange at the balance sheet date. Income and expense accounts are
translated at average monthly rates of exchange. The resultant translation
adjustments are included in the cumulative translation adjustment, a separate
component of shareholders' equity. Gains and losses from foreign currency
transactions are included in the operations.
 
REVENUE RECOGNITION
 
     The Company's revenue is associated with its customers right to use the
network and is recognized on a straight-line basis over the terms of the
customer contracts.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company believes that the carrying amount of its assets and liabilities
reported in the balance sheets approximates their fair value.
 
OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
 
     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains most of its cash and cash equivalents in high
quality European financial institutions.
 
     The Company does not now hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results from operations could be adversely affected by
fluctuations in foreign currency exchange rates.
 
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
 
     The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
NOTE 3:  SUPPLEMENTAL BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1995           1996
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Other assets consist of:
  Deposits..................................................     $   17        $   606
  VAT receivable............................................        272            402
  Other assets..............................................        290             92
                                                                 ------        -------
          Total other assets................................     $  579        $ 1,100
                                                                 ======        =======
</TABLE>
 
                                      F-60
<PAGE>   186
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 3:  SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1995           1996
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Property and equipment, net consists of:
  Construction in process...................................     $3,879        $12,981
  Telecommunications equipment in service...................         --          4,947
  Furniture, fixtures and equipment.........................        807          2,507
  Leasehold improvements....................................          2            543
                                                                 ------        -------
                                                                  4,688         20,978
     Less: accumulated depreciation.........................         17            675
                                                                 ------        -------
          Total property and equipment, net.................     $4,671        $20,303
                                                                 ======        =======
Accounts payable and accrued expenses consist of:
  Trade accounts payable....................................      2,225          5,445
  Accrued salaries and bonuses..............................        668          1,924
  Accrued vacation expense..................................        110            774
  Accrued legal expenses....................................        522            147
  Accrued expense...........................................      1,134            186
                                                                 ------        -------
                                                                 $4,659        $ 8,476
                                                                 ======        =======
</TABLE>
 
NOTE 4:  DEBT OBLIGATIONS
 
     Company debt consists of:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1995           1996
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
Debt obligation, vendor financing agreement with quarterly
  principal payments and maturing on October 1, 2004 at 6.8%
  interest..................................................      $--            $562
Other financing agreements with interest at 10.2%...........       19              --
                                                                  ---            ----
Less: debt maturing within one year.........................        9              63
                                                                  ---            ----
Total long-term debt........................................      $10            $499
                                                                  ===            ====
</TABLE>
 
     Aggregate maturities of long-term debt, as of December 31, 1996, are as
follows: 1997 -- $0.06 million, 1998 -- $0.06 million, 1999 -- $0.06 million,
2000 -- $0.07 million, 2001 -- $0.07 million and $0.2 million thereafter.
 
     The Company paid interest of $0.02 million and $0.01 million in 1996 and
1995, respectively. The Company did not pay interest in 1994.
 
NOTE 5:  DEFINED BENEFIT PLAN
 
     The Company established a defined benefit pension plan in 1995 that covers
substantially all of its employees upon twenty-five years of age and at least
one year of service. The benefits are based on years of service and the
employee's compensation. The Company has entered into an arrangement with an
insurance company for the provision of a group insurance policy (the "Policy").
Under the Policy, the insurance provider has undertaken a legal obligation to
provide specified benefits to participants in return for a fixed premium;
accordingly, the Company no longer bears significant financial risk. Premium
payments for the
 
                                      F-61
<PAGE>   187
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 5:  DEFINED BENEFIT PLAN (CONTINUED)
Policy are partly paid by the employee; based on specified terms that consider
the employees annual salary, with the remaining premium paid by the employer.
Premiums are intended to provide not only for benefits attributed to service to
date but also for those expected to be earned in the future.
 
\ The following table sets forth the plan's funded status and amounts recognized
at December 31, 1996:
 
<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Actuarial present value of benefit obligations:
  Accumulated benefit obligation............................      $(136)
                                                                  -----
  Projected benefit obligation for service rendered to
     date...................................................      $(388)
  Plan assets at fair value, primarily Belgian bonds........        338
                                                                  -----
  Projected benefit obligations in excess of plan assets....        (50)
  Unrecognized net obligation...............................         42
                                                                  -----
  Pension obligation........................................      $   8
                                                                  =====
Net pension cost for 1996 included the following components:
  Service cost -- benefits earned during the period.........      $ 365
  Interest cost on projected benefit obligation.............          3
  Actual return on plan assets..............................         (9)
  Net amortization..........................................          2
                                                                  -----
          Net periodic pension cost.........................      $ 361
                                                                  =====
</TABLE>
 
     The discount rate and rate of increase in future compensation levels used
in determining the actuarial present value of the projected benefit obligation
was 4.5%. The expected long-term rate of return on assets was 7.0%
 
NOTE 6:  INCOME TAXES
 
     The components of loss before income taxes were as follows:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                         1994      1995        1996
                                                         -----    -------    --------
<S>                                                      <C>      <C>        <C>
Pretax loss:
  Domestic (the Netherlands)...........................  $ (95)   $  (422)   $   (608)
  Foreign..............................................   (125)    (6,080)    (15,361)
                                                         -----    -------    --------
                                                         $(220)   $(6,502)   $(15,969)
                                                         =====    =======    ========
</TABLE>
 
     No current income taxes are due as the Company incurred losses due to the
start-up activities in the Belgian branch and the Company.
 
                                      F-62
<PAGE>   188
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 6:  INCOME TAXES (CONTINUED)
     A deferred tax asset is recorded based on temporary differences between
earnings as reported in the financial statements and earnings for income tax
purposes. The following table summarizes major components of the Company's
deferred tax asset:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 31,
                                                                  1995            1996
                                                              ------------    ------------
                                                                     (IN THOUSANDS)
<S>                                                           <C>             <C>
Deferred tax assets:
  Net operating loss carryforwards..........................     $ 3,919        $ 11,729
                                                                 -------        --------
Net deferred tax assets.....................................       3,919          11,729
Less: valuation allowance...................................      (3,919)        (11,729)
                                                                 -------        --------
          Total.............................................     $    --        $     --
                                                                 =======        ========
</TABLE>
 
     As of December 31, 1996, the Company had net operating loss carryforwards
for Belgian and Dutch income tax purposes of approximately $29.3 million, which
are recoverable from profits for an unlimited period of time.
 
NOTE 7:  COMMITMENTS AND CONTINGENCIES
 
OPERATING LEASES
 
     Operating lease commitments are primarily for office space and car rental.
The office lease has a term of nine years, expiring on June 30, 2005, with an
option to cancel January 1, 2002 with a penalty of six months, rental payment as
well as the remaining principal due on the debt obligation (see Note 4, "Debt
Obligations"). In addition, the Company received a reduction in annual expense
during the first three years of the lease. This reduction is being amortized
over the first six years of the lease, using a straight-line method.
 
     Rental expense aggregated approximately $0.5 million and $0.7 million, net
of sublease income of $0.01 million and $0.08 million for the years ended
December 31, 1996 and 1995, respectively. The Company did not have rent expense
in 1994.
 
     Future minimum lease payments under these non-cancelable operating leases
with terms of one year or more, as of December 31, 1996, are as follows:
1997 -- $1.1 million, 1998 -- $1.1 million, 1999 -- $1.2 million, 2000 -- $1.2
million, 2001 -- $1.2 million and $0.6 million thereafter.
 
OTHER MATTERS
 
     In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
regulatory environments in which the Company currently or intends to operate. In
the opinion of management, the Company's liability, if any, in all pending
litigation, or other legal proceeding or other matter other than what is
discussed above, will not have a material effect upon the financial condition,
results of operations or liquidity of the Company.
 
                                      F-63
<PAGE>   189
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 8:  RELATED PARTY TRANSACTIONS
 
     The Company received financing through shareholders' loan transactions
provided by HIT Rail and GTS-Hermes. The components of the Company's shareholder
loans are as follows:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   DECEMBER 31,
                                                                  1995           1996
                                                              ------------   ------------
                                                                    (IN THOUSANDS)
<S>                                                           <C>            <C>
HIT Rail....................................................     $6,425        $13,999
GTS-Hermes..................................................      1,928         20,864
                                                                 ------        -------
          Total shareholders' loans.........................     $8,353        $34,863
                                                                 ======        =======
</TABLE>
 
     The amount due from GTS-Hermes includes $0.1 million of accrued interest at
December 31, 1996. The loans will be converted into shares of the Company's
common stock as part of the Recapitalization which is expected to be completed
by the end of August, 1997 (see Note 9, "Subsequent Events and Pro Forma
Adjustments").
 
NOTE 9:  SUBSEQUENT EVENTS AND PRO FORMA ADJUSTMENTS
 
     Subsequent to December 31, 1996, Hermes Europe Railtel N.V. began
negotiating a new lease on a second office building, which is currently being
constructed. The terms of the lease are expected to be finalized by the fourth
quarter of 1997, the expected completion date of the construction. The lease
period will be for eight years and will have an annual expense of $0.4 million
to be paid in quarterly installments.
 
     In January and February 1997, additional loans of ECU 6.4 million
(approximately $7.5 million) were advanced to the Company by GTS-Hermes. These
loans were converted into shares of the Company's common stock ("Common Stock")
as part of the Recapitalization. In addition, loans of ECU 5.4 million
(approximately $6.1 million) were advanced to the Company in February and April
1997 by individual members of HIT Rail. These loans are expected to be converted
into Common Stock as part of the Recapitalization discussed below.
 
     To increase the equity of the Company by means of the contribution of fiber
optic cable leases and/or cash by its current partners and individual
shareholders of HIT Rail, the Company expects to complete the Recapitalization
by the end of August, 1997.
 
     Pursuant to the Recapitalization, the Company extended rights to subscribe
to additional Common Stock to GTS-Hermes, HIT Rail and the eleven individual
members of the HIT Rail consortium. HIT Rail and eight of the members of HIT
Rail have declined to exercise their rights, while GTS-Hermes and three of the
members of HIT Rail have indicated that they intend to exercise their rights.
 
     The first phase of the Recapitalization was completed on July 7, 1997. As a
result, all shareholders' loans from GTS-Hermes and HIT Rail were converted into
Common Stock. In addition, GTS-Hermes exercised its right to subscribe to
additional Common Stock, resulting in a contribution of ECU 46.0 million
(approximately $51.1 million), which will be paid to the Company by September
30, 1997. The first phase of the Recapitalization resulted in the following
ownership of the Company:
 
<TABLE>
<CAPTION>
                                       SHARES            CONVERSION OF      EXERCISE       SHARES
                                  DECEMBER 31, 1996   SHAREHOLDERS' LOANS   OF RIGHTS   JULY 7, 1997
                                  -----------------   -------------------   ---------   ------------
<S>                               <C>                 <C>                   <C>         <C>
GTS-Hermes......................         40                 50,197           100,395      150,632
HITRail.........................         40                 24,007                --       24,047
                                         --                -------           -------      -------
                                         80                 74,204           100,395      174,679
                                         ==                =======           =======      =======
</TABLE>
 
                                      F-64
<PAGE>   190
 
                           HERMES EUROPE RAILTEL B.V.
                         (A DEVELOPMENT STAGE COMPANY)
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 9:  SUBSEQUENT EVENTS AND PRO FORMA ADJUSTMENTS (CONTINUED)
     Under Dutch law, the Company is required to pay a 1% capital duty tax on
all issuances of common stock, which will result in the Company paying a capital
duty tax of approximately $0.9 million. The pro forma balance sheet at December
31, 1996 gives effect to the first phase of the Recapitalization as discussed
above.
 
     Additional phases of the Recapitalization are expected to include the
conversion of loans of ECU 5.4 million (approximately $6.1 million) advanced to
the Company by two of the individual members of HIT Rail, as well as the
contribution of fiber optic cable leases. If all three individual members of HIT
Rail participate in the Recapitalization as anticipated, it will result in the
following ownership of the Company:
 
<TABLE>
<CAPTION>
                                                  SHARES      ADDITIONAL   SHARES AT COMPLETION
                                               JULY 7, 1997     SHARES     OF RECAPITALIZATION
                                               ------------   ----------   --------------------
<S>                                            <C>            <C>          <C>
GTS-Hermes...................................    150,632                         150,632
HIT Rail.....................................     24,047                          24,047
Individual members of the HIT Rail
  consortium.................................         --        21,385            21,385
                                                 -------        ------           -------
                                                 174,679        21,385           196,064
                                                 =======        ======           =======
</TABLE>
 
                                      F-65
<PAGE>   191
 
                           HERMES EUROPE RAILTEL B.V.
 
                  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                         FOR THE SECOND QUARTER OF 1997
                                   UNAUDITED
 
                                      F-66
<PAGE>   192
 
                           HERMES EUROPE RAILTEL B.V.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                       PRO FORMA AT
                                                             DECEMBER 31,   JUNE 30,   JUNE 30, 1997
                                                                 1996         1997     (SEE NOTE 3)
                                                             ------------   --------   -------------
                                                                (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                          <C>            <C>        <C>
                          ASSETS
Current assets
  Cash and cash equivalents................................    $  2,013     $  1,050     $240,542
  Restricted cash..........................................       3,840        1,142       29,392
  Accounts receivable......................................          84          749          749
  Due from affiliated companies............................         491          624           --
  Other assets.............................................       1,100        5,995        5,995
                                                               --------     --------     --------
          Total current assets.............................       7,528        9,560      276,678
Property and equipment, net................................      20,303       23,950       23,950
Deferred financing costs...................................          --           --       13,500
Restricted cash............................................          --           --       28,250
                                                               --------     --------     --------
          Total assets.....................................    $ 27,831     $ 33,510     $342,378
                                                               ========     ========     ========
           LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
  Accounts payable and accrued expenses....................       8,476        9,654        9,654
  Due to affiliated companies..............................       3,344        6,295           --
  Debt maturing within one year............................          63           29           29
  Other current liabilities................................          24          326          326
                                                               --------     --------     --------
          Total current liabilities........................      11,907       16,304       10,009
Long-term debt, less current portion.......................         499          444      265,444
Pension obligation.........................................           8            8            8
                                                               --------     --------     --------
          Total liabilities................................      12,414       16,756      275,461
Commitments and contingencies
Shareholders' loans........................................      34,863       48,491        6,142
Shareholders' equity
  Common stock, 1,000 Dutch guilders par value (305 shares
     authorized and 80 shares issued and outstanding at
     December 31, 1996 and June 30, 1997; 297,000 shares
     authorized and 174,679 shares issued and outstanding
     on a pro forma basis at June 30, 1997)................          45           45       88,829
  Additional paid-in capital...............................       2,884        2,884        6,612
  Cumulative translation adjustment........................         316       (1,945)      (1,945)
  Accumulated deficit......................................     (22,691)     (32,721)     (32,721)
                                                               --------     --------     --------
          Total shareholders' equity.......................     (19,446)     (31,737)      60,775
                                                               --------     --------     --------
          Total liabilities and shareholders' equity.......    $ 27,831     $ 33,510     $342,378
                                                               ========     ========     ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-67
<PAGE>   193
 
                           HERMES EUROPE RAILTEL B.V.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
 
<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              --------------------
                                                               1996         1997
                                                              -------     --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Revenues....................................................  $    --     $    593
                                                              -------     --------
Operating costs and expenses:
  Cost of revenues..........................................    2,251        3,304
  Selling, general and administrative.......................    4,652        6,345
                                                              -------     --------
                                                                6,903        9,649
                                                              -------     --------
Loss from operations........................................   (6,903)      (9,056)
Other income/(expense):
  Interest income/(expense), net............................      300         (569)
  Foreign currency losses...................................     (514)        (405)
                                                              -------     --------
                                                                 (214)        (974)
                                                              -------     --------
Loss before income taxes....................................   (7,117)     (10,030)
Income taxes................................................       --           --
                                                              -------     --------
Net loss....................................................  $(7,117)    $(10,030)
                                                              =======     ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-68
<PAGE>   194
 
                           HERMES EUROPE RAILTEL B.V.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)
 
<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                              ---------------------
                                                                1996         1997
                                                              --------     --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>          <C>
OPERATING ACTIVITIES
  Net loss..................................................  $ (7,117)    $(10,030)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization..........................       179          832
     Changes in assets and liabilities:
       Accounts receivable..................................        --         (665)
       Accounts payable and accrued expenses................     4,826        1,178
       Other changes in assets and liabilities..............    (1,040)      (4,595)
                                                              --------     --------
          Net cash used in operating activities.............    (3,152)     (13,280)
INVESTING ACTIVITIES
  Purchases of property and equipment.......................    (5,530)      (4,477)
  Restricted cash...........................................    (6,579)       2,698
                                                              --------     --------
          Net cash used in investing activities.............   (12,109)      (1,779)
FINANCING ACTIVITIES
  Repayment of debt.........................................        (2)         (89)
  Proceeds from shareholders' loans.........................    19,543       13,628
  Due to affiliated companies, net..........................       (23)       2,818
                                                              --------     --------
          Net cash provided by financing activities.........    19,518       16,357
Effect of exchange rate changes on cash and cash
  equivalents...............................................       128       (2,261)
                                                              --------     --------
Net increase (decrease) in cash and cash equivalents........     4,385         (963)
Cash and cash equivalents at beginning of period............     5,784        2,013
                                                              --------     --------
Cash and cash equivalents at end of period..................  $ 10,169     $  1,050
                                                              ========     ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-69
<PAGE>   195
 
                           HERMES EUROPE RAILTEL B.V.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)
 
NOTE 1:  FINANCIAL PRESENTATION AND DISCLOSURES
 
     In the opinion of management, the accompanying unaudited condensed,
consolidated financial statements of Hermes Europe Railtel B.V. (the "Company")
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's financial position as of December 31, 1996, June
30, 1997 and pro forma at June 30, 1997 (see Note 3, "Subsequent Events and Pro
Forma Adjustments to Balance Sheet"), and the results of operations and cash
flows for the periods indicated.
 
     Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. Material intercompany affiliate account
transactions have been eliminated; however, other adjustments may have been
required had an audit been performed. It is suggested that these financial
statements be read in conjunction with the Company's 1996 audited consolidated
financial statements and the notes related thereto. The results of operations
for six months ended June 30, 1997 may not be indicative of the operating
results for the full year.
 
     The Company intends to become the leading pan-European carriers' carrier by
developing and operating a managed, seamless, fiber optic, pan-European network,
and providing high quality trans-border transmission services to
telecommunications carriers across Europe.
 
     As of June 30, 1997, the Company was 50% owned by HIT Rail B.V. ("HIT
Rail"), a consortium of eleven European railway companies and 50% owned by
GTS-Hermes, Inc. ("GTS-Hermes"), a U.S. holding company that is a wholly-owned
subsidiary of Global TeleSystems Group, Inc. ("GTS"), a provider of a broad
range of telecommunications services to businesses, other telecommunications
service providers and consumers through its operation of voice and data
networks, international gateways, local access and cellular networks and the
provision of various value-added services in markets outside of the United
States. In an effort to increase the equity of the Company by means of the
contribution of fiber optic cable leases and/or cash by its current owners and
individual shareholders of HIT Rail, the Company undertook a recapitalization
(the "Recapitalization") during the first quarter of 1997 which is expected to
be completed by the end of August 1997 (see Note 3, "Subsequent Events and Pro
Forma Adjustments to Balance Sheet").
 
NOTE 2:  RELATED PARTY TRANSACTIONS
 
     The Company received financing through shareholders' loans transactions
provided by HIT Rail and GTS-Hermes and individual members of HIT Rail. The
components of the Company's shareholders' loans are as follows:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,        JUNE 30,
                                                                 1996              1997
                                                             ------------        --------
                                                                    (IN THOUSANDS)
<S>                                                        <C>                 <C>
HIT Rail.................................................       $13,999           $13,999
GTS-Hermes...............................................        20,864            28,350
Individual members of HIT Rail...........................            --             6,142
                                                                -------           -------
          Total shareholders' loans......................       $34,863           $48,491
                                                                =======           =======
</TABLE>
 
     The shareholder loans from GTS-Hermes and HIT Rail were converted into
shares of the Company's common stock ("Common Stock") on July 7, 1997 as part of
the Recapitalization discussed below. The loans from the individual members of
HIT Rail are expected to be converted into Common Stock by the end of August
1997 as part of the Recapitalization.
 
                                      F-70
<PAGE>   196
 
                           HERMES EUROPE RAILTEL B.V.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)
 
NOTE 3:  SUBSEQUENT EVENTS AND PRO FORMA ADJUSTMENTS TO BALANCE SHEET
 
FINANCING TRANSACTION
 
     Subsequent to June 30, 1997, the Company initiated a debt offering that is
expected to raise $265 million through a series of senior notes due August 15,
2007 ("Senior Notes"). The Senior Notes will be general unsecured obligations of
the Company, with interest payable semiannually at a rate of 11.5%.
Approximately $56.5 million of the net proceeds of the offering will be held in
escrow for the first four semi-annual interest payments commencing in 1998. The
offering includes an optional redemption clause that allows the Company to
redeem the Senior Notes, in whole or in part, any time on or after August 15,
2002 at specific redemption prices. The Company may also redeem the Senior Notes
at a price equal to 111.5% of the principal amount prior to August 15, 2000 with
cash proceeds of a public offering that results in gross proceeds of at least
$75 million or in certain other circumstances specified in the indenture for the
Senior Notes, provided, however, that at least two-thirds of the principal
amount of the Senior Notes originally issued remains outstanding after each such
redemption. Pursuant to the covenants in the offering, the Company will be
required to file a registration statement with the Securities Exchange
Commission within 90 days of the closing of the offering.
 
RECAPITALIZATION
 
     To increase the equity of the Company by means of the contribution of fiber
optic cable leases and/or cash by its current partners and individual
shareholders of HIT Rail, the Company expects to complete the Recapitalization
by the end of August 1997.
 
     Pursuant to the Recapitalization, the Company extended rights to subscribe
to additional Common Stock to GTS-Hermes, HIT Rail and the eleven individual
members of the HIT Rail consortium. HIT Rail and nine of the members of HIT Rail
have declined to exercise their rights, while GTS-Hermes and two of the members
of HIT Rail have indicated that they intend to exercise their rights.
 
     The first phase of the Recapitalization was completed on July 7, 1997. As a
result, all shareholders' loans from GTS-Hermes and HIT Rail were converted into
Common Stock. In addition, GTS-Hermes exercised its right to subscribe to
additional Common Stock, resulting in a contribution of ECU 46.0 million
(approximately $51.1 million), which will be paid to the Company in cash, net of
the Company's outstanding payables to GTS and GTS-Hermes (approximately $5.7
million at June 30, 1997, as reflected in Due to/from affiliated companies on
the balance sheet) by September 30, 1997. The ECU 46.0 million obligation has
been reflected as paid in the pro forma balance sheet. The first phase of the
Recapitalization resulted in the following ownership of the Company.
 
<TABLE>
<CAPTION>
                                                            CONVERSION OF
                                               SHARES       SHAREHOLDERS'   EXERCISE       SHARES
                                            JUNE 30, 1997       LOANS       OF RIGHTS   JULY 7, 1997
                                            -------------   -------------   ---------   ------------
<S>                                         <C>             <C>             <C>         <C>
GTS-Hermes................................       40            50,197        100,395      150,632
HIT Rail..................................       40            24,007             --       24,047
                                                 --            ------        -------      -------
                                                 80            74,204        100,395      174,679
                                                 ==            ======        =======      =======
</TABLE>
 
     In addition, under Dutch law, the Company is required to pay a 1% capital
duty tax on all issuances of common stock, which will result in the Company
paying a capital duty tax of approximately $0.9 million. The pro forma balance
sheet at June 30, 1997 gives effect to the financing transaction and the first
phase of the Recapitalization as discussed above.
 
     The Recapitalization is expected to be completed by the end of August 1997.
Additional phases of the Recapitalization are expected to include the conversion
of loans of ECU 5.4 million (approximately $6.1 million) advanced to the Company
by two of the individual members of HIT Rail, as well as the
 
                                      F-71
<PAGE>   197
 
                           HERMES EUROPE RAILTEL B.V.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (unaudited)
 
NOTE 3:  SUBSEQUENT EVENT AND PRO FORMA ADJUSTMENTS
         TO BALANCE SHEET (CONTINUED)
contribution of fiber optic cable leases. If all members of HIT Rail participate
in the Recapitalization as anticipated, it will result in the following
ownership of the Company:
 
<TABLE>
<CAPTION>
                                                                                  SHARES AT
                                                    SHARES       ADDITIONAL     COMPLETION OF
                                                 JULY 7, 1997      SHARES      RECAPITALIZATION
                                                 ------------    ----------    ----------------
<S>                                              <C>             <C>           <C>
GTS-Hermes.....................................    150,632             --          150,632
HIT Rail.......................................     24,047             --           24,047
Individual members of HIT Rail.................         --         15,789           15,789
                                                   -------         ------          -------
                                                   174,679         15,789          190,468
                                                   =======         ======          =======
</TABLE>
 
                                      F-72
<PAGE>   198
 
                                                                       EXHIBIT A
 
                 GLOSSARY OF TELECOMMUNICATIONS INDUSTRY TERMS
 
     Accounting Rate Mechanism (ARM) -- The current system of bilateral
settlement agreements between PTOs under which tariffs for cross-border
pan-European-switched voice traffic are determined.
 
     Add-drop multiplexer (ADM) -- A multiplexer which controls cross connect
between individual circuits by software, permitting dynamic cross connect of
individual 64 kbps circuits within an E-1 line.
 
     AMPS -- Advanced Mobile Phone System; the cellular mobile telephone system
based on analog technology that is now used in U.S. systems. Each AMPS cell can
handle 832 simultaneous conversations.
 
     Asynchronous Transfer Mode (ATM) -- A switching and transmission technology
that is one of general class of packet technologies that relay traffic by way of
an address contained within the first five bits of a switching and transmission
of mixed voice, data, and video at varying rates. The ATM format can be used by
many different information systems, including LANs.
 
     Bps -- Bits per second; the basic measuring unit of speed in a digital
transmission system; the number of bits that a transmission facility can convey
between a sending location and a receiving location in one second.
 
     Backbone -- The through-portions of a transmission network, as opposed to
spurs which branch off the through-portions.
 
     Bandwidth -- The information-carrying capability of a transmission medium
is measured by its bandwidth, which is the relative range of frequencies that
can be passed without distortion by such medium. Bandwidth is measured in Hertz,
but may also be expressed as the number of bits that can be transmitted per
second.
 
     Capacity -- Refers to transmission.
 
     Carrier -- A provider of communications transmission services by fiber,
wire, or radio.
 
     CCIT -- International Telegraph and Telephone Consultative Committee.
 
     Closed User Group -- A group of customers with some affiliation with one
another and which are treated for regulatory purposes as not being the public.
 
     Competitive Local Telecommunications Provider -- A company that provides
its customers with an alternative to the local telephone company for local
transport of private line, special access and transport of switched access
telecommunications services. Competitive Local Telecommunications Providers are
also referred to in the industry as alternative local telecommunications service
providers (ALTS), Competitive Access Providers (CAPs) and Competitive Local
Exchange Carriers (CLECs).
 
     Dark Fiber -- Fiber that lacks the requisite electronic and optronic
equipment necessary to use the fiber for transmission.
 
     Dedicated -- Refers to telecommunications lines dedicated to or reserved
for use by particular customers along predetermined routs (in contract to
telecommunications lines within the local telephone company's public switched
network).
 
     Digital -- Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission/switching technologies
employ a sequence of discrete, distinct pulses to represent information, as
opposed to the continuously variable analog signal.
 
     E1 -- Data transmission rate of approximately 2 Mbps.
 
     E3 -- Data transmission rate of approximately 34 Mbps.
 
     Electrosviaz -- regional telephone company.
 
                                       A-1
<PAGE>   199
 
     Enhanced Network Services -- Telecommunications services providing digital
connectivity, primarily for data applications, via frame relay, ATM, or digital
interexchange private line facilities. Enhanced network services also include
applications on such networks, including Internet access and other Internet
services.
 
     ERMES -- A standard for a pan-European radio message system sponsored by
the EC.
 
     Eutelsat -- European Telecommunications Satellite Organization; an
international satellite organization in which members of the European Union hold
an 88% combined investment.
 
     Frame Relay -- A wide area transport technology that organizes data into
units called frames instead of providing fixed bandwidth as with private lines.
A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access speeds
ranging from 56 kilobits per second to 1.5 megabits per second. This service is
well-suited for connecting local area networks, but is not presently well-suited
for voice and video applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on modern fiber optic
networks.
 
     Gbps -- Gigabits per second, which is a measurement of speed for digital
signal transmission expressed in billions of bits per second.
 
     Gateway -- A network element interconnecting two otherwise incompatible
networks, network nodes, subnetworks or devices; performs a protocol conversion
operation across a wide spectrum of communications functions.
 
     GSM -- Global System for Mobile Communications, formerly known as Groupe
Speciale Mobile. GSM began as a pan-European standard for digital cellular
systems. The name was changed to reflect the fact that the standard has been
adopted by several countries in Asia.
 
     Hertz -- The unit for measuring the frequency with which an electromagnetic
signal cycles through the zero-value state between lowest and highest states.
One Hz (Hertz) equals one cycle per second. kHz (kilohertz) stands for thousands
of Hertz; MHz (megahertz) stands for millions of Hertz.
 
     Inmarsat -- The International Maritime Satellite service, which provides
mobile communications to ships at sea, aircraft in flight and vehicles on the
road.
 
     Intelsat -- International Telecommunications Satellite Organization; a
worldwide consortium of national satellite communications organizations.
 
     Interconnect -- Connection of a telecommunications device of service to the
PSTN.
 
     Interconnection -- Connection of a piece of telephone equipment to the
telephone network, or a data terminal to a data communications network. Also
refers to the connection of one communications network to another so that users
of one network can communicate with users of another network.
 
     International Simple Resale -- Refers to the wholesale purchase of IPLCs
from facilities-based carriers and the reselling of such capacity to customers
for switched telephone service.
 
     IPLC -- International Private Leased Circuits.
 
     ISDN (Integrated Services Digital Network) -- ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission line.
ISDN permits video conferencing over a single line, for example, and also
supports a multitude of value-added switched service applications. ISDN's
combined voice and data networking capabilities reduce costs for end users and
result in more efficient use of available facilities. ISDN combines standards
for highly flexible customer to network signaling with both voice and data
within a common facility.
 
     ITU -- International Telecommunications Union; a United Nations treaty
organization whose purpose is to accredit international telecommunications
standards. ITU signatories can turn ITU-approved standards into law through
international treaties such as the treaties governing use of the radio spectrum
for international satellite telecommunications and broadcasting.
 
                                       A-2
<PAGE>   200
 
     Kbps -- Kilobits per second, which is a measurement of speed for digital
signal transmission expressed in thousands of bits per second.
 
     Local Area Network (LAN) -- The interconnection of computers for the
purpose of sharing files, programs and peripheral devices such as printers and
high-speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routes.
 
     Local Loop -- The local loop is that portion of the local telephone network
that connects the customer's premises to the local exchange provider's central
office or switching center. This includes all the facilities starting from the
customer premise interface which connects to the inside wiring and equipment at
the customer premise to a terminating point within the switching wire center.
 
     Mbps -- Megabits per second, which is a measurement of speed for digital
signal transmission expressed in millions of bits per second.
 
     Multiplexing -- The use of some means to inter-leave narrow-band or
slow-speed data from multiple sources in order to make use of a wide-band or
high-speed channel.
 
     NMT -- Acronym for Nordic Mobile Telephone System, a cellular standard
widely used in Northern Europe.
 
     Nodes -- Locations within the network housing electronic equipment and/or
switches which serve as intermediate connection points to send and receive
transmission signals.
 
     PBX/PABX (private branch exchange/private automatic branch exchange) -- A
customer operated switch on customer premises, typically used by large
businesses with multiple telephone lines.
 
     Plesiochronous Digital Hierarchy (PDH) -- A method of controlling the
timing between transmission and switching systems that is not synchronized but
rather relies on highly accurate clocks to minimize the slip rates between
switching nodes.
 
     POCSAG (Postal Office Code Standard Advisory Group) -- A lower-cost paging
technology which can be transmitted on ERMES frequency.
 
     Points of Presence (POPs) -- Locations where a carrier has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that carrier.
 
     PSTN -- Public switched telecommunications network.
 
     PTT/PTO -- Postal, Telegraph and Telephone agency/Public Telephony
Operators; a government authority or agency that operates the public
telecommunications network, and sets standards and policies. PTTs/PTOs are
agencies in charge of telecommunications services in many countries, under
direct supervision of the national government.
 
     Public Telecommunications Operator (PTO) -- A licensed telecommunications
common carrier.
 
     Redundant Electronics -- Describes a telecommunications facility using two
separate electronic devices to transmit the telecommunications signal so that if
one device malfunctions, the signal may continue without interruption.
 
     Regeneration/amplifier -- Devices which automatically re-transmit or boost
signals on an out-bound circuit.
 
     Route Kilometers -- The number of kilometers along which fiber optic cables
are installed.
 
     Route Mile -- The number of miles along which fiber optic cables are
installed.
 
     SDH -- Synchronous Digital Hierarchy; the international standard for
ultra-high-speed broadband fiber-optic, digital transmission networks that use
equipment from many different manufacturers and carry a variety
 
                                       A-3
<PAGE>   201
 
of services. The basic communications channel of SDH is a 155.52 Mbps
transmission channel that is multiplexed upward.
 
     STM-1 -- Data transmission rate of approximately 155 Mbps.
 
     STM-4 -- Data transmission rate of approximately 622 Mbps.
 
     STM-16 -- Data transmission of approximately 2,488 Mbps.
 
     STM-64 -- Data transmission rate of approximately 9,952 Mbps.
 
     Switch -- A mechanical or electronic device that opens or closes circuits
or selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users.
 
     Synchronous Digital Hierarchy (SDH) -- SDH is a set of standards for
optical communications transmission systems that define optical rates and
formats, signal characteristics, performance, management and maintenance
information to be embedded within the signals and the multiplexing techniques to
be employed in optical communications transmission systems. SDH facilitates the
interoperability of dissimilar vendors' equipment and benefits customers by
minimizing the equipment necessary for telecommunications applications. SDH also
improves the reliability of the local loop connecting customers' premises to the
local exchange provider, historically one of the weakest links in the service
delivery.
 
     TCP/IP -- Transmission Control Protocol/Internet Protocol; an "open"
standard operating and interface protocol for federal government local area
networks that use devices from multiple vendors. TCP/IP, first developed by the
U.S. Defense Department, has been adopted by some academic and business
institutions who deal regularly with the federal government.
 
     Trunk -- A telephone circuit with a switch at both ends. A trunk may
connect two central office switches, or two PBXs, or a PBX and a central office
switch.
 
     VSAT -- Very Small Aperture Terminal; a satellite communications technology
that employs frequencies in the Ku band or C band and very small receiving
dishes. VSAT systems employ satellite transponders; the receiving dishes may be
leased or owned by the VSAT user.
 
     Wavelength Division Multiplexing (WDM) -- A multiplexing technique allowing
multiple different signals to be carried simultaneously on a fiber by allocating
resources according to frequency on non-overlapping frequency bands.
 
     X.25 -- A CCITT standard governing the interface between data terminals and
data circuit termination equipment for terminals on packet-switched data
networks.
 
                                       A-4
<PAGE>   202
 
             ======================================================
 
  NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDER-WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
                             ---------------------
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                         PAGE
                                         ----
<S>                                      <C>
Prospectus Summary.....................    1
Risk Factors...........................   10
Use of Proceeds........................   24
Dividend Policy........................   24
Dilution...............................   25
Capitalization.........................   26
Selected Historical Consolidated
  Financial Data.......................   27
Unaudited Selected Historical Financial
  Data -- Combined Operations..........   28
Unaudited Selected Historical Financial
  Data -- Combining Operations: Detail
  Review...............................   29
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...........................   35
Business...............................   49
Management.............................   96
Executive Compensation and Other
  Information..........................  101
Certain Related Party Transactions.....  107
Principal Stockholders.................  108
Description of Certain Indebtedness....  109
Description of Capital Stock...........  112
Shares Eligible for Future Sale........  114
Certain United States Federal Tax
  Consequences to Non-U.S.
  Stockholders.........................  115
Underwriting...........................  117
Legal Matters..........................  119
Experts................................  120
Index to Financial Statements..........  F-1
Exhibit A -- Glossary of
  Telecommunications Industry Terms....  A-1
</TABLE>
 
                             ---------------------
  UNTIL             , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
 
             ======================================================
 
             ======================================================
                                                 SHARES
                     [GLOBAL TELESYSTEMS GROUP, INC. LOGO]
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                                  COMMON STOCK
 
                             ---------------------
 
                                   PROSPECTUS
                             ---------------------
 
                              MERRILL LYNCH & CO.
 
                          DONALDSON, LUFKIN & JENRETTE
                             SECURITIES CORPORATION
 
                                 UBS SECURITIES
 
                                LEHMAN BROTHERS
 
                                  FURMAN SELZ
                                           , 1997
 
             ======================================================
<PAGE>   203
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
                   INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE
                             SUBJECT TO COMPLETION
                PRELIMINARY PROSPECTUS DATED             , 1997
PROSPECTUS
                                             SHARES
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                                  COMMON STOCK
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
                             ---------------------
 
     All of the shares of Common Stock, par value $.0001 per share (the "Common
Stock"), offered hereby (the "Offering") are being offered by Global TeleSystems
Group, Inc. (the "Company"). Of the           shares of Common Stock offered
hereby,        shares are being offered outside the United States and Canada
(the "International Offering") and        shares are being offered in the United
States and Canada (the "U.S. Offering" and, together with the International
Offering, the "Offerings"). The initial offering price and the aggregate
underwriting discount per share are identical for both offerings. See
"Underwriting."
 
     Prior to the Offerings, there has been no public market for the Common
Stock. Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "GTSG" and for listing on the        Stock
Exchange.
 
     SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 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>
=============================================================================================================
                                           PRICE TO               UNDERWRITING             PROCEEDS TO
                                            PUBLIC                DISCOUNT(1)               COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S>                                <C>                      <C>                      <C>
Per Share.........................            $                        $                        $
- -------------------------------------------------------------------------------------------------------------
Total(3)..........................            $                        $                        $
=============================================================================================================
</TABLE>
 
(1) The Company has agreed to indemnify the several Underwriters (as defined
    herein) against certain liabilities, including liabilities under the
    Securities Act of 1933, as amended (the "Securities Act"). See
    "Underwriting."
 
(2) Before deducting expenses payable by the Company estimated to be
    $          .
 
(3) The Company has granted to the International Managers and the U.S.
    Underwriters options, exercisable within 30 days of the date hereof, to
    purchase up to an additional        and        additional shares of Common
    Stock, respectively solely to cover over-allotments, if any. See
    "Underwriting." If such options are exercised in full, the total Price to
    Public, Underwriting Discount and Proceeds to the Company will be
    $          , $          and $          , respectively.
                             ---------------------
 
            MERRILL LYNCH & CO. IS THE BOOKRUNNER OF THE OFFERINGS.
                             ---------------------
 
<TABLE>
<S>                                        <C>
            GLOBAL COORDINATOR                       CO-GLOBAL COORDINATOR
           MERRILL LYNCH & CO.                           UBS SECURITIES
</TABLE>
 
                             ---------------------
 
     The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about             , 1997.
                             ---------------------
 
MERRILL LYNCH INTERNATIONAL                                          UBS LIMITED
 
DONALDSON, LUFKIN & JENRETTE
    SECURITIES CORPORATION
 
                                LEHMAN BROTHERS
                                                                     ING BARINGS
                             ---------------------
 
               The date of this Prospectus is             , 1997.
<PAGE>   204
 
           INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
 
                                  UNDERWRITING
 
     Subject to the terms and conditions set forth in an international purchase
agreement (the "International Purchase Agreement") among the Company and each of
the underwriters named below (the "International Managers") and concurrently
with the sale of           shares of Common Stock to the U.S. Underwriters (as
defined below), the Company has agreed to sell to each of the International
Managers, and each of the International Managers for whom Merrill Lynch
International ("Merrill Lynch"), UBS Limited, Donaldson, Lufkin & Jenrette
Securities Corporation, Lehman Brothers Inc. and ING Bank N.V. are acting as
representatives (the "International Representatives"), has severally agreed to
purchase from the Company, the number of shares of Common Stock set forth
opposite its name below.
 
<TABLE>
<CAPTION>
                                                               NUMBER
                                                              OF SHARES
                   INTERNATIONAL MANAGERS                     ---------
<S>                                                           <C>
Merrill Lynch International.................................
UBS Limited.................................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Lehman Brothers Inc. .......................................
ING Bank N.V................................................
 
             Total..........................................
</TABLE>
 
     The Company has also entered into a U.S. purchase agreement (the "U.S.
purchase agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, UBS Securities LLC, Lehman
Brothers Inc. and Furman Selz LLC are acting as representatives (the "U.S.
Representatives"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of        shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Company has agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters severally have agreed to purchase, an aggregate of        shares of
Common Stock. The initial public offering price per share and the underwriting
discount per share of Common Stock are identical under the International
Purchase Agreement and the U.S. Purchase Agreement.
 
     In each Purchase Agreement, the several International Managers and the
several U.S. Underwriters, respectively have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all the shares of
Common Stock offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriters may be increased or the
Purchase Agreement may be terminated. The sale of Common Stock to the U.S.
Underwriters is conditioned upon the sale of shares of Common Stock to the
International Managers, and vice versa.
 
     The Company has appointed Merrill Lynch & Co. as Global Coordinator and UBS
Securities LLC as Co-Global Coordinator of the Offerings. Merrill Lynch & Co. is
the bookrunner of the Offerings.
 
     The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price set forth on the cover page of this Prospectus, less an amount not greater
than the selling concession. Under the terms of the Intersyndicate Agreement,
the U.S. Underwriters and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, and the International Managers
and any dealer to whom they sell shares of Common Stock will not offer to sell
or sell shares of Common Stock to U.S. persons or Canadian persons or to persons
they believe intend to resell to U.S. persons or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement.
<PAGE>   205
 
           INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
 
     The International Representatives have advised the Company that the
International Managers propose initially to offer the shares of Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $          per share of Common Stock. The International Managers may
allow, and such dealers may allow, a discount not in excess of $          per
share of Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
 
     The Company, its directors, executive officers and certain stockholders
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any Common Stock or any
securities convertible into or exchangeable or exercisable for any shares of
Common Stock, or request the filing of any registration statement under the
Securities Act, with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of Common Stock,
whether any such swap transaction is to be settled by delivery of the Common
Stock or other securities, in cash or otherwise without the prior written
consent of Merrill Lynch, on behalf of the Underwriters, for a period of 180
days after the date of this Prospectus. In addition, all existing stockholders
have agreed not to make any demand for or exercise any rights with respect to
the registration of Common Stock and have waived all rights (including demand
and "piggyback" registration rights) to register securities owned by them for
such 180 day period and rights to purchase additional shares of Common Stock in
connection with the Offerings. See "Shares Eligible for Future Sale."
 
     The Company has granted an option to the International Managers,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of           additional shares of Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise this option only
to cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. To the extent that the International Managers exercise this option, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
International Manager's initial amount reflected in the foregoing table. The
Company has also granted an option to the U.S. Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an additional
          shares of Common Stock to cover over-allotments, if any, on terms
similar to those granted to International Managers.
 
     Prior to the Offerings, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined through negotiations between the Company and the U.S.
Representatives. Among the factors considered in determining the initial public
offering price, in addition to prevailing market conditions, are the financial
and operating history and condition of the Company, an assessment of the
Company's business and financial prospects, the Company's management, the
prospects for the industry in which the Company operates and the recent market
prices of securities of companies in industries similar to that of the Company.
The initial public offering price set forth on the cover page of this Prospectus
should not, however, be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. There can be no assurance that 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 made hereby at or above the initial public
offering price.
 
     The Company has agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
 
     The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
 
     Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the U.S.
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U.S. Representatives are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
 
     If the Underwriters create a short position in the Common Stock in
connection with the Offerings, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the
<PAGE>   206
 
           INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
 
U.S. Representatives may reduce that short position by purchasing Common Stock
in the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
 
     The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the
<PAGE>   207
 
           INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE -- (CONTINUED)
 
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offering.
 
     In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
 
     Neither the Company nor any of the U.S. Underwriters makes any
representation or prediction, however, as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transaction or that
such transactions, once commenced, will not be discontinued without notice.
 
     Application will be made to list the Common Stock on the Nasdaq National
Market under the symbol "GTSG" and for listing on the              Stock
Exchange.
 
     Certain of the Underwriters have been engaged from time to time, and may in
the future be engaged, to perform financial advisory and other investment
banking services to the Company and its affiliates. In connection with rendering
such services in the past, such Underwriters have received customary
compensation, including reimbursement of related expenses.
 
                                 LEGAL MATTERS
 
     The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shearman & Sterling, New York, New York and for the
Underwriters by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.
 
                                    EXPERTS
 
     The financial statements of Global TeleSystems Group, Inc. as of December
31, 1996 and 1995, and for each of the three years in the period ended December
31, 1996, included in this Prospectus, have been audited by Ernst & Young, LLP,
independent auditors, as set forth in their report appearing elsewhere herein.
 
     The financial statements of EDN Sovintel as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, included
in this Prospectus, have been audited by Ernst & Young (CIS) Ltd., independent
auditors as set forth in their report appearing elsewhere herein.
 
     The financial statements of Hermes Europe Railtel B.V. as of December 31,
1996 and 1995, and for each of the two years in the period ended December 31,
1996, included in this Prospectus have been audited by Ernst & Young Reviseurs
d'Entreprises S.C.C., independent auditors as set forth in their report
appearing elsewhere herein.
<PAGE>   208
 
             INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE (CONTINUED)
 
                        EXECUTIVE OFFICE OF THE COMPANY
 
                         GLOBAL TELESYSTEMS GROUP, INC.
                              1751 Pinnacle Drive
                             McLean, Virginia 22102
 
                              INDEPENDENT AUDITORS
                               ERNST & YOUNG, LLP
                           1225 Connecticut Ave., NW
                             Washington, D.C. 20036
 
                                 LEGAL ADVISERS
 
                                 to the Company
 
                              SHEARMAN & STERLING
                              599 Lexington Avenue
                         New York, New York 10022-6069
 
                                 as to CIS law
                                COUDERT BROTHERS
                              1627 I Street, N.W.
                             Washington, D.C. 20006
 
                              to the Underwriters
 
                            CAHILL GORDON & REINDEL
                                 80 Pine Street
                            New York, New York 10005
 
               REGISTRAR AND PRINCIPAL PAYING AND TRANSFER AGENT
                              THE BANK OF NEW YORK
                                One Wall Street
                            New York, New York 10286
 
<PAGE>   209
 
                   INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE
 
             ------------------------------------------------------
 
             ------------------------------------------------------
 
  NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
                             ---------------------
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                         PAGE
                                         ----
<S>                                      <C>
Prospectus Summary.....................    1
Risk Factors...........................   10
Use of Proceeds........................   24
Dividend Policy........................   24
Dilution...............................   25
Capitalization.........................   26
Selected Historical Consolidated
  Financial Data.......................   27
Unaudited Selected Historical Financial
  Data -- Combined Operations..........   28
Unaudited Selected Historical Financial
  Data -- Combining Operations: Detail
  Review...............................   29
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...........................   35
Business...............................   49
Management.............................   96
Executive Compensation and Other
  Information..........................  101
Certain Related Party Transactions.....  107
Principal Stockholders.................  108
Description of Certain Indebtedness....  109
Description of Capital Stock...........  112
Shares Eligible for Future Sale........  114
Certain United States Federal Tax
  Consequences to Non-U.S.
  Stockholders.........................  115
Underwriting...........................  117
Legal Matters..........................  119
Experts................................  119
Index to Financial Statements..........  F-1
Exhibit A -- Glossary of
  Telecommunications Industry Terms....  A-1
</TABLE>
 
                             ---------------------
  UNTIL             , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
 
             ======================================================
 
             ======================================================
                                                 SHARES
                     [GLOBAL TELESYSTEMS GROUP, INC. LOGO]
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                                  COMMON STOCK
 
                             ---------------------
 
                                   PROSPECTUS
                             ---------------------
 
                          MERRILL LYNCH INTERNATIONAL
 
                                  UBS LIMITED
 
                          DONALDSON, LUFKIN & JENRETTE
                             SECURITIES CORPORATION
 
                                LEHMAN BROTHERS
 
                                  ING BARINGS
                                           , 1997
 
             ======================================================
<PAGE>   210
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
     The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, to be borne by the Company in connection
with the offering of the securities being hereby registered.
 
<TABLE>
<CAPTION>
                            ITEM
                            ----
<S>                                                           <C>
SEC Registration Fee........................................  $69,697
NASD Filing Fee.............................................   23,500
Nasdaq National Market Listing Fee..........................     *
Blue Sky Fees and Expenses..................................     *
Transfer Agent and Registrar Fees...........................     *
Accounting Fees and Expenses................................     *
Legal Fees and Expenses.....................................     *
Printing and Mailing Expenses...............................     *
Miscellaneous...............................................     *
                                                              -------
          TOTAL.............................................  $
                                                              =======
</TABLE>
 
- ---------------
 
* To be provided by amendment
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
 
     Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
 
     The Company's Certificate of Incorporation (the "Certificate") provides
that the Company's Directors shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a
 
                                      II-1
<PAGE>   211
 
director provided, however, that such exculpation from liabilities is not
permitted with respect to liability arising from items described in clauses (i)
through (iv) in the preceding paragraph. The Certificate and the Company's
By-Laws further provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by the DGCL.
 
     The directors and officers of the Company are covered under directors' and
officers' liability insurance policies maintained by the Company.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Within the past three years the Company issued securities which were not
registered under the Securities Act of 1933, as amended (the "Securities Act")
as follows:
 
     On March 13, 1995, the Company issued 266,667 shares of common stock, par
value $0.0001 per share, pursuant to a stock purchase agreement. The shares were
issued to CIBV Liquidating B.V., a closed company with limited liability
organized under the laws of the Netherlands. No underwriter or underwriting
discount was involved in the offering. Exemption from registration was claimed
under Section 4(2) of the Securities Act regarding transactions by an issuer not
involving any public offering.
 
     On June 21, 1995, the Company issued 3,393,917 shares of common stock, par
value $0.0001 per share, at a purchase price of $13.50 per share, for an
aggregate offering price of $45.8 million, pursuant to a stock purchase
agreement. In addition to (i) certain investment funds and (ii) certain
individual private investors, these shares were issued to certain members of
management and various entities affiliated with certain members of management.
No underwriter or underwriting discount was involved in the offering. Exemption
from registration was claimed under Section 4(2) of the Securities Act regarding
transactions by an issuer not involving any public offering.
 
     On January 19, 1996, and June 6, 1996, the Company granted affiliates of
George Soros an aggregate of 2,962,962 warrants, each warrant to purchase one
share of common stock, par value $0.0001 per share, at an exercise price of
$15.40 per share. No underwriter or underwriting discount was involved in the
offering. Exemption from registration was claimed under Section 4(2) of the
Securities Act regarding transactions by an issuer not involving any public
offering.
 
     On February 2, 1996, the Company granted affiliates of Capital Research
International an aggregate of 2,222,222 warrants, each warrant to purchase one
share of common stock, par value $0.0001 per share, at an exercise price of
$15.40 per share. No underwriter or underwriting discount was involved in the
offering. Exemption from registration was claimed under Section 4(2) of the
Securities Act regarding transactions by an issuer not involving any public
offering.
 
     On July 23, 1996, July 31, 1996, August 8, 1996, August 22, 1996 and
September 12, 1996 the Company issued an aggregate of 5,565,688 shares of common
stock, par value $0.0001 per share, at a purchase price of $20.00 per share, for
an aggregate offering price of $111 million, pursuant to a stock purchase
agreement. In addition to (i) certain investment funds and (ii) certain
individual private investors, these shares were issued to certain members of
management and various entities affiliated with certain members of management.
Exemption from registration was claimed under Section 4(2) of the Securities Act
regarding transactions by an issuer not involving any public offering.
 
     On July 14, 1997 and July 31, 1997, the Company issued an aggregate
$141,295,000 of its Senior Subordinated Convertible Bonds due 2000, convertible
into the common stock, par value $0.0001 per share, at a purchase price of 100%,
pursuant to a subscription agreement. UBS Securities LLC, Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch & Co. acted as managers in the
offering and the aggregate discount was $5,651,800. The securities were sold to
a limited number of qualified institutional buyers as defined in Rule 144A under
the Securities Act and to non-U.S. persons outside the United States. Exemption
from registration was claimed under Rule 144A and Regulation S of the Securities
Act.
 
     On August 15, 1997, August 29, 1997 and September 5, 1997, the Company
issued an aggregate 1,668,457 shares of common stock, par value $0.0001 per
share, at a purchase price of $23.50 per share, for an aggregate offering price
of $39.3 million, pursuant to a stock purchase agreement. In addition to (i)
certain investment funds and (ii) certain individual private investors, these
shares were issued to certain members of
 
                                      II-2
<PAGE>   212
 
management and various entities affiliated with certain members of management.
Exemption from registration was claimed under Section 4(2) of the Securities Act
regarding transactions by an issuer not involving any public offering.
 
     On August 29, 1997, the Company issued $2.9 million of its Senior
Subordinated Convertible Bonds due 2000, convertible into the common stock, par
value $0.0001 per share, at a purchase price of 100%. In addition to (i) certain
investment funds and (ii) certain individual private investors, these shares
were issued to certain members of management and various entities affiliated
with certain members of management. Exemption from registration was claimed
under Section 4(2) of the Securities Act regarding transactions by an issuer not
involving any public offering.
 
ITEM 16. EXHIBITS
 
     (a) Exhibits:
 
     The following is a list of exhibits filed as a part of this registration
statement.
 
<TABLE>
  <S>        <C>  <S>
   1.1***    --   Form of U.S. Purchase Agreement
   1.2***    --   Form of International Purchase Agreement
   3.1*      --   Certificate of Incorporation of SFMT, Inc.
   3.2*      --   Certificate of Correction to the Certificate of
                  Incorporation of SFMT, Inc., filed with the Delaware
                  Secretary of State on October 8, 1993
   3.3*      --   Certificate of Ownership and Merger Merging San
                  Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed with
                  the Delaware Secretary of State on November 3, 1993
   3.4*      --   Certificate of Amendment to the Certificate of Incorporation
                  of SFMT, Inc., filed with the Delaware Secretary of State on
                  January 12, 1995
   3.5*      --   Certificate of Amendment to the Certificate of Incorporation
                  of SFMT, Inc., filed with the Delaware Secretary of State on
                  February 22, 1995
   3.6*      --   Certificate of Amendment to the Certificate of Incorporation
                  of Global TeleSystems Group, Inc., filed with the Delaware
                  Secretary of State on October 16, 1996
   3.7*      --   By-laws of SFMT, Inc.
   4.1***    --   Specimen Stock Certificate for Common Stock of the
                  Registrant
   4.2***    --   Indenture dated as of July 14, 1997 between the Company and
                  The Bank of New York (including the form of Senior
                  Subordinated Convertible Bond due 2000 as an exhibit
                  thereto)
   4.3***    --   Registration Rights Agreement, dated as of July 14, 1997,
                  between Global TeleSystems Group, Inc. and UBS Securities
                  LLC.
   4.4*      --   Indenture dated as of August 19, 1997 between Hermes Europe
                  Railtel B.V. and The Bank of New York (including the form of
                  11 1/2% Senior Note due 2007 as an exhibit thereto)
   4.5***    --   Registration Rights Agreement dated as of August 19, 1997
                  between Hermes Europe Railtel B.V. and Donaldson, Lufkin &
                  Jenrette Securities Corporation, UBS Securities LLC, and
                  Lehman Brothers, Inc.
   5.1***    --   Form of Opinion of Shearman & Sterling respecting the Common
                  Stock registered hereby
  10.1***    --   Senior Note Purchase Agreement, dated as of January 19,
                  1996, among Global TeleSystems Group, Inc., The Open Society
                  Institute and Chatterjee Fund Management, L.P.
  10.2*      --   Registration Rights Letter Agreement, dated as of January
                  19, 1996, among Global TeleSystems Group, Inc., The Open
                  Society Institute and Chatterjee Fund Management, L.P.
  10.3*      --   Warrant Agreement, dated as of January 19, 1996, among
                  Global TeleSystems Group, Inc., The Open Society Institute
                  and Chatterjee Fund Management, L.P.
  10.4*      --   Joint Venture Letter Agreement, dated January 19, 1996,
                  among Global TeleSystems Group, Inc., The Open Society
                  Institute and Chatterjee Fund Management, L.P.
  10.5***    --   Senior Note Purchase Agreement, dated as of June 6, 1996,
                  among the Company, The Open Society Institute, Winston
                  Partners II LDC and Winston Partners II LLC
  10.6*      --   Registration Rights Letter Agreement, dated June 6, 1996,
                  among the Company, The Open Society Institute, Winston
                  Partners II LDC and Winston Partners II LLC
  10.7*      --   Warrant Agreement, dated as of June 6, 1996, between Global
                  TeleSystems Group, Inc., The Open Society Institute, Winston
                  Partners II LDC and Winston Partners II LLC
</TABLE>
 
                                      II-3
<PAGE>   213
 
<TABLE>
  <C>        <C>  <S>
  10.8***    --   Senior Note Purchase Agreement, dated as of February 2,
                  1996, between Global TeleSystems Group, Inc. and Emerging
                  Markets Growth Fund, Inc.
  10.9*      --   Registration Rights Letter Agreement, dated as February 2,
                  1996, between Global TeleSystems Group, Inc. and Emerging
                  Markets Growth Fund, Inc.
  10.10*     --   Warrant Agreement, dated as of February 2, 1996, between
                  Global TeleSystems Group, Inc. and Emerging Markets Growth
                  Fund, Inc.
  10.11***   --   Senior Note Purchase Agreement, dated as of February 2,
                  1996, between the Company and Capital International Emerging
                  Markets Funds
  10.12*     --   Registration Rights Letter Agreement, dated as February 2,
                  1996, between Global TeleSystems Group, Inc. and Capital
                  International Emerging Markets Funds
  10.13*     --   Warrant Agreement, dated as of February 2, 1996, between
                  Global TeleSystems Group, Inc. and Capital International
                  Emerging Markets Funds
  10.14*     --   Global TeleSystems Group, Inc. Non-Employee Directors' Stock
                  Option Plan
  10.15*     --   GTS-Hermes, Inc. 1994 Stock Option Plan
  10.16*     --   Restricted Stock Grant letter, dated as of January 1, 1995
  10.17*     --   Employment Agreement dated as of January 1995 between SFMT,
                  Inc. and Jan Loeber
  10.18*     --   Employment Agreement dated as of April 1996 between GTS
                  Group, Inc. and Louis Toth
  10.19*     --   Employment Agreement dated as of April 1996 between GTS
                  Group, Inc. and Gerald W. Thames
  10.20*     --   Employment Agreement dated as of April 1996 between GTS
                  Group, Inc. and Raymond J. Marks
  10.21*     --   Employment Agreement dated as of April 1996 between GTS
                  Group, Inc. and Henry Radzikowski
  10.22*     --   SFMT, Inc. Equity Compensation Plan
  10.23*     --   Form of Non-Statutory Stock Option Agreement
  10.24*     --   Amended and Restated 1992 Stock Option Plan of Global
                  TeleSystems Group Inc. dated as of January 16, 1997
  10.25*     --   GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                  Option Grant
  11.1***    --   Statement regarding computation of per share earnings
  21.1*      --   List of Subsidiaries of the Registrant
  23.1***    --   Consent of Shearman & Sterling (included in its opinion
                  delivered under Exhibit No. 5.1)
  23.2*      --   Consent of Ernst & Young LLP, Ernst & Young (CIS) Ltd., and
                  Ernst & Young Reviseurs d'Entreprises S.C.C.
  24.1*      --   Powers of Attorney (included on signature page to this
                  registration statement)
  27.1*      --   Financial Data Schedule extracted from 12/31/96 audited
                  financial statements
  27.2*      --   Financial Data Schedule extracted from 6/30/97 unaudited
                  financial statements
</TABLE>
 
- ---------------
 
* Filed herewith.
 
** Previously filed.
 
*** To be filed by amendment.
 
     (b) Financial Statements and Schedules:
 
     (1) Financial Statements
 
     The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
 
     (2) Schedules
 
     The financial statement schedules of the Company have been omitted because
the information required to be set forth therein is not applicable or is shown
in the Financial Statements or Notes thereto.
 
ITEM 17. UNDERTAKINGS
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under
 
                                      II-4
<PAGE>   214
 
"Item 14 -- Indemnification of Directors and Officers" hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
 
     The undersigned registrant hereby undertakes that:
 
          (1) For purposes of determining any liability under the Securities Act
     of 1933, the information omitted from the forms of prospectus filed as part
     of this registration statement in reliance upon Rule 430A and contained in
     forms of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective.
 
          (2) For the purpose of determining any liability under the Securities
     Act of 1933, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.
 
                                      II-5
<PAGE>   215
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of McLean, Commonwealth of Virginia, on this 26th day of September, 1997.
 
                                            GLOBAL TELESYSTEMS GROUP, INC.
 
                                            By:   /s/ WILLIAM H. SEIPPEL
                                              ----------------------------------
                                              Name: William H. Seippel
                                              Title: Executive Vice President
                                                     and
                                                 Chief Financial Officer
 
     We, the undersigned officers and directors of Global TeleSystems Group,
Inc. hereby severally constitute and appoint Gerald W. Thames, William H.
Seippel, and Alan Krenek, and each of them, with full power of substitution, our
true and lawful attorney with full power to him singly to sign for us and in our
names in the capacities indicated below the Registration Statement on Form S-1
filed herewith and any and all pre-effective and post-effective amendments to
said Registration Statement, and, in connection with any registration of
additional securities pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, to sign any abbreviated registration statement and any and all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, in each case, with the Securities and
Exchange Commission, and generally to do all such things in our names and on our
behalf in our capacities as officers and directors to enable Global TeleSystems
Group, Inc. to comply with the provisions of the Securities Act of 1933, as
amended, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to said Registration Statement and any and all amendments thereto.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 26th day of September, 1997.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                   TITLE                     DATE
                      ---------                                   -----                     ----
<C>                                                    <S>                           <C>
 
                /s/ GERALD W. THAMES                   President, Chief Executive    September 26, 1997
- -----------------------------------------------------    Officer and Director
                  Gerald W. Thames                       (principal executive
                                                         officer)

 
               /s/ WILLIAM H. SEIPPEL                  Executive Vice President of   September 26, 1997
- -----------------------------------------------------    Finance and Chief
                 William H. Seippel                      Financial Officer
                                                         (principal financial and
                                                         accounting officer)
 
                 /s/ ALAN B. SLIFKA                    Chairman of the Board of      September 26, 1997
- -----------------------------------------------------    Directors
                   Alan B. Slifka
 
                 /s/ GARY GLADSTEIN                    Director                      September 26, 1997
- -----------------------------------------------------
                   Gary Gladstein
 
                 /s/ MICHAEL GREELEY                   Director                      September 26, 1997
- -----------------------------------------------------
                   Michael Greeley
 
                /s/ BERNARD MCFADDEN                   Director                      September 26, 1997
- -----------------------------------------------------
                  Bernard McFadden
</TABLE>
 
                                      II-6

<PAGE>   216
 
<TABLE>
<C>                                                    <S>                          <C>
               /s/ STEWART J. PAPERIN                  Director                      September 26, 1997
- -----------------------------------------------------
                 Stewart J. Paperin
 
                  /s/ W. JAMES PEET                    Director                      September 26, 1997
- -----------------------------------------------------
                    W. James Peet
 
                  /s/ JEAN SALMONA                     Director                      September 26, 1997
- -----------------------------------------------------
                    Jean Salmona
 
                /s/ MORRIS A. SANDLER                  Director                      September 26, 1997
- -----------------------------------------------------
                  Morris A. Sandler
 
                   /s/ JOEL SCHATZ                     Director                      September 26, 1997
- -----------------------------------------------------
                     Joel Schatz
 
                  /s/ ADAM SOLOMON                     Director                      September 26, 1997
- -----------------------------------------------------
                    Adam Solomon
</TABLE>
 
                                      II-7

<PAGE>   217
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                              SEQUENTIALLY
EXHIBIT                                                                         NUMBERED
 NUMBER                                 DESCRIPTION                               PAGE
- -------                                 -----------                           ------------
<C>        <C>  <S>                                                           <C>
 1.1***    --   Form of U.S. Purchase Agreement.............................
 1.2***    --   Form of International Purchase Agreement....................
</TABLE>
 
 3.1*      --   Certificate of Incorporation of SFMT, Inc...................
 3.2*      --   Certificate of Correction to the Certificate of
                Incorporation of SFMT, Inc., filed with the Delaware
                Secretary of State on October 8, 1993.......................
 3.3*      --   Certificate of Ownership and Merger Merging San
                Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed with
                the Delaware Secretary of State on November 3, 1993.........
 3.4*      --   Certificate of Amendment to the Certificate of Incorporation
                of SFMT, Inc., filed with the Delaware Secretary of State on
                January 12, 1995............................................
 3.5*      --   Certificate of Amendment to the Certificate of Incorporation
                of SFMT, Inc., filed with the Delaware Secretary of State on
                February 22, 1995...........................................
 3.6*      --   Certificate of Amendment to the Certificate of Incorporation
                of Global TeleSystems Group, Inc., filed with the Delaware
                Secretary of State on October 16, 1996......................
 3.7*      --   By-laws of SFMT, Inc........................................
 4.1***    --   Specimen Stock Certificate for Common Stock of the
                Registrant..................................................
 4.2***    --   Indenture dated as of July 14, 1997 between the Company and
                The Bank of New York (including the form of Senior
                Subordinated Convertible Bond due 2000 as an exhibit
                thereto)....................................................
 4.3***    --   Registration Rights Agreement, dated as of July 14, 1997,
                between Global TeleSystems Group, Inc. and UBS Securities
                LLC.........................................................
 4.4*      --   Indenture dated as of August 19, 1997 between Hermes Europe
                Railtel B.V. and The Bank of New York (including the form of
                11 1/2% Senior Note due 2007 as an exhibit thereto).........
 4.5***    --   Registration Rights Agreement dated as of August 19, 1997
                between Hermes Europe Railtel B.V. and Donaldson, Lufkin &
                Jenrette Securities Corporation, UBS Securities LLC, and
                Lehman Brothers, Inc........................................
 5.1***    --   Form of Opinion of Shearman & Sterling respecting the Common
                Stock registered hereby.....................................
10.1***    --   Senior Note Purchase Agreement, dated as of January 19,
                1996, among Global TeleSystems Group, Inc., The Open Society
                Institute and Chatterjee Fund Management, L.P...............
10.2*      --   Registration Rights Letter Agreement, dated as of January
                19, 1996, among Global TeleSystems Group, Inc., The Open
                Society Institute and Chatterjee Fund Management, L.P.......
10.3*      --   Warrant Agreement, dated as of January 19, 1996, among
                Global TeleSystems Group, Inc., The Open Society Institute
                and Chatterjee Fund Management, L.P.........................
10.4*      --   Joint Venture Letter Agreement, dated January 19, 1996,
                among Global TeleSystems Group, Inc., The Open Society
                Institute and Chatterjee Fund Management, L.P...............
10.5***    --   Senior Note Purchase Agreement, dated as of June 6, 1996,
                among the Company, The Open Society Institute, Winston
                Partners II LDC and Winston Partners II LLC.................
10.6*      --   Registration Rights Letter Agreement, dated June 6, 1996,
                among the Company, The Open Society Institute, Winston
                Partners II LDC and Winston Partners II LLC.................
<PAGE>   218
<TABLE>
<CAPTION>
                                                                              SEQUENTIALLY
EXHIBIT                                                                         NUMBERED
 NUMBER                                 DESCRIPTION                               PAGE
- -------                                 -----------                           ------------
<C>        <C>  <S>                                                           <C>
10.7*      --   Warrant Agreement, dated as of June 6, 1996, between Global
                TeleSystems Group, Inc., The Open Society Institute, Winston
                Partners II LDC and Winston Partners II LLC.................
10.8***    --   Senior Note Purchase Agreement, dated as of February 2,
                1996, between Global TeleSystems Group, Inc. and Emerging
                Markets Growth Fund, Inc....................................
10.9*      --   Registration Rights Letter Agreement, dated as February 2,
                1996, between Global TeleSystems Group, Inc. and Emerging
                Markets Growth Fund, Inc....................................
10.10*     --   Warrant Agreement, dated as of February 2, 1996, between
                Global TeleSystems Group, Inc. and Emerging Markets Growth
                Fund, Inc...................................................
10.11***   --   Senior Note Purchase Agreement, dated as of February 2,
                1996, between the Company and Capital International Emerging
                Markets Funds...............................................
10.12*     --   Registration Rights Letter Agreement, dated as February 2,
                1996, between Global TeleSystems Group, Inc. and Capital
                International Emerging Markets Funds........................
10.13*     --   Warrant Agreement, dated as of February 2, 1996, between
                Global TeleSystems Group, Inc. and Capital International
                Emerging Markets Funds......................................
10.14*     --   Global TeleSystems Group, Inc. Non-Employee Directors' Stock
                Option Plan.................................................
10.15*     --   GTS-Hermes, Inc. 1994 Stock Option Plan.....................
10.16*     --   Restricted Stock Grant letter, dated as of January 1,
                1995........................................................
10.17*     --   Employment Agreement dated as of January 1995 between SFMT,
                Inc. and Jan Loeber.........................................
10.18*     --   Employment Agreement dated as of April 1996 between GTS
                Group, Inc. and Louis Toth..................................
10.19*     --   Employment Agreement dated as of April 1996 between GTS
                Group, Inc. and Gerald W. Thames............................
10.20*     --   Employment Agreement dated as of April 1996 between GTS
                Group, Inc. and Raymond J. Marks............................
10.21*     --   Employment Agreement dated as of April 1996 between GTS
                Group, Inc. and Henry Radzikowski...........................
10.22*     --   SFMT, Inc. Equity Compensation Plan.........................
10.23*     --   Form of Non-Statutory Stock Option Agreement................
10.24*     --   Amended and Restated 1992 Stock Option Plan of Global
                TeleSystems Group Inc. dated as of January 16, 1997.........
10.25*     --   GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                Option Grant................................................
11.1***    --   Statement regarding computation of per share earnings.......
21.1*      --   List of Subsidiaries of the Registrant......................
23.1***    --   Consent of Shearman & Sterling (included in its opinion
                delivered under Exhibit No. 5.1)............................
23.2*      --   Consent of Ernst & Young LLP, Ernst & Young (CIS) Ltd., and
                Ernst & Young Reviseurs d'Entreprises S.C.C.................
24.1*      --   Powers of Attorney (included on signature page to this
                registration statement).....................................
27.1*      --   Financial Data Schedule extracted from 12/31/96 audited
                financial statements........................................
27.2*      --   Financial Data Schedule extracted from 6/30/97 unaudited
                financial statements........................................
</TABLE>
 
- ---------------
 
* Filed herewith.
 
** Previously filed.
 
*** To be filed by amendment.

<PAGE>   1
                                                        Exhibit 3.1             


                          CERTIFICATE OF INCORPORATION

                                       OF

                                   SFMT, INC.

                            (A Delaware Corporation)

         FIRST:    The name of the Corporation is SFMT, INC.

         SECOND:   The address of its registered office in the State of
Delaware is 15 North Street, City of Dover, County of Kent 19901. The name of
the registered agent at such address is National Corporate Research, Ltd.

         THIRD:    The nature of the business or purpose to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.

         FOURTH:   The total number of shares of capital stock which the
Corporation shall have authority to issue is 30,000,000 shares, of which there
shall be 20,000,000 million shares of common stock, par value $0.0001 per
share, and 10,000,000 shares of preferred stock, par value, $0.0001 per share.

                   A.     Common Stock. All shares of Common Stock shall be
identical with each other in every respect.  The holders of shares of Common
Stock shall be entitled to one vote for each share upon all matters upon which
the stockholders have the right to vote. The Common Stock is subject to all the
powers, rights, privileges, preferences and priorities of the Preferred Stock
as are stated and expressed in any resolution or resolutions adopted by the
Board of Directors pursuant to authority expressly granted to and vested in it
by the provisions of this Article Fourth and in any Certificate of Amendment of
this Certificate of Incorporation.

                   B.     Preferred Stock. Shares of Preferred Stock may be
issued from time to time in one or more series as determined from time to time
by the Board of Directors. Subject to the rights of the holders of any
previously issued series of Preferred Stock, the Board of Directors is hereby
expressly vested with authority to fix by resolution or resolutions the
designations and the powers and relative participating, optional or other
rights, if any, and the qualifications, limitations or restrictions thereof,
including, without limitation, the voting powers, if any, the dividend rate,
conversion rights, redemption price, or amount paid on liquidation of any
series of Preferred Stock and to fix the number of shares constituting any such
series and to increase or decrease the number of shares of any such series (but
not below the number of shares thereof then outstanding). The number of
authorized shares of any class or classes of Preferred Stock may be increased
or decreased (but not below the number of shares then outstanding) by the
affirmative vote of the holders of a majority of shares of stock of the
Corporation entitled to vote.

                   The Board of Directors is also expressly vested with
authority to amend any of the provisions of any resolution or resolutions
providing for the issue of any series of Preferred Stock, subject to the
rights of the holders of shares of any series of Preferred Stock contained in
the resolution or resolutions and Certificate of Amendment, as now in effect or
as amended, providing for the issue of such series and subject to the
requirements of the laws of the State of Delaware.

         FIFTH:    The name and mailing address of the incorporator is N. S.
Molberger, 10 Surrey Drive, Riverside, Connecticut 06878.





                                       1
<PAGE>   2
         SIXTH:    The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights and powers
conferred herein upon stockholders and directors are granted subject to this
reservation.

         SEVENTH:  In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter or
repeal the by-laws of the Corporation (the "By Laws").

         EIGHTH:   Meetings of stockholders shall be held at such place, within
or without the State of Delaware, as may be designated by or in the manner
provided in the By-laws, or, if not so designated, at the registered office of
the Corporation in the State of Delaware. Elections of directors need not be by
written ballot unless and to the extent that the By-laws so provide.

         NINTH:    No director of the Corporation shall be personally liable,
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the Delaware General
Corporation Law, or (d) for any transaction from which the director derived any
improper personal benefits. Neither any amendment nor repeal of this Article
Ninth, nor the adoption of any provision of this Certificate of Incorporation
inconsistent with this Article Ninth, shall eliminate or reduce the effect of
this Article Ninth in respect of any matter occurring, nor any cause of action,
suit or claim that, but for this Article Ninth, would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision.

         TENTH:

                   10.1   To the extent not prohibited by law, the Corporation
shall indemnify any person who is or was made, or threatened to be made, a
party to any threatened pending or completed action, suit or proceeding (a
"Proceeding"), whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of the Corporation
to procure a Judgment in its favor, by reason of the fact that such person, or
a person of whom such person is the legal representative, is or was a director
or officer of the Corporation, or is or was serving in any capacity at the
request of the Corporation for any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise (an "Other Entity"),
against judgments, fines, penalties, excise taxes, amounts paid in settlement
and costs, charges and expenses (including attorneys' fees and disbursements).
Persons who are not directors or officers of the Corporation may be similarly
indemnified in respect of service to the Corporation or to an Other Entity at
the request of the Corporation to the extent the board of directors at any time
specifies that such persons are entitled to the benefits of this Article Tenth.

                   10.2   The Corporation shall, from time to time, reimburse
or advance any director or officer or other person entitled to indemnification
hereunder the funds necessary for payment of expenses, including attorneys'
fees and disbursements, incurred in connection with any Proceeding, in advance
of the final disposition of such Proceeding; provided, however, that, if
required by the Delaware General Corporation Law, such expenses incurred by or
on behalf of any director or officer or other person may be paid in advance of
the final disposition of a Proceeding only upon receipt by the Corporation of
an undertaking, by or on behalf of such director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of appeal that such director, officer or other person is not
entitled to be indemnified for such expenses.

                   10.3   The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Article Tenth
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or reimbursement or advancement of expenses may have or
hereafter be entitled under any statute, this Certificate of Incorporation, the
By-laws, any agreement, any vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action
in another capacity while holding such office.





                                       2
<PAGE>   3

                   10.4   The rights to indemnification and reimbursement or
advancement of expenses, provided by, or granted pursuant to, this Article Tenth
shall continue as to a person who has ceased to be a director or officer (or
other person indemnified hereunder) and shall inure to the benefit of the
executors, administrators, legatees and distributees of such person.

                   10.5   The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of an Other Entity
against any liability asserted against such person and incurred by such person
in any such capacity, or out of such person's status as such, whether or not
the Corporation would have the power to indemnify such person against such
liability under the provisions of this Article Tenth, the By-laws or under
Section 145 of the Delaware General Corporation Law or any other provision of
law.

                   10.6   The provisions of this Article Tenth shall be a
contract between the Corporation, on the one hand, and each director and
officer who serves in such capacity at any time while this Article Tenth is in
effect and any other person indemnified hereunder, on the other hand, pursuant
to which the Corporation and each such director, officer, or other person
intend to be legally bound. No repeal or modification of this Article Tenth
shall affect any rights or obligations with respect to any state of facts then
of theretofore existing or thereafter rising or any Proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.

                   10.7   The rights to indemnification and reimbursement or
advancement of expenses provided by, or granted pursuant to, this Article Tenth
shall be enforceable by any person entitled to such indemnification or
reimbursement or advancement of expenses in any court of competent
jurisdiction. The burden of proving that such indemnification or reimbursement
or advancement of expenses is not appropriate shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors, its
independent legal counsel and its stockholders) to have made a determination
prior to the commencement of such action that such indemnification or
reimbursement or advancement of expenses is proper in the circumstances nor an
actual determination by the Corporation (including its Board of Directors, its
independent legal counsel and its stockholders) that such person is not
entitled to such indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a presumption that such
person is not so entitled. Such a person shall also be indemnified for any
expenses incurred in connection with successfully establishing his or her right
to such indemnification reimbursement or advancement of expenses, in whole or
in part, in any such proceeding.

                   10.8   Any director or officer of the Corporation serving in
any capacity (a) another corporation of which a majority of the shares entitled
to vote in the election of its directors is held, directly or indirectly, by
the Corporation or (b) any employee benefit plan of the Corporation or any
corporation referred to in clause (a) shall be deemed to be doing so at the
request of the Corporation.

                   10.9   Any person entitled to indemnification or to
reimbursement or advancement of expenses as a matter of right pursuant to this
Article Tenth may elect to have the right to indemnification or reimbursement
or advancement of expenses interpreted on the basis of the applicable law in
effect at the time of the occurrence of the event or events giving rise to the
applicable Proceeding, to the extent permitted by law, or on the basis of the
applicable law in effect at the time such indemnification or reimbursement or
advancement of expenses is sought. Such election shall be made, by a notice in
writing to the Corporation, at the time indemnification or reimbursement or
advancement of expenses is sought; provided, however, that if no such notice is
given, the right to indemnification or reimbursement or advancement of expenses
shall be determined by the law in effect at the time indemnification or
reimbursement or advancement of expenses is sought.

         IN WITNESS WHEREOF, this Certificate has been signed this 30th day of
September, 1993.
                                        
                                        /s/ N.S. MOLBERGER
                                        --------------------------------------
                                        N.S. Molberger
                                        Sole Incorporator





                                       3

<PAGE>   1
                                                                   Exhibit 3.2


                                                           STATE OF DELAWARE
                                                           SECRETARY OF STATE
                                                        DIVISION OF CORPORATIONS
                                                       FILED 09:00 AM 10/08/1993
                                                          932815278 - 2353237

                  CERTIFICATE OF CORRECTION FILED TO CORRECT A
               CERTAIN ERROR IN THE CERTIFICATE OF INCORPORATION
             OF SFMT, INC. FILED IN THE OFFICE OF THE SECRETARY OF
                    STATE OF DELAWARE ON SEPTEMBER 30, 1993

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

SFMT, Inc., a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware.

         DOES HEREBY CERTIFY THAT:

         1.        The name of the corporation is SFMT, Inc. (the "Company")

         2.        The Certificate of Incorporation of SFMT, Inc. was filed
with the Secretary of State of Delaware on September 30, 1993, and said
certificate requires correction as permitted by subsection (f) of section 103
of the General Corporation Law of the State of Delaware.

         3.        The inaccuracy or defect of said certificate to be corrected
is the statement in the first paragraph of Article FOURTH of the Certificate of
Incorporation that "there shall be 20,000,000 million shares of Common Stock",
which should have stated that there shall be 20,000,000 shares of Common Stock.

         4.        The first paragraph of Article FOURTH of the Certificate of
Incorporation is corrected to read as follows:

                   The total number of shares of capital stock which the
                   Corporation shall have authority to issue is 30,000,000
                   shares, of which there shall be 20,000,000 shares of common
                   stock, par value $0.0001 per share, and 10,000,000 shares of
                   preferred stock, par value $0.0001 per share.

         IN WITNESS WHEREOF, this Certificate has been signed by the sole
incorporator, this 1st day of October, 1993.



                                        /s/ N.S. MOLBERGER
                                        --------------------------------------
                                        N.S. Molberger
                                        Sole Incorporator

<PAGE>   1
                                                                  Exhibit 3.3

                      CERTIFICATE OF OWNERSHIP AND MERGER
                                    MERGING
                      SAN FRANCISCO/MOSCOW TELEPORT, INC.
                                      INTO
                                   SFMT, INC.

        San Francisco/Moscow Teleport, Inc., a corporation organized and
existing under the laws of California (the "Corporation"), does hereby certify:

        FIRST: That the Corporation was incorporated on September 25, 1986,
pursuant to the laws of the State of California, the provisions of which permit
the merger of a corporation of another state and a corporation organized and
existing under the laws of said state.

        SECOND: That the Corporation owns all of the outstanding shares of
SFMT, Inc., a corporation incorporated on September 30, 1993, pursuant to the
laws of the State of Delaware (the "Surviving Corporation").

        THIRD: That the Board of Directors of the Corporation, at a duly
convened meeting of the Board of Directors on August 30, 1993 determined to
merge itself into the Surviving Corporation by adopting, inter alia the
following resolution:

        RESOLVED, that the Corporation be merged with any into the Surviving
        Corporation pursuant to Section 1110 of the California Corporations
        Code, Section 253 of the Delaware General Corporation Law and the 
        Agreement and Plan of Merger annexed hereto as Exhibit B.

        FOURTH: That the proposed merger has been adopted, approved, certified,
executed and acknowledged by the Corporation in accordance with the laws of the
State of California, under which it is organized.

        IN WITNESS WHEREOF, San Francisco/Moscow Teleport, Inc. has caused this
Certificate to be signed by Alan B. Slifka, its President and attested by Brian
L. Zimbler, its Secretary, this 31st day of October, 1993.

                                SAN FRANCISCO/MOSCOW TELEPORT, INC.


                                By: /s/ ALAN B. SLIFKA
                                   ----------------------------------
                                   Alan B. Slifka, President

                                ATTEST:


                                By: /s/ BRIAN L. ZIMBLER
                                   ----------------------------------
                                   Brian L. Zimbler, Secretary
<PAGE>   2
                                                                      Exhibit B


                          AGREEMENT AND PLAN OF MERGER
                      San Francisco/Moscow Teleport, Inc.
                            with and into SFMT, Inc.

        This Agreement and Plan of Merger is made and entered into as of the
13th day of October, 1993, by and between San Francisco/Moscow Teleport, Inc.,
a California corporation ("Merging Corporation"), with and into SFMT, Inc., a
Delaware corporation ("Surviving Corporation").

        WHEREAS, the boards of directors of each of the Merging Corporation and
the Surviving Corporation have determined that it is in the best interests to
merge the Merging Corporation with and into the Surviving Corporation upon the
terms and subject to the conditions herein provided for the sole purpose of
effecting the reincorporation of the Merging Corporation into the State of
Delaware; 

        WHEREAS, the Surviving Corporation is a wholly-owned subsidiary of the
Merging Corporation, currently has no material assets and no liabilities and
will conduct no operations until such time as the merger is effected, at which
time the Surviving Corporation shall assume all assets, rights and liabilities
of the Merging Corporation, except for any liabilities of the Merging
Corporation originating from the California Franchise Tax Board as provided
herein. 

        NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:

        1. Upon the approval of the boards of directors of each of the Merging
Corporation and the Surviving Corporation and the holders of a majority of the
issued and outstanding shares of capital stock of the Merging Corporation, the
Merging Corporation shall merge with and into the Surviving Corporation. Upon
the completion of the merger, the separate existence of the Merging Corporation
shall cease and the Surviving Corporation shall be the surviving corporation in
the merger. The merger shall be effective upon filing a Certificate of
Ownership and Merger with the Secretary of State of the State of Delaware (the
"Effective Date").

        2. On the Effective Date, by virtue of the merger and without any action
on the part of the Merging Corporation or Surviving Corporation or the holders 
of any of the following securities; 

        (a) Each share of common stock of the Surviving Corporation issued and
     outstanding immediately prior to the Effective Date shall be surrendered
     and canceled, and all rights in respect thereof shall cease to exist, the
     certificate(s) therefor shall be canceled, and no further shares of the
     Surviving Corporation shall be issued in exchange therefor. Until so
     surrendered, the foregoing outstanding shares of the common stock of the
     Surviving Corporation shall be treated by the Surviving Corporation for all
     purposes as being canceled.

        (b) Each share of common stock of the Merging Corporation issued and
     outstanding immediately prior to the Effective Date shall be converted,
     upon surrender of the respective stock certificate(s) representing such
     shares, into and become one share of common stock, par value $0.0001 per
     share, of the Surviving Corporation (the ratio of 1:1 being hereinafter
     referred to as the "Conversion Ratio").

        3.  On the Effective Date, the Surviving Corporation shall assume all
the liabilities of the Merging Corporation, except for any liabilities of the
Merging Corporation originating from the California Franchise Tax Board, which
are specifically being assumed by San Francisco International Teleport, Inc., a
Delaware corporation duly qualified to transact business in California.

<PAGE>   3
        4.  On the Effective Date, the 1992 Stock Option Plan of the Merging
Corporation shall be and become the Stock Option Plan of the Surviving
Corporation, with such amendments and modifications thereto as the Board of
Directors of the Surviving Corporation shall thereafter deem appropriate.

        5.  On the Effective Date, each option to purchase common stock of the
Merging Corporation granted by the Merging Corporation to any of its directors,
officers, employees or consultants, either under the 1992 Stock Option Plan of
the Merging Corporation or otherwise, which option is outstanding immediately
prior to the Effective Date, shall be automatically converted into and become
an option in favor of such optionee to purchase the same number of shares of
the common stock of the Surviving Corporation, upon the same terms and
conditions, and at the same exercise price and in accordance with the same
vesting schedule.

        6.  The liabilities of the Merging Corporation assumed by the Surviving
Corporation in connection with the Merger shall include the obligations of the
Merging Corporation to any of its shareholders under any written agreement
allowing for an adjustment to the number of shares issued and sold to such
shareholder thereunder depending on whether the Merging Corporation raises at
least $7.5 million in additional capital through the sale of common stock of
the Merging Corporation within the one-year period following the initial
issuance and sale of shares to such shareholder thereunder. The obligation of
the Surviving Corporation, as so assumed, shall be to make a corresponding
adjustment in the number of its own shares of common stock held by any such
shareholder, the one-year period continuing to run from the date the shares of
the Merging Corporation were originally issued and sold, and not one
year from the Effective Date.

        7.  The boards of directors of each of the Merging Corporation and the
Surviving Corporation intend that the merger shall constitute a tax-free
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended.

        8.  The merger contemplated by this Agreement and Plan of Merger is
being accomplished for the sole purpose of "reincorporating" the business of
the Merging Corporation in the State of Delaware. The Surviving Corporation
shall have no material assets or liabilities prior to the Effective Date, at
which time it shall acquire and assume by operation of law all operating
functions, rights, assets and liabilities of the Merging Corporation. All
provisions of this Agreement and Plan of Merger should be construed and
interpreted to give effect to this purpose.

        9.  If, at any time prior to the Effective Date, events or
circumstances occur, which in the opinion of a majority of the board of
directors of either the Merging Corporation or the Surviving Corporation,
renders it inadvisable to consummate the merger, this Agreement and Plan of
Merger shall not become effective even though previously adopted by the
shareholders of the Merging Corporation as herein above provided. The filing of
the Certificate of Ownership and Merger with the Secretary of State of the State
of Delaware shall conclusively establish that no action to terminate this
Agreement and Plan of Merger has been taken by the board of directors of either
the Merging Corporation or the Surviving Corporation.

        IN WITNESS WHEREOF, the parties have executed this Agreement and Plan
of Merger this 13th day of October, 1993.

SAN FRANCISCO/MOSCOW TELEPORT, INC.             SFMT, INC.


by:  ALAN B. SLIFKA                             by:  ALAN B. SLIFKA
   ---------------------------------               ------------------------
     ALAN B. SLIFKA                                  ALAN B. SLIFKA




                                       2

<PAGE>   1
                                                                  Exhibit 3.4

                           CERTIFICATE OF AMENDMENT

                                    TO THE

                         CERTIFICATE OF INCORPORATION

                                      OF

                                  SFMT, INC.

        SFMT, INC., a Delaware corporation, HEREBY CERTIFIES AS FOLLOWS:

        1.      The name of the Corporation is SFMT, Inc.  The date of filing
of its Certificate of Incorporation with the Secretary of State of the State of 
Delaware was September 30, 1993.

        2.      This Certificate of Amendment sets forth an amendment to the
Certificate of Incorporation of the Corporation which was duly adopted by
holders of a majority of the outstanding stock of the Corporation entitled to
vote thereon in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.

        3.      The initial language of Paragraph FOURTH of the Certificate of
Incorporation of the Corporation is hereby amended to read as follows:

                                  "ARTICLE IV


        The total number of shares of capital stock which the Corporation shall
have authority to issue is 50,000,000 shares, of which there shall be
40,000,000  (forty million) shares of common stock, par value $0.0001 per 
share, and 10,000,000 (ten million) shares of preferred stock, par value 
$0.0001 per share."

        IN WITNESS WHEREOF, SFMT, INC. has caused this certificate to be signed
by Morris A. Sandler, its Executive Vice President, and attested by Neil
Molberger, its Secretary, this 12th day of January, 1995.

                                          SFMT, INC.



                                          By: /s/  MORRIS A. SANDLER
                                             ----------------------------------
                                             Title:  Executive Vice President

ATTEST:


/s/  NEIL MOLBERGER
- -----------------------------------
Secretary




 

<PAGE>   1
                                                                     Exhibit 3.5

                           CERTIFICATE OF AMENDMENT

                                    TO THE

                         CERTIFICATE OF INCORPORATION

                                      OF

                                  SFMT, INC.

        SFMT, INC., a Delaware corporation, HEREBY CERTIFIES AS FOLLOWS:

        1.      The name of the Corporation is SFMT, Inc.  The date of filing
of its Certificate of Incorporation with the Secretary of State of the State of 
Delaware was September 30, 1993.

        2.      This Certificate of Amendment sets forth an amendment to the
Certificate of Incorporation of the Corporation which was duly adopted by
the written consent of the holders of a majority of the outstanding stock of 
the Corporation entitled to vote thereon in accordance with the provisions of 
Sections 242 and 228 of the General Corporation Law of the State of Delaware.

        3.      Article FIRST of the Certificate of Incorporation of the
Corporation is hereby amended in full to be and read as follows:

        "FIRST: The name of the corporation is Global TeleSystems Group, Inc.
(the "Corporation")."

        IN WITNESS WHEREOF, SFMT, INC. has caused this certificate to be signed
by Garth Self, its Vice President and attested by N. S. Molberger, its
Secretary, this 22nd day of February, 1995.

                                          SFMT, INC.



                                         By: /s/ GARTH SELF        
                                             ----------------------------------
                                             Name: Garth Self
                                             Title:  Vice President

ATTEST:

/s/ N.S. MOLBERGER
- -----------------------------------
Secretary



<PAGE>   1
                                                                     Exhibit 3.6

                           CERTIFICATION OF AMENDMENT

                                     TO THE

                          CERTIFICATE OF INCORPORATION

                                       OF

                         GLOBAL TELESYSTEMS GROUP, INC.


        GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation, HEREBY
CERTIFIES AS FOLLOWS:

        1.      The name of the Corporation is Global TeleSystems, Group, Inc.
The date of filing of its Certificate of Incorporation with the Secretary of
State of the State of Delaware was September 30, 1993.

        2.      This Certificate of Amendment sets forth amendments to the
Certificate of Incorporation of the Corporation which were duly adopted by the
written consent of the holders of a majority of the outstanding stock of the
Corporation entitled to vote thereon in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.  Written
notice has been given in accordance with the provisions of Section 228 of the
General Corporation Law of the State of Delaware.

        3.      The first paragraph of Article FOURTH of the Certificate of
Incorporation of the Corporation is hereby amended to read as follows:

                                "ARTICLE FOURTH

        The total number of shares of capital stock which the Corporation shall
        have authority to issue is 70,000,000 (seventy million) shares, of which
        there shall be 60,000,000 (sixty million) shares of common stock, par
        value $0.0001 par share, and 10,000,000 (ten million) shares of
        preferred stock, par value $0.0001 per share."

        IN WITNESS WHEREOF, GLOBAL TELESYSTEMS GROUP, INC. has caused this
certificate to be signed by R. Michael Farmer, its Vice President and Chief
Financial Officer, and attested by Arnold Y. Dean, its Assistant Secretary,
this 16th day of October, 1996.

                                        GLOBAL TELESYSTEMS GROUP, INC.


                                        By:    /s/ R. MICHAEL FARMER
                                           --------------------------------
                                        Name:  R.  Michael Farmer
                                        Title: Vice President and
                                               Chief Financial Officer


ATTEST:


/s/ ARNOLD Y. DEAN
- ----------------------------
Assistant Secretary


<PAGE>   1
                                                                Exhibit 3.7


                                    BY-LAWS

                                       OF

                                   SFMT, Inc.

                            (A Delaware Corporation)

                                   ARTICLE I
                                    OFFICES

        Section 1.  The registered office of the Corporation in the state of
Delaware shall be in the city of Dover, county of Kent, and the name of the
resident agent in charge thereof is National Corporate Research, Ltd.

        Section 2.  The Corporation may also have offices at such other places,
both within and without the state of Delaware as the Board of Directors may
from time to time determine or the business of the Corporation may requires.


                                   ARTICLE II
                            MEETING OF STOCKHOLDERS

        Section 1.  All meetings of stockholders for the election of directors
shall be held at such place within or without the state of Delaware as may be
fixed from time to time by the Board of Directors and stated in the notice of
meeting or in a duly executed waiver of notice thereof.

        Section 2.  Annual meetings of stockholders shall be held on such date
and at such time as may be fixed from time to time by the Board of Directors
and stated in the notice of meeting or in a duly executed waiver of notice
thereof, at which the stockholders shall elect, by a Plurality vote, or such
other vote as may be required by the provisions of any agreement among the
stockholders of the Corporation, a Board of Directors and transact such other
business as may properly be brought before the meeting.

        Section 3.  Special meetings of stockholders may be held at such time
and place within or without the state of Delaware as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof.

        Section 4.  Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the President and Vice President acting
jointly, the Board of Directors, or the holders of not less than a majority of
all the shares entitled to vote at the meeting.

        Section 5.  Written notice of every meeting of stockholders, stating
the purpose or purposes for which the meeting is called, the date and time and
the place where it is to be held and, if the list of stockholders required by
Section 7, Article X is not to be at such place at least ten days prior to the
meeting, the place where such list will be, shall be served, not less than ten
nor more



                                       1
<PAGE>   2
than sixty days before the meeting, either personally or by mail, upon each
stockholder entitled to vote at such meeting and upon each stockholder of
record who, by reason of any action proposed at such meeting, would be entitled
to have his stock appraised if such action were taken.  If mailed, such notice
shall be deemed given when deposited in the mail directed to a stockholder at
his address as it shall appear on the books of the Corporation unless he shall
have filed with the Secretary of the Corporation a written request that notices
intended for him be mailed to some other address, in which case it shall be
mailed to the address designated in such request.  The attendance of any
stockholder at a meeting, in person or by proxy, shall constitute a waiver of
notice by him except when the stockholder attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of
any business because the meeting is not lawfully called or converted.

                                 ARTICLE III
                          QUORUM AND VOTING OF STOCK

        Section 1.  The holders of a majority of the shares of stock issued and
outstanding and entitled to vote, represented in person or by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute, or by the certificate of
incorporation of the Corporation or by the provisions of any agreement among
the stockholders of the Corporation.  If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
present in person or represented by proxy shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented.  At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified.   Notice of the adjourned meeting shall be given when required by
law.

        Section 2.  If a quorum is present, the affirmative vote of a majority
of the shares of stock represented at the meeting shall be the act of the
stockholders, unless the vote of a greater or lesser number of shares of stock
is required by law, or the certificate of incorporation of the Corporation, or
pursuant to Article II, Section 2, above, or pursuant to the provisions of any
agreement of the Stockholders of the corporation.  Cumulative voting shall not
be allowed.

        Section 3.  Each outstanding share of stock having voting power shall
be entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.  A stockholder may vote either in person or by proxy executed in
writing by the stockholder or by his duly authorized attorney-in-fact.

        Section 4.  The Board of Directors in advance of any stockholders'
meeting may appoint one or more inspectors to act at the meeting or any
adjournment thereof.  If inspectors are not so appointed, the person presiding
at a stockholders meeting may, and, on the request of any stockholder entitled
to vote thereat, shall, appoint one or more inspectors.  In case any person
appointed as inspector fails to appear or act, the vacancy may be filed by the
Board in advance of the meeting by the person presiding thereat.  Each
inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability.



                                      2



<PAGE>   3
        Section 5.  Whenever stockholders are required or permitted to take any
action by vote, such action may be taken without a meeting and without a vote, 
if a consent in writing setting forth the action so taken shall be signed by the
holders of outstanding shares having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.

                                   ARTICLE IV
                                   DIRECTORS

        Section 1.  The Board of Directors of the Corporation shall consist
initially of seven members.  The number of directors constituting the entire
Board may be changed from time to time by resolution adopted by the Board of
Directors or the stockholders, provided no decrease made in such number shall
shorten the term of any incumbent director.

        Section 2.  Directors shall be at least eighteen years of age and need
not be residents of the state of Delaware nor stockholders of the Corporation. 
The directors, other than the first Board of Directors, shall be elected at the
annual meeting of the stockholders and, except as hereinafter provided, each
director elected shall serve until the next succeeding annual meeting of
stockholders and until his successor shall have been elected and qualified. 
The first Board of Directors shall hold office until the first annual meeting of
stockholders.

        Section 3.  Subject to the provisions of any agreement among the
Stockholders of the Corporation, any or all of the directors may be removed,
with or without cause, at any time by the vote of the stockholders at a special
meeting of stockholders called for that purpose.   Any director may be removed
for cause by the action of the directors at a special meeting of the Board of
Directors called for that purpose.

        Section 4.  Subject to the provisions of any agreement among the
stockholders of the Corporation, vacancies and newly created directorships
resulting from an increase in the authorized number of directors may be filled
by a majority vote of the directors in office, although less than a quorum, or
by election by the stockholders at any meeting thereof.  A director elected to
fill a vacancy shall be elected for the unexpired portion of the term of his
predecessor in office.  A director elected to fill a newly created directorship
shall serve until the next succeeding annual meeting of stockholders and until
his successor shall have been elected and qualified.

        Section 5.  The business affairs of the Corporation shall be managed by
its Board of Directors, which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by statute or certificate of
incorporation of the Corporation or by these by-laws directed or required to be
exercised or done by the stockholders.

        Section 6.  The directors may keep the books of the Corporation, except
such as are required by law to be kept within the state, outside the state of
Delaware, at such place or places as they may from time to time determine.

        Section 7.  The Board of Directors, by the affirmative vote of a
majority of the directors, or such other number of directors required pursuant
to the provisions of any agreement among the stockholders, then in office, and
irrespective of any personal interest of any of its 



                                      3

<PAGE>   4
members, shall have authority to establish reasonable compensation of all
directors for services to the Corporation as directors, officers or otherwise.

        Section 8.   The directors may close the stock transfer books for a
period not exceeding twenty (20) days prior to stockholders' meetings or
payment of dividends or for such other reasons as they may see fit.


                                   ARTICLE V
                       MEETINGS OF THE BOARD OF DIRECTORS

        Section 1.  Meetings of the Board of Directors, regular or special, may
be held either within or without the state of Delaware, at such places as the
Board may from time to time determine.

        Section 2.  Regular meetings of the Board of Directors may be held
without notice at such time as the Board may from time to time determine.
Special meetings of the Board of Directors shall be held whenever called at the
direction of the President or any of the directors then in office.  The
Secretary or some other officer or director of the Corporation shall give
notice to each director of the time and place of each special meeting by
mailing the same at least two days before the meeting or telecopying or
telephoning the same not later than one day before the meeting, at the
residence address of each director or at his usual place of business, or such
shorter time as may be permitted by the General Corporation Law of the State of
Delaware and by the certificate of incorporation of the Corporation.  Special
meetings of the Board shall be held at such place, within or without the State
of Delaware as shall be provided in the call for the meeting.

        Section 3.  Notice of a meeting need not be given to any director who
submits a signed waiver of notice, whether before or after the meeting, or who
attends the meeting without protesting prior thereto or at its commencement,
the lack of notice.  Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board of Directors need be specified
in the notice or waiver of notice of such meeting.

        Section 4.  A majority of the entire Board of Directors shall
constitute a quorum for the transaction of business unless a greater or lesser
number is required by law or by the certificate of incorporation of the
Corporation.  The vote of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board of Directors, unless
the vote of a greater number is required by law or by the certificate of
incorporation of the Corporation or a larger number of directors shall be
required under the provisions of any agreement among the stockholders.  If a
quorum shall not be present at any meeting of directors, the directors present
may adjourn the meeting from time to time, without notice other than 
announcement at the meeting, until a quorum shall be present.

        Section 5.  Any action required or permitted to be taken by the Board
of Directors or any committee thereof, may be taken without a meeting if all
members of the Board of Directors, or the committee, consent thereto in writing
and the writing or writings are filed with the minutes of the proceedings of
the Board of Directors or the committee.




                                       4
<PAGE>   5
        Section 6.  Any one or more members of the Board of Directors, or any
committee thereof, may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment allowing
all persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.


                                   ARTICLE VI
                      COMMITTEES OF THE BOARD OF DIRECTORS

        Section 1.  The Board of Directors, by a resolution passed by a vote of
a majority of the whole Board, may appoint an Executive Committee and such
other committees, each consisting of one or more directors.  To the extent
permitted by law and as directed by resolutions adopted by the Board of
Directors from time to time, the Executive Committee shall have and exercise
the powers of the Board, during the intervals between meetings of the Board, in
the management of the property, business and affairs of the Corporation.


                                  ARTICLE VII
                                    NOTICES

        Section 1.  Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be 
given to any director or stockholder, such notice may be given in writing, 
either personally or by courier, facsimile or telegram or by mail, addressed 
to such director or stockholder, at his address as it appears on the records 
of the Corporation, with postage thereon prepaid in which case such notice 
shall be deemed to be given at the time when the same shall be deposited in 
the United States Mail.

        Section 2.  Whenever any notice of a meeting is required to be given
under the provisions of the statutes or under provisions of the certificate of
incorporation or these by-laws, a waiver thereof in writing signed by the
person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice.
Neither the business to be transacted at nor the purpose of the meeting need
be specified in any written waiver of notice.


                                  ARTICLE VIII
                                    OFFICERS

        Section 1.  The officers of the Corporation shall be appointed by the
Board of Directors and shall be a President, one or more Vice Presidents, a
Treasurer and a Secretary.  The Board of Directors may also appoint one or more
Assistant Secretaries and Assistant Treasurers.

        Section 2.  The Board of Directors, at its first meeting after each
annual meeting of stockholders, shall appoint a President, a Vice President, a
Treasurer and a Secretary, none of whom need to be a member of the Board.  Any
two or more offices may be held by the same person, except that there shall
always be two person who hold offices which entitle them to sign instruments
and stock certificates.



                                       5
<PAGE>   6


        Section 3.  The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board of Directors.

        Section 4.  The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors.

        Section 5.  The officers of the Corporation, unless removed by the
Board of Directors as herein provided, shall hold office until their successors
are chosen and qualify or until their earlier death, resignation or removal.
Any officer elected or appointed by the Board of Directors may be removed at 
any time, with or without cause, by the affirmative vote of a majority of the
Board of Directors. Any officer may resign his office at any time upon written
notice to the Corporation.  Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.

        Section 6.  In the event of the absence of any officer of the
Corporation or for any other reason that the Board of Directors may deem
sufficient, the Board of Directors may at any time or from time to time
delegate all or any part of the powers or duties of any officer to any other
officer or officers or to any director or directors.


                                  PRESIDENT

        Section 7.  The President shall be the chief executive officer of the
Corporation and as such shall exercise such authority and control over the
affairs of the Corporation, subject to the control of the Board of Directors,
as are implied by the position of chief executive officers.  The President shall
preside at all meetings of the Board of Directors and stockholders of the
Corporation and shall perform such other duties as may be assigned to him by
the Board of Directors.


                             THE VICE PRESIDENTS

        Section 8.  If there shall be appointed a Vice President, or Vice
Presidents, each of the Vice Presidents shall perform such duties and have such
other powers as may be prescribed by the Board of Directors or the President,
under whose supervision he or they shall be.


                   THE SECRETARY AND ASSISTANT SECRETARIES


        Section 9.  The Secretary shall record all the proceedings of the
meetings of the stockholders and of the Board of Directors in a book to be kept
for that purpose.  He shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be.  He shall have custody of the
corporate seal of the Corporation and he, or an Assistant Secretary, shall have
authority to affix the same to any instrument requiring it and, when so
affixed, it may be attested by his signature or by the signature 



                                     6


<PAGE>   7
of such Assistant Secretary.  The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his signature.


        Section 10.  The Assistant Secretary or, if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors, shall,
in the absence or disability of the Secretary, perform the duties and exercise
the powers of the Secretary and shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.


                    THE TREASURER AND ASSISTANT TREASURERS

        Section 11.  The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors.

        Section 12.  The Treasurer shall disburse the funds of the Corporation
as may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.

        Section 13.  If required by the Board of Directors, the Treasurer shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under his control belonging to the Corporation.

        Section 14.  The Assistant Treasurer, or, if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.


                                  ARTICLE IX
                            CERTIFICATE FOR SHARES


        Section 1.  Every holder of shares of stock in the Corporation shall be
entitled to have a certificate certifying the number of shares owned by him in
the Corporation.  Each such certificate shall be numbered and entered in the
books of the Corporation as they are issued.  They shall exhibit the holder's
name and the number of shares and shall be signed by the Chairman or any Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer of the Corporation and may be sealed with the seal of the
Corporation or a facsimile



                                      7


<PAGE>   8
thereof. When the Corporation is authorized to issue shares of more than one
class there shall be set forth upon the face or back of the certificate a
statement that the Corporation will furnish to any shareholder upon request and
without charge, a full statement of the designation, relative rights,
preferences, and limitations of the shares of each class authorized to be
issued, and, if the Corporation is authorized to issue any class of preferred
shares in series, the designation, relative rights, preferences and limitations
of each such series so far as the same have been fixed and the authority of the
Board of Directors to designate and fix the relative rights, preferences and
limitations of other series.

        Section 2.  The signatures of the officers of the Corporation upon a
certificate may be facsimiles if the certificate is countersigned by a
transfer agent or registered by a registrar other than the Corporation itself
or an employee of the Corporation. In case any officer who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of 
issue.

                               LOST CERTIFICATES

        Section 3.  The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate theretofore issued by
the Corporation alleged by have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate has been lost or 
destroyed. When authorizing such issue of a new certificate, the Board of 
Directors, in its discretion and as a condition precedent to the issuance 
thereof, may prescribe such terms and conditions as it deems expedient, and may 
require such indemnities as it deems adequate, to protect the Corporation from 
any claim that may be made against it with respect to any such certificate 
alleged to have been lost or destroyed.

                              TRANSFERS OF SHARES

        Section 4.  Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto, and
the old certificate canceled and the transaction recorded upon the books of the 
Corporation.

                               FIXING RECORD DATE

        Section 5.  For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to or dissent from any proposal without a meeting, or for
the purpose of determining stockholders entitled to receive payment of any
dividend or the allotment of any rights, or for the purpose of any other
action, the Board of Directors shall fix, in advance, a date as the record date
for any such determination of stockholders. Such date shall not be more than
sixty nor less than ten days before the date of any meeting nor more than sixty 
days prior to any other action. When a determination of stockholders of record 
entitled to notice of or to vote at any meeting of stockholders has been 




                                       8
<PAGE>   9
made as provided in this section, such determination shall apply to any
adjournment thereof, unless the Board fixes a new record date for the 
adjourned meeting.

                            REGISTERED STOCKHOLDERS
     
        Section 6.  The Corporation shall be entitled to recognize the 
exclusive right of a person registered on its books as the owner of shares to
receive dividends and to vote as such owner, and shall be entitled to hold
liable for calls and assessments a person registered on its books as the owner,
and the Corporation shall not be bound to recognize any equitable or other claim
to or interest in such share or shares on the part of any other person, whether
or not it shall have express or other notice thereof, except as otherwise
provided by the laws of Delaware.


                              LIST OF STOCKHOLDERS

        Section 7.  A list of stockholders as of the record date, certified by
the corporate officer responsible for its preparation or by a transfer agent
shall be produced at any meeting upon the request thereat or prior thereto of
any stockholder.  If the right to vote at any meeting is challenged, the
inspectors of election or person presiding thereat, shall require such list of
stockholders to be produced as evidence of the right of the persons challenged
to vote at such meeting and all persons who appear from such list to be
stockholders entitled to vote thereat may vote at such meeting.


                                   ARTICLE X
                                INDEMNIFICATION

        Section 1.  Any and every person made a party to any action, suite or
proceeding by reason of the fact that he, his testator or intestate, is or was
a director, officer, employee or agent of this Corporation, or of any
corporation, partnership joint venture, trust or other enterprise which he
served as such at the request of this Corporation, shall be indemnified by the
Corporation, to the fullest extent permissible under the laws of the state of
Delaware, against any and all reasonable expenses (including attorneys' fees),
judgement, fines and amounts paid in settlement actual and necessarily incurred
by him in connection with the defense of any such action, suit or proceeding.
Such right of indemnification shall not be deemed exclusive of any other
rights to which such person may be entitled apart from this provision.
The Board of Directors is authorized to provide for the discharge of the
Corporation's responsibilities under this Article by way of insurance or any
other feasible and proper means.


                                   ARTICLE XI
                               GENERAL PROVISIONS

                                   DIVIDENDS

        Section 1. Subject to the provisions of the certificate of
incorporation relating thereto, if any, dividends may be declared by the Board
of Directors at any regular or special




                                       9
<PAGE>   10
meeting, pursuant to law.  Dividends may be paid in cash, in shares of the
capital stock or in the Corporation's bonds or its property, including the
shares or bonds of other corporations, subject to any provisions of law and of
the certificate of incorporation.

        Section 2.  Before payment of any dividend, there may be set aside out
of any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion think proper as a
reserve fund to meet contingencies or for equalizing dividends or for repairing
or maintaining any property of the Corporation or for such other purpose as the
directors shall deem to be in the best interest of the Corporation and the
directors may modify or abolish any such reserve in the manner in which it was
created.

                                     CHECKS

        Section 3.  All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.

                                  FISCAL YEAR

        Section 4.  The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.

                                      SEAL

        Section 5.  The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its organization and the words "Corporate Seal
Delaware."  The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.

                                  ARTICLE XII
                                   AMENDMENTS

        These by-laws may be amended or repealed or new by-laws may be adopted
by the stockholders entitled to vote or by the Board of Directors.

                                     * * *



                                       10

<PAGE>   1
                                                                     Exhibit 4.4


                                    INDENTURE


                           DATED AS OF AUGUST 19, 1997


                                      AMONG


                     HERMES EUROPE RAILTEL B.V., AS ISSUER,



                         GLOBAL TELESYSTEMS GROUP, INC.


                                       AND


                        THE BANK OF NEW YORK, AS TRUSTEE

                              --------------------
                                  $265,000,000

                          11-1/2% SENIOR NOTES DUE 2007
                     11-1/2% SENIOR NOTES DUE 2007, SERIES B
<PAGE>   2
                              CROSS-REFERENCE TABLE

<TABLE>
<CAPTION>
TRUST INDENTURE                                                                                 INDENTURE
   ACT Section                                                                                   Section
   -----------                                                                                   -------
<S>                                                                                     <C>
Section  310(a)(1)...................................................................                7.10
      (a)(2).........................................................................                7.10
      (a)(3).........................................................................                N.A.
      (a)(4).........................................................................                N.A.
      (a)(5).........................................................................         7.08, 7.10.
      (b)............................................................................   7.08; 7.10; 10.02
      (c)............................................................................                N.A.
Section  311(a)......................................................................                7.11
      (b)............................................................................                7.11
      (c)............................................................................                N.A.
Section 312(a).......................................................................                2.05
      (b)............................................................................               10.03
      (c)............................................................................               10.03
Section 313(a).......................................................................                7.06
      (b)(1).........................................................................                7.06
      (b)(2).........................................................................                7.06
      (c)............................................................................         7.06; 10.02
      (d)............................................................................                7.06
Section 314(a).......................................................................   4.07; 4.09; 10.02
      (b)............................................................................               11.02
      (c)(1).........................................................................               10.04
      (c)(2).........................................................................               10.04
      (c)(3).........................................................................                N.A.
      (d)............................................................................               11.03
      (e)............................................................................               10.05
      (f)............................................................................                N.A.
Section 315(a).......................................................................              7.01(b)
      (b)............................................................................         7.05; 10.02
      (c)............................................................................              7.01(a)
      (d)............................................................................              7.01(c)
      (e)............................................................................                6.11
Section 316(a)(last sentence)........................................................                2.09
      (a)(1)(A)......................................................................                6.05
      (a)(1)(B)......................................................................                6.04
      (a)(2).........................................................................                N.A.
      (b)............................................................................                6.07
      (c)............................................................................                9.04
Section 317(a)(1)....................................................................                6.08
      (a)(2).........................................................................                6.09
      (b)............................................................................                2.04
Section 318(a).......................................................................               10.01
</TABLE>

- --------------------
N.A. means Not Applicable.

NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE>   3
                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
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                                   ARTICLE ONE
                   DEFINITIONS AND INCORPORATION BY REFERENCE

<S>                 <C>                                                                                    <C>
SECTION 1.01.       Definitions...............................................................................1
SECTION 1.02.       Incorporation by Reference of Trust Indenture Act.........................................18
SECTION 1.03.       Rules of Construction.....................................................................19

                                   ARTICLE TWO
                                 THE SECURITIES

SECTION 2.01.       Form and Dating...........................................................................19
SECTION 2.02.       Execution and Authentication..............................................................20
SECTION 2.03.       Registrar and Paying Agent................................................................21
SECTION 2.04.       Paying Agent To Hold Assets in Trust......................................................21
SECTION 2.05.       Securityholder Lists......................................................................22
SECTION 2.06.       Transfer and Exchange.....................................................................22
SECTION 2.07.       Replacement Securities....................................................................22
SECTION 2.08.       Outstanding Securities....................................................................23
SECTION 2.09.       Treasury Securities.......................................................................23
SECTION 2.10.       Temporary Securities......................................................................23
SECTION 2.11.       Cancellation..............................................................................23
SECTION 2.12.       Defaulted Interest........................................................................24
SECTION 2.13.       CUSIP Number..............................................................................24
SECTION 2.14.       Deposit of Moneys.........................................................................24
SECTION 2.15.       Book-Entry Provisions for Global Securities...............................................24
SECTION 2.16.       Registration of Transfers and Exchanges...................................................25

                                  ARTICLE THREE
                                   REDEMPTION

SECTION 3.01.       Notices to Trustee........................................................................29
SECTION 3.02.       Selection of Securities To Be Redeemed....................................................29
SECTION 3.03.       Notice of Redemption......................................................................29
SECTION 3.04.       Effect of Notice of Redemption............................................................30
SECTION 3.05.       Deposit of Redemption Price...............................................................30
SECTION 3.06.       Securities Redeemed in Part...............................................................31

                                  ARTICLE FOUR
                                    COVENANTS

SECTION 4.01.       Payment of Securities.....................................................................31
SECTION 4.02.       Maintenance of Office or Agency...........................................................31
SECTION 4.03.       Corporate Existence.......................................................................31
</TABLE>

                                      -i-
<PAGE>   4
<TABLE>
<CAPTION>
                                                                                                            Page
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<S>                 <C>                                                                                    <C>
SECTION 4.04.       Payment of Taxes and Other Claims.........................................................32
SECTION 4.05.       Notice of Defaults........................................................................32
SECTION 4.06.       Maintenance of Properties and Insurance...................................................32
SECTION 4.07.       Compliance Certificate....................................................................33
SECTION 4.08.       Waiver of Stay, Extension or Usury Laws...................................................33
SECTION 4.09.       Provision of Financial Information........................................................33
SECTION 4.10.       Change of Control.........................................................................34
SECTION 4.11.       Limitation on Restricted Payments.........................................................34
SECTION 4.12.       Limitation on Incurrence of Indebtedness..................................................36
SECTION 4.13.       Limitations on Restrictions Affecting Restricted Subsidiaries.............................38
SECTION 4.14.       Designation of Unrestricted Subsidiaries..................................................39
SECTION 4.15.       Limitation on Liens.......................................................................40
SECTION 4.16.       Limitation on Asset Sales.................................................................40
SECTION 4.17.       Limitation on Transactions with Affiliates................................................41
SECTION 4.18.       Limitation on Issuances of Guarantees by Restricted Subsidiaries..........................42
SECTION 4.19.       Limitation on the Issuance and Sale of Capital Stock of Restricted
                      Subsidiaries............................................................................43
SECTION 4.20.       Additional Amounts........................................................................43
SECTION 4.21.       Deposit of Funds with Escrow Agent........................................................43

                                  ARTICLE FIVE
                         MERGERS; SUCCESSOR CORPORATION

SECTION 5.01.       Mergers, Sale of Assets, etc..............................................................44
SECTION 5.02.       Successor Corporation Substituted.........................................................44

                                   ARTICLE SIX
                              DEFAULT AND REMEDIES

SECTION 6.01.       Events of Default.........................................................................45
SECTION 6.02.       Acceleration..............................................................................46
SECTION 6.03.       Other Remedies............................................................................47
SECTION 6.04.       Waiver of Past Default....................................................................47
SECTION 6.05.       Control by Majority.......................................................................48
SECTION 6.06.       Limitation on Suits.......................................................................48
SECTION 6.07.       Rights of Holders To Receive Payment......................................................48
SECTION 6.08.       Collection Suit by Trustee................................................................48
SECTION 6.09.       Trustee May File Proofs of Claim..........................................................49
SECTION 6.10.       Priorities................................................................................49
SECTION 6.11.       Undertaking for Costs.....................................................................49

                                  ARTICLE SEVEN
                                     TRUSTEE

SECTION 7.01.       Duties of Trustee.........................................................................50
SECTION 7.02.       Rights of Trustee.........................................................................51
SECTION 7.03.       Individual Rights of Trustee..............................................................52
SECTION 7.04.       Trustee's Disclaimer......................................................................52
</TABLE>

                                      -ii-
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<TABLE>
<CAPTION>
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<S>                 <C>                                                                                    <C>
SECTION 7.05.       Notice of Defaults........................................................................52
SECTION 7.06.       Reports by Trustee to Holders.............................................................52
SECTION 7.07.       Compensation and Indemnity................................................................52
SECTION 7.08.       Replacement of Trustee....................................................................53
SECTION 7.09.       Successor Trustee by Merger, etc..........................................................54
SECTION 7.10.       Eligibility; Disqualification.............................................................54
SECTION 7.11.       Preferential Collection of Claims Against Company.........................................54

                                  ARTICLE EIGHT
                             DISCHARGE OF INDENTURE

SECTION 8.01.       Termination of Company's Obligations......................................................55
SECTION 8.02.       Application of Trust Money................................................................56
SECTION 8.03.       Repayment to Company......................................................................56
SECTION 8.04.       Reinstatement.............................................................................56

                                  ARTICLE NINE
                       AMENDMENTS, SUPPLEMENTS AND WAIVERS

SECTION 9.01.       Without Consent of Holders................................................................57
SECTION 9.02.       With Consent of Holders...................................................................57
SECTION 9.03.       Compliance with Trust Indenture Act.......................................................58
SECTION 9.04.       Revocation and Effect of Consents.........................................................59
SECTION 9.05.       Notation on or Exchange of Securities.....................................................59
SECTION 9.06.       Trustee To Sign Amendments, etc...........................................................59

                            ARTICLE TEN MISCELLANEOUS

SECTION 10.01.      Trust Indenture Act Controls..............................................................60
SECTION 10.02.      Notices...................................................................................60
SECTION 10.03.      Communications by Holders with Other Holders..............................................62
SECTION 10.04.      Certificate and Opinion as to Conditions Precedent........................................62
SECTION 10.05.      Statements Required in Certificate or Opinion.............................................62
SECTION 10.06.      Rules by Trustee, Paying Agent, Registrar.................................................63
SECTION 10.07.      Governing Law.............................................................................63
SECTION 10.08.      No Recourse Against Others................................................................63
SECTION 10.09.      Successors................................................................................63
SECTION 10.10.      Counterpart Originals.....................................................................63
SECTION 10.11.      Severability..............................................................................63
SECTION 10.12.      No Adverse Interpretation of Other Agreements.............................................64
SECTION 10.13.      Legal Holidays............................................................................64
SECTION 10.14.      Agent for Service; Submission to Jurisdiction; Waiver of Immunities.......................64
SECTION 10.15.      Judgment Currency.........................................................................64
</TABLE>

                                     -iii-
<PAGE>   6
<TABLE>
<CAPTION>
                                 ARTICLE ELEVEN
                             COLLATERAL AND SECURITY
                                                                                                            Page
                                                                                                            ----
<S>     <C>                                                                                                <C>
SECTION 11.01.      Escrow Agreement..........................................................................65
SECTION 11.02.      Recording and Opinions....................................................................65
SECTION 11.03.      Release of Collateral.....................................................................66
SECTION 11.04.      Authorization of Actions to Be Taken by the Trustee Under the
                      Escrow Agreement........................................................................66
SECTION 11.05.      Authorization of Receipt of Funds by the Trustee Under the Escrow
                      Agreement...............................................................................67
SECTION 11.06.      Termination of Security Interest..........................................................67

                                 ARTICLE TWELVE
                   COVENANT OF GLOBAL TELESYSTEMS GROUP, INC.

SECTION 12.01.      GTS Contribution..........................................................................67

SIGNATURES..................................................................................................S-1

EXHIBIT A         Form of Series A Security.................................................................A-1
EXHIBIT B         Form of Series B Security.................................................................B-1
EXHIBIT C         Form of Legend for Global Securities......................................................C-1
EXHIBIT D         Form of Transfer Certificate..............................................................D-1
EXHIBIT E         Form of Transfer Certificate for Institutional Accredited Investors.......................E-1
EXHIBIT F         Form of Transfer Certificate for Regulation S Transfers...................................F-1
</TABLE>

                                      -iv-
<PAGE>   7
                  INDENTURE dated as of August 19, 1997, among HERMES EUROPE
RAILTEL B.V., a Netherlands limited company (the "Company"), GLOBAL TELESYSTEMS
GROUP, INC., (with respect only to Article Twelve) and THE BANK OF NEW YORK, a
New York banking corporation, as Trustee.

                  Each party hereto agrees as follows for the benefit of each
other party and for the equal and ratable benefit of the Holders of the
Securities:


                                   ARTICLE ONE

                   DEFINITIONS AND INCORPORATION BY REFERENCE


SECTION 1.01. Definitions.

                  "Acquired Indebtedness" means Indebtedness of a Person (a)
assumed in connection with an Acquisition from such Person or (b) existing at
the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary; provided,
however, that such Indebtedness was not Incurred in connection with, or in
contemplation of, such Acquisition, such Person becoming a Restricted Subsidiary
or such merger or consolidation.

                  "Acquired Person" means, with respect to any specified Person,
any other Person which merges with or into or becomes a Subsidiary of such
specified Person.

                  "Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary to any other Person, or any acquisition or purchase of
Equity Interests of any other Person by the Company or any Restricted
Subsidiary, in either case pursuant to which such Person shall become a
Restricted Subsidiary or shall be consolidated, merged with or into the Company
or any Restricted Subsidiary or (ii) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.

                  "Additional Interest" has the meaning provided in Section 4(a)
of the Registration Rights Agreement.

                  "Affiliate" of any specified person means any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such person,
whether through the ownership of voting securities, by agreement or otherwise.

                  "Agent" means any Registrar, Paying Agent or co-Registrar.

                  "Asset Sale" means any direct or indirect sale, conveyance,
transfer, lease (that has the effect of a disposition) or other disposition
(including, without limitation, any merger, consolidation or sale-leaseback
transaction) to any Person other than the Company or a Restricted Subsidiary, in
one transaction or a series of
<PAGE>   8
                                      -2-

related transactions, of (i) any Equity Interest of any Restricted Subsidiary;
(ii) any material license, franchise or other authorization of the Company or
any Restricted Subsidiary; (iii) any assets of the Company or any Restricted
Subsidiary which constitute substantially all of an operating unit or line of
business of the Company or any Restricted Subsidiary; or (iv) any other property
or asset of the Company or any Restricted Subsidiary outside of the ordinary
course of business (including the receipt of proceeds paid on account of the
loss of or damage to any property or asset and awards of compensation for any
asset taken by condemnation, eminent domain or similar proceedings). For the
purposes of this definition, the term "Asset Sale" shall not include (a) any
transaction consummated in compliance with Section 5.01 and the creation of any
Lien not prohibited by Section 4.15; provided, however, that any transaction
consummated in compliance with Section 5.01 involving a sale, conveyance,
assignment, transfer, lease or other disposal of less than all of the properties
or assets of the Company and the Restricted Subsidiaries shall be deemed to be
an Asset Sale with respect to the properties or assets of the Company and
Restricted Subsidiaries that are not so sold, conveyed, assigned, transferred,
leased or otherwise disposed of in such transaction; (b) sales of property or
equipment that has become worn out, obsolete or damaged or otherwise unsuitable
for use in connection with the business of the Company or any Restricted
Subsidiary, as the case may be; and (c) any transaction consummated in
compliance with Section 4.11. In addition, solely for purposes of Section 4.16,
any sale, conveyance, transfer, lease or other disposition of any property or
asset, whether in one transaction or a series of related transactions, involving
assets with a Fair Market Value not in excess of $1.0 million in any fiscal year
shall be deemed not to be an Asset Sale.

                  "Bankruptcy Law" see Section 6.01.

                  "Basket" see Section 4.11.

                  "Board of Directors" means, with respect to any Person, the
Board of Directors of such Person (or comparable governing body), or any
authorized committee of that Board (it being understood that the Board of
Directors of the Company shall be its Board of Supervisory Directors).

                  "Board Resolution" means, with respect to any Person, a duly
adopted resolution of the Board of Directors of such Person.

                  "Business Day" means a day (other than a Saturday or Sunday)
on which the Depository and banks in New York are open for business.

                  "Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease that would at such time be so required to be capitalized on the
balance sheet in accordance with GAAP.

                  "Cash Equivalents" means: (a) U.S. dollars; (b) securities
issued or directly and fully guaranteed or insured by the U.S. government or any
agency or instrumentality thereof having maturities of not more than six months
from the date of acquisition; provided, however, that securities deposited in
the Escrow Account may have longer maturities; (c) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any commercial bank having capital
and surplus in excess of $500 million; provided, however, that securities
deposited in the Escrow Account may have longer maturities; (d) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (b) and (c) entered into with any financial
institution meeting the qualifications specified in clause (c) above; and (e)
commercial paper rated P-1, A-1 or the equivalent thereof by Moody's Investors
<PAGE>   9
                                       -3-

Service, Inc. or Standard & Poor's Ratings Group, respectively, and in each case
maturing within six months after the date of acquisition.

                  "Change of Control" shall mean the occurrence of any of the
following events (whether or not approved by the Board of Directors of the
Company): (a) any Person or group, excluding Permitted Holders, is or becomes
the beneficial owner, directly or indirectly, of Voting Equity Interests
representing 35% or more of the total voting power of the Voting Equity
Interests of the Company at a time when the Permitted Holders together (x) own
Voting Equity Interests representing a lesser percentage of the total voting
power of the Voting Equity Interests of the Company, than such Person or group
(for purposes of determining the percentage of the Voting Equity Interests of
such Person or group, the holdings of the Permitted Holders who are part of such
Person or group shall not be counted in the Voting Equity Interests of such
Person or group) or (y) do not hold the power to elect a majority of the members
of the Board of Directors of the Company; (b) any Person or group is or becomes
the beneficial owner directly or indirectly, of Voting Equity Interests
representing 50% or more of the total voting power of the Voting Equity
Interests of GTS or has the power, directly or indirectly, to elect a majority
of the members of the Board of Directors of GTS; (c) the Company consolidates
with, or merges with or into, another Person or the Company or one or more
Restricted Subsidiaries sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of the assets of the Company and the
Restricted Subsidiaries, taken as a whole, to any Person (other than a Wholly
Owned Restricted Subsidiary), or any Person consolidates with, or merges with or
into, the Company, in any such event other than pursuant to a transaction in
which the Person or Persons that "beneficially owned," directly or indirectly,
Voting Equity Interests representing a majority of the total voting power of the
Voting Equity Interests of the Company immediately prior to such transaction,
"beneficially own," directly or indirectly, Voting Equity Interests representing
a majority of the total voting power of the Voting Equity Interests of the
surviving or transferee Person; (d) GTS consolidates with, or merges with or
into, another Person or GTS or one or more of its Subsidiaries sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of the
assets of GTS and its Subsidiaries, taken as a whole, to any Person (other than
a wholly owned Subsidiary of GTS), or any Person consolidates with, or merges
with or into, GTS, in any such event other than pursuant to a transaction in
which the Person or Persons that "beneficially owned," directly or indirectly,
Voting Equity Interests representing a majority of the total voting power of the
Voting Equity Interests of GTS immediately prior to such transaction,
"beneficially own," directly or indirectly Voting Equity Interests representing
a majority of the total voting power of the Voting Equity Interests of the
surviving or transferee Person; (e) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by the
Board of Directors of the Company or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason (other than by action of the Permitted Holders)
to constitute a majority of the Board of Directors of the Company, then in
office; (f) during any consecutive two year period, individuals who at the
beginning of such period constituted the Board of Directors of GTS (together
with any new directors whose election by the Board of Directors of GTS or whose
nomination for election by the stockholders of GTS was approved by a vote of a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of GTS then in office; or (g) there shall occur the
liquidation or dissolution of the Company or GTS. For purposes of this
definition, (I) "group" has the meaning under Section 13(d) and 14(d) of the
Exchange Act or any successor provision to either of the foregoing, including
any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act, and
(II) "beneficial ownership" has the meaning set forth in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the
<PAGE>   10
                                      -4-

right to acquire, whether such right is exercisable immediately or only after
the passage of time, upon the happening of an event or otherwise.

                  "Change of Control Date" see Section 4.10.

                  "Collateral" has the meaning set forth in Section 6 of the
Escrow Agreement.

                  "Company" means the Person named as the "Company" in the first
paragraph of this Indenture until a successor shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor.

                  "Company Request" or "Company Order" means a written request
or order signed in the name of the Company by two Officers or by an Officer and
an Assistant Treasurer or an Assistant Secretary, and delivered to the Trustee.

                  "Consolidated Income Tax Expense" means, with respect to any
period, the provision for federal, state, local and foreign income taxes payable
by the Company and the Restricted Subsidiaries for such period as determined on
a consolidated basis in accordance with GAAP.

                  "Consolidated Interest Expense" means, with respect to any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, including, without limitation, (a) any
amortization of debt discount, (b) the net cost under Interest Rate Protection
Obligations (including any amortization of discounts), (c) the interest portion
of any deferred payment obligation, (d) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and (e) all capitalized interest and all accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and the Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with GAAP
and (iii) dividends and distributions in respect of Disqualified Equity
Interests actually paid in cash by the Company or any Restricted Subsidiary
(other than to the Company or another Restricted Subsidiary) during such period
as determined on a consolidated basis in accordance with GAAP.

                  "Consolidated Net Income" means, with respect to any period,
the net income of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such net income, by excluding, without
duplication, (a) other than for purposes of calculating the Basket, all
extraordinary gains or losses for such period, (b) other than for purposes of
calculating the Basket, all gains or losses from the sales or other dispositions
of assets out of the ordinary course of business (net of taxes, fees and
expenses relating to the transaction giving rise thereto) for such period; (c)
that portion of such net income derived from or in respect of investments in
Persons other than Restricted Subsidiaries, except to the extent actually
received in cash by the Company or any Restricted Subsidiary (subject, in the
case of any Restricted Subsidiary, to the provisions of clause (f) of this
definition); (d) the portion of such net income (or loss) allocable to minority
interests in any Person (other than a Restricted Subsidiary) for such period,
except to the extent the Company's allocable portion of such Person's net income
for such period is actually received in cash by the Company or any Restricted
Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions
of clause (f) of this definition); (e) the net income (or loss) of any other
Person combined with the Company or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination;
and (f) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
<PAGE>   11
                                      -5-

of that income is not at the time (regardless of any waiver) permitted, directly
or indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its Equity Interest holders.

                  "Consolidated Operating Cash Flow" means, with respect to any
period, Consolidated Net Income for such period increased (without duplication),
to the extent deducted in calculating such Consolidated Net Income, by (a)
Consolidated Income Tax Expense for such period; (b) Consolidated Interest
Expense for such period; and (c) depreciation, amortization and any other
non-cash items for such period (other than any non-cash item which requires the
accrual of, or a reserve for, cash charges for any future period) of the Company
and the Restricted Subsidiaries, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing determined
on a consolidated basis in accordance with GAAP minus non-cash items to the
extent they increase Consolidated Net Income (including the partial or entire
reversal of reserves taken in prior periods) for such period.

                  "Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 10.02 or such other address as the
Trustee may give notice to the Company.

                  "CT Corporation System" see Section 10.14.

                  "Cumulative Operating Cash Flow" means, as at any date of
determination, the positive cumulative Consolidated Operating Cash Flow realized
during the period commencing on the Issue Date and ending on the last day of the
most recent fiscal quarter immediately preceding the date of determination for
which consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.

                  "Currency Agreement" shall mean any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement, which may
include the use of derivatives, designed to protect the Company or any
Restricted Subsidiary against fluctuations in currency values.

                  "Custodian" see Section 6.01.

                  "Debt to Annualized Operating Cash Flow Ratio" means the ratio
of (a) the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") to (b) two times the Consolidated Operating Cash Flow for
the latest two fiscal quarters for which financial information is available
immediately preceding such Determination Date (the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the Measurement
Period immediately prior to the relevant Determination Date, (I) any Person that
is a Restricted Subsidiary on the Determination Date (or would become a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed to have been a Restricted Subsidiary at all times during
such Measurement Period, (II) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed not to
have been a Restricted Subsidiary at any time during such Measurement Period,
and (III) if the Company or any Restricted Subsidiary shall have in any manner
(x) acquired (through an Acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (by way of an Asset
Sale or the termination or discontinuance of activities constituting such
operating business) any operating business during such Measurement Period or
after the end of such period and on or prior to such Determination Date, such
calculation will be made on a pro
<PAGE>   12
                                      -6-

forma basis in accordance with GAAP as if, in the case of an Acquisition or the
commencement of activities constituting such operating business, all such
transactions had been consummated on the first day of such Measurement Period
and, in the case of an Asset Sale or termination or discontinuance of activities
constituting such operating business, all such transactions had been consummated
prior to the first day of such Measurement Period (it being understood that in
calculating Consolidated Operating Cash Flow the exclusions set forth in clauses
(a) through (f) of the definition of Consolidated Net Income shall apply to an
Acquired Person as if it were a Restricted Subsidiary).

                  "Default" means any event that is, or with the passage of time
or the giving of notice or both would be, an Event of Default.

                  "Depository" means, with respect to the Securities issued in
the form of one or more Global Securities, The Depository Trust Company or
another Person designated as Depository by the Company, which must be a clearing
agency registered under the Exchange Act.

                  "Designation" see Section 4.14.

                  "Designation Amount" see Section 4.14.

                  "Determination Date" has the meaning set forth in the
definition of "Debt to Annualized Operating Cash Flow Ratio" above.

                  "Disinterested Director" means a member of the Board of
Directors of the Company who does not have any material direct or indirect
financial interest in or with respect to the transaction being considered.

                  "Disposition" means, with respect to any Person, any merger,
consolidation or other business combination involving such Person (whether or
not such Person is the Surviving Person) or the sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of such
Person's assets.

                  "Disqualified Equity Interest" means any Equity Interest
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder
thereof), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable,
at the option of the holder thereof, in whole or in part, on or prior to the
Maturity Date; provided, however, that any Equity Interests that would not
constitute Disqualified Equity Interests but for provisions thereof giving
holders thereof the right to require the Company to repurchase or redeem such
Equity Interests upon the occurrence of a change in control occurring prior to
the Maturity Date shall not constitute Disqualified Equity Interests if the
change in control provisions applicable to such Equity Interests are no more
favorable to the holders of such Equity Interests than the provisions under
Section 4.10 and such Equity Interests specifically provide that the Company
will not repurchase or redeem any such Equity Interests pursuant to such
provisions prior to the Company's repurchase of Securities as are required to be
repurchased pursuant to the provisions under Section 4.10.

                  "Dollar Equivalent" shall mean, with respect to a monetary
amount in a currency other than U.S. Dollars, at any time for the determination
thereof, the amount of U.S. Dollars obtained by converting such other currency
involved in such computation into U.S. dollars at the rate for the purchase of
U.S. dollars with the applicable currency as set forth in the Key Currency Cross
Rates table of The Wall Street Journal (or a successor table) on the date that
is two Business Days prior to such determination.
<PAGE>   13
                                      -7-

                  "Equity Interest" in any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) corporate stock or other
equity participations, including partnership interests, whether general or
limited, in such Person, including any Preferred Equity Interests.

                  "Escrow Account" has the meaning set forth in Section 2 of the
Escrow Agreement.

                  "Escrow Agent" means The Bank of New York, as escrow agent
under the Escrow Agreement, until a successor replaces it in accordance with the
provisions of the Escrow Agreement and thereafter means such successor.

                  "Escrow Agreement" means the Escrow Agreement dated as of
August 19, 1997 among the Company, the Escrow Agent and the Trustee.

                  "Event of Default" see Section 6.01.

                  "Escrow Funds" see Section 11.03.

                  "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated by the SEC thereunder.

                  "Expiration Date" has the meaning set forth in the definition
of "Offer to Purchase" below.

                  "Fair Market Value" means, with respect to any asset, the
price (after taking into account any liabilities relating to such assets) which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of which is under
any compulsion to complete the transaction; provided, however, that the Fair
Market Value of any such asset or assets shall be determined conclusively by the
Board of Directors of the Company acting in good faith, which determination
shall be evidenced by a resolution of such Board delivered to the Trustee.

                  "GAAP" means, at any date of determination, generally accepted
accounting principles in effect in the United States which are applicable at the
date of determination and which are consistently applied for all applicable
periods.

                  "Global Security" means a security evidencing all or a portion
of the Securities issued to the Depository or its nominee in accordance with
Section 2.01 and bearing the legend set forth in Exhibit C hereto.

                  "GTS" means Global TeleSystems Group, Inc., a Delaware
corporation, and its successors.

                  "GTS Contribution" means one or more investments, on and after
the Issue Date, in the Company (other than by a Subsidiary of the Company) of
not less than ECU 46.0 million (the equivalent of $51.1 million on July 7,
1997), in the aggregate, by capital contribution to the Company, purchase from
the Company of common Equity Interests of the Company and conversion of
Indebtedness owing to GTS-Hermes, Inc. by the Company into common Equity
Interests of the Company.

                  "guarantee" means, as applied to any obligation, (i) a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner, of any part
or all of such obligation and (ii) an agreement, direct or indirect, contingent
or otherwise, the
<PAGE>   14
                                      -8-

practical effect of which is to assure in any way the payment or performance (or
payment of damages in the event of non-performance) of all or any part of such
obligation, including, without limiting the foregoing, the payment of amounts
drawn down by letters of credit. A guarantee shall include, without limitation,
any agreement to maintain or preserve any other person's financial condition or
to cause any other Person to achieve certain levels of operating results.

                  "Holder," "holder of Securities," "Securityholders" or other
similar terms mean the registered holder of any Security.

                  "Incur" means, with respect to any Indebtedness or other
obligation of any Person, to create, issue, incur (including by conversion,
exchange or otherwise), assume, guarantee or otherwise become liable in respect
of such Indebtedness or other obligation or the recording, as required pursuant
to GAAP or otherwise, of any such Indebtedness or other obligation on the
balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall
have meanings correlative to the foregoing). Indebtedness of a Person existing
at the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary shall be
deemed to be Incurred at such time.

                  "Indebtedness" means (without duplication), with respect to
any Person, whether recourse is to all or a portion of the assets of such Person
and whether or not contingent, (a) every obligation of such Person for money
borrowed; (b) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses; (c) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person; (d)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable incurred in the
ordinary course of business and payable in accordance with industry practices,
or other accrued liabilities arising in the ordinary course of business which
are not overdue or which are being contested in good faith); (e) every Capital
Lease Obligation of such Person; (f) every net obligation under interest rate
swap or similar agreements or foreign currency hedge, exchange or similar
agreements of such Person; (g) every obligation of the type referred to in
clauses (a) through (f) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable for, directly or indirectly, as obligor, guarantor or
otherwise; and (h) any and all Refinancings of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (a) through (g) above. Indebtedness (i) shall never be calculated taking
into account any cash and cash equivalents held by such Person; (ii) shall not
include obligations of any Person (x) arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
inadvertently drawn against insufficient funds in the ordinary course of
business, provided that such obligations are extinguished within two Business
Days of their incurrence unless covered by an overdraft line, (y) resulting from
the endorsement of negotiable instruments for collection in the ordinary course
of business and consistent with past business practices and (z) under stand-by
letters of credit to the extent collateralized by cash or Cash Equivalents;
(iii) which provides that an amount less than the principal amount thereof shall
be due upon any declaration of acceleration thereof shall be deemed to be
Incurred or outstanding in an amount equal to the accreted value thereof at the
date of determination determined in accordance with GAAP; and (iv) shall include
the liquidation preference and any mandatory redemption payment obligations in
respect of any Disqualified Equity Interests of the Company or any Preferred
Equity Interests of any Restricted Subsidiary.

                  "Indenture" means this Indenture as amended or supplemented
from time to time.
<PAGE>   15
                                      -9-

                  "Independent Financial Advisor" means a recognized,
accounting, appraisal, investment banking firm or consultant with experience in
a Telecommunications Business (i) which does not, and whose directors, officers
and employees or Affiliates do not, have a material direct or indirect financial
interest in the Company and (ii) which, in the judgment of the Board of
Directors of the Company, is otherwise independent and qualified to perform the
task for which it is to be engaged.

                  "Initial Purchasers" means Donaldson, Lufkin & Jenrette
Securities Corporation, UBS Securities LLC and Lehman Brothers Inc.

                  "Institutional Accredited Investor" means an institution that
is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act.

                  "interest" means, with respect to the Securities, the sum of
any cash interest and any Additional Interest on the Securities.

                  "Interest Payment Date" means each semiannual interest payment
date on February 15 and August 15 of each year, commencing February 15, 1998.

                  "Interest Rate Protection Obligations" means, with respect to
any Person, the Obligations of such Person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar agreements,
and (ii) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.

                  "Interest Record Date" for the interest payable on any
Interest Payment Date (except a date for payment of defaulted interest) means
the February 1 or August 1 (whether or not a Business Day), as the case may be,
immediately preceding such Interest Payment Date.

                  "Investment" means, with respect to any Person, any direct or
indirect loan, advance, guarantee or other extension of credit or capital
contribution to (by means of transfers of cash or other property or assets to
others or payments for property or services for the account or use of others, or
otherwise), or purchase or acquisition of capital stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued by, any other
Person. The amount of any Investment shall be the original cost of such
Investment, plus the cost of all additions thereto, and minus the amount of any
portion of such Investment repaid to such Person in cash as a repayment of
principal or a return of capital, as the case may be, but without any other
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment. In determining the amount of any
investment involving a transfer of any property or asset other than cash, such
property shall be valued at its Fair Market Value at the time of such transfer.
"Investments" shall exclude extensions of trade credit in the ordinary course of
business in accordance with normal trade practices.

                  "Issue Date" means the original issue date of the Securities.

                  "Judgment Currency" see Section 10.15.

                  "Latest Balance Sheet" means, of any Person, the latest
consolidated balance sheet of such Person reported on by a recognized firm of
independent accountants without qualification as to scope; provided, however,
that such balance sheet is as of a date within the past 135 days.
<PAGE>   16
                                      -10-

                  "Lien" means any lien, mortgage, charge, security interest,
hypothecation, assignment for security or encumbrance of any kind (including any
conditional sale or capital lease or other title retention agreement, any lease
in the nature thereof, and any agreement to give any security interest).

                  "Maturity Date" means the date, which is set forth on the face
of the Securities, on which the Securities will mature.

                  "Measurement Period" has the meaning set forth in the
definition of "Debt to Annualized Operating Cash Flow Ratio" above.

                  "Monetization Sale" see Section 4.16.

                  "Net Cash Proceeds" means the aggregate proceeds in the form
of cash or Cash Equivalents received by the Company or any Restricted Subsidiary
in respect of any Asset Sale, including all cash or Cash Equivalents received
upon any sale, liquidation or other exchange of proceeds of Asset Sales received
in a form other than cash or Cash Equivalents, net of (a) the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale; (d) amounts deemed, in good faith, appropriate by the Board of
Directors of the Company to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets which are the subject of
such Asset Sale (provided that the amount of any such reserves shall be deemed
to constitute Net Cash Proceeds at the time such reserves shall have been
released or are not otherwise required to be retained as a reserve); and (e)
with respect to Asset Sales by Subsidiaries, the portion of such cash payments
attributable to Persons holding a minority interest in such Subsidiary.

                  "Non-U.S. Person" means a person who is not a U.S. Person, as
defined in Regulation S.

                  "Obligations" means any principal, interest (including,
without limitation, post-petition interest), penalties, fees, indemnifications,
reimbursement obligations, damages and other liabilities payable under the
documentation governing any Indebtedness.

                  "Offer" has the meaning set forth in the definition of "Offer
to Purchase" below.

                  "Offer to Purchase" means a written offer (the "Offer") sent
by or on behalf of the Company by first-class mail, postage prepaid, to each
holder at his address appearing in the register for the Securities on the date
of the Offer offering to purchase up to the principal amount of Securities
specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to the Indenture). Unless otherwise required by applicable
law, the Offer shall specify an expiration date (the "Expiration Date") of the
Offer to Purchase, which shall be not less than 20 Business Days nor more than
90 days after the date of such Offer, and a settlement date (the "Purchase
Date") for purchase of Securities to occur no later than five Business Days
after the Expiration Date. The Company shall notify the Trustee at least 15
Business Days (or such shorter period as is acceptable to the Trustee) prior to
the mailing of the Offer of the Company's obligation to make an Offer to
Purchase, and the Offer shall be mailed by the Company or, at the Company's
request, by the Trustee in the name and at the expense of the Company. The Offer
shall contain all the information required by applicable law to be included
therein. The Offer shall contain all instructions and materials necessary to
enable such Holders to tender Securities pursuant to the Offer to Purchase. The
Offer shall also state:
<PAGE>   17
                                      -11-

                  (1) the Section of this Indenture pursuant to which the Offer
         to Purchase is being made;

                  (2) the Expiration Date and the Purchase Date;

                  (3) the aggregate principal amount of the outstanding
         Securities offered to be purchased by the Company pursuant to the Offer
         to Purchase (including, if less than 100%, the manner by which such
         amount has been determined pursuant to the Section of this Indenture
         requiring the Offer to Purchase) (the "Purchase Amount");

                  (4) the purchase price to be paid by the Company for each
         $1,000 aggregate principal amount of Securities accepted for payment
         (as specified pursuant to the Indenture) (the "Purchase Price");

                  (5) that the holder may tender all or any portion of the
         Securities registered in the name of such holder and that any portion
         of a Security tendered must be tendered in an integral multiple of
         $1,000 principal amount at maturity;

                  (6) the place or places where Securities are to be surrendered
         for tender pursuant to the Offer to Purchase;

                  (7) that interest on any Security not tendered or tendered but
         not purchased by the Company pursuant to the Offer to Purchase will
         continue to accrue;

                  (8) that on the Purchase Date the Purchase Price will become
         due and payable upon each Security being accepted for payment pursuant
         to the Offer to Purchase and that interest thereon shall cease to
         accrue on and after the Purchase Date;

                  (9) that each holder electing to tender all or any portion of
         a Security pursuant to the Offer to Purchase will be required to
         surrender such Security at the place or places specified in the Offer
         prior to the close of business on the Expiration Date (such Security
         being, if the Company or the Trustee so requires, duly endorsed by, or
         accompanied by a written instrument of transfer in form satisfactory to
         the Company and the Trustee duly executed by, the holder thereof or his
         attorney duly authorized in writing);

                  (10) that holders will be entitled to withdraw all or any
         portion of Securities tendered if the Company (or its Paying Agent)
         receives, not later than the close of business on the fifth Business
         Day next preceding the Expiration Date, a telegram, telex, facsimile
         transmission or letter setting forth the name of the holder, the
         principal amount of the Security the holder tendered, the certificate
         number of the Security the holder tendered and a statement that such
         holder is withdrawing all or a portion of his tender;

                  (11) that (a) if Securities in an aggregate principal amount
         less than or equal to the Purchase Amount are duly tendered and not
         withdrawn pursuant to the Offer to Purchase, the Company shall purchase
         all such Securities and (b) if Securities in an aggregate principal
         amount in excess of the Purchase Amount are tendered and not withdrawn
         pursuant to the Offer to Purchase, the Company shall purchase
         Securities having an aggregate principal amount equal to the Purchase
         Amount on a pro rata basis (with such adjustments as may be deemed
         appropriate so that only Securities in denominations of $1,000
         principal amount at maturity or integral multiples thereof shall be
         purchased); and
<PAGE>   18
                                      -12-

                  (12) that in the case of any holder whose Security is
         purchased only in part, the Company shall execute and the Trustee shall
         authenticate and deliver to the holder of such Security without service
         charge, a new Security or Securities, of any authorized denomination as
         requested by such holder, in an aggregate principal amount equal to and
         in exchange for the unpurchased portion of the Security so tendered.

                  An Offer to Purchase shall be governed by and effected in
accordance with the provisions above pertaining to any Offer.

                  "Officer" means the Chairman, any Vice Chairman, the
President, any Vice President, the Chief Financial Officer, the Treasurer, or
the Secretary of the Company.

                  "Officers' Certificate" means a certificate signed by two
Officers or by an Officer and an Assistant Treasurer or Assistant Secretary of
the Company complying with Sections 10.04 and 10.05.

                  "Opinion of Counsel" means a written opinion from legal
counsel who is reasonably acceptable to the Trustee. The counsel may be an
employee of or counsel to the Company.

                  "Other Debt" see Section 4.16.

                  "Participant" see Section 2.15.

                  "Permitted Holders" means GTS or any of its Affiliates.

                  "Permitted Investments" means (a) Cash Equivalents; (b)
Investments in prepaid expenses, negotiable instruments held for collection and
lease, utility and workers' compensation, performance and other similar
deposits; (c) loans and advances to employees made in the ordinary course of
business not to exceed $3,000,000 in the aggregate at any one time outstanding;
(d) Interest Rate Protection Obligations and Currency Agreements permitted under
Section 4.12; (e) bonds, notes, debentures or other securities received as a
result of Asset Sales permitted under Section 4.16; (f) transactions with
officers, directors and employees of the Company or any Restricted Subsidiary
entered into in the ordinary course of business (including compensation or
employee benefit arrangements with any such director or employee) and consistent
with past business practices; (g) Investments made in the ordinary course of
business and on ordinary business terms as partial payment for constructing a
network relating principally to a Telecommunications Business; (h) Investments
in any Restricted Subsidiary; (i) intercompany Indebtedness to the extent
permitted under Section 4.12(b)(v); (i) Investments by the Company or any
Restricted Subsidiary in another Person, if as a result of such Investment (x)
such other Person becomes a Restricted Subsidiary or (y) such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all of its assets to, the Company or a Restricted Subsidiary; and
(j) Investments in evidences of Indebtedness, securities or other property
received from another Person by the Company or any Restricted Subsidiary in
connection with any bankruptcy proceeding or by reason of a composition or
readjustment of debt or a reorganization of such Person or as a result of
foreclosure, perfection or enforcement of any Lien in exchange for evidences of
Indebtedness, securities or other property of such Person held by the Company or
any Restricted Subsidiary, or for other liabilities or obligations of such other
Person to the Company or any Restricted Subsidiary that were created in
accordance with the terms of this Indenture.

                  "Permitted Liens" means (a) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary; provided, however, that such
<PAGE>   19
                                      -13-

Liens were in existence prior to the contemplation of such merger or
consolidation and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation; (b) Liens existing on the Issue Date; (c)
Liens securing Indebtedness consisting of Capitalized Lease Obligations,
mortgage financings, industrial revenue bonds or other monetary obligations, in
each case incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets used in the
business of the Company or any Restricted Subsidiary, or repairs, additions or
improvements to such assets; provided, however, that (I) such Liens secure
Indebtedness in an amount not in excess of the original purchase price or the
original cost of any such assets or repair, addition or improvement thereto
(plus an amount equal to the reasonable fees and expenses in connection with the
Incurrence of such Indebtedness), (II) such Liens do not extend to any other
assets of the Company or any Restricted Subsidiary (and, in the case of repair,
addition or improvements to any such assets, such Lien extends only to the
assets (and improvements thereto or thereon) repaired, added to or improved),
(III) the Incurrence of such Indebtedness is permitted by Section 4.12 and (IV)
such Liens attach within 90 days of such purchase, construction, installation,
repair, addition or improvement; (d) Liens to secure any Refinancings, in whole
or in part, of any Indebtedness secured by Liens referred to in the clauses
above so long as such Lien does not extend to any other property (other than
improvements thereto); (e) Liens securing letters of credit entered into in the
ordinary course of business and consistent with past business practice; (f)
Liens on and pledges of the capital stock of any Unrestricted Subsidiary
securing any Indebtedness of such Unrestricted Subsidiary; (g) Liens on any
property or assets of a Restricted Subsidiary granted in favor of and held by
the Company or any Restricted Subsidiary; (h) Liens on any property or assets of
the Company or any Restricted Subsidiary securing on a pari passu basis all of
the Securities; (i) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other like Liens arising in the
ordinary course of business of the Company or any Restricted Subsidiary and with
respect to amounts not yet delinquent or being contested in good faith by
appropriate proceedings; (j) Liens for taxes, assessments, government charges or
claims that are being contested in good faith by appropriate proceedings
promptly instituted and diligently conducted; provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (k) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory obligations, surety and appeal
bonds, government contracts, performance bonds and other obligations of a like
nature incurred in the ordinary course of business (other than contracts for the
payment of money); (l) easements, rights-of-way, restrictions and other similar
charges or encumbrances not interfering in any material respect with the
business of the Company or any Restricted Subsidiary incurred in the ordinary
course of business; (m) Liens arising by reason of judgment, decree or order of
any court so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired; (n) Liens
securing Qualified Subsidiary Indebtedness to the extent permitted to be
Incurred under Section 4.12; (o) Liens securing Indebtedness under Interest Rate
Protection Obligations or Indebtedness under Currency Agreements to the extent
permitted to be Incurred under Section 4.12; and (p) Liens incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security.

                  "Permitted Refinancing" means, with respect to any
Indebtedness, Indebtedness to the extent representing a Refinancing of such
Indebtedness; provided, however, that (1) the Refinancing Indebtedness shall not
exceed the sum of the amount of the Indebtedness being Refinanced, plus the
amount of accrued interest or dividends thereon, the amount of any reasonably
determined prepayment premium necessary to accomplish such Refinancing and
reasonable fees and expenses incurred in connection therewith; (2) the
Refinancing Indebtedness shall have a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced and shall not permit redemption or other re-
<PAGE>   20
                                      -14-

tirement (including pursuant to any required offer to purchase to be made by the
Company or any Restricted Subsidiary) of such Indebtedness at the option of the
holder thereof prior to the final stated maturity of the Indebtedness being
Refinanced, other than a redemption or other retirement at the option of the
holder of such Indebtedness (including pursuant to a required offer to purchase
made by the Company or a Restricted Subsidiary) upon a change of control of the
Company pursuant to provisions substantially similar to those under Section
4.10; (3) Indebtedness that ranks pari passu with the Securities may be
Refinanced only with Indebtedness that is made pari passu with or subordinate in
right of payment to the Securities, and Indebtedness that is subordinated in
right of payment to the Securities may be Refinanced only with Indebtedness that
is subordinate in right of payment to the Securities on terms no less favorable
to the Holders than those contained in the Indebtedness being Refinanced; and
(4) the Refinancing Indebtedness shall be Incurred by the obligor on the
Indebtedness being Refinanced or by the Company.

                  "Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, limited
liability partnership, limited partnership, trust, unincorporated organization
or government or any agency or political subdivision thereof.

                  "Physical Securities" has the meaning set forth in Section
2.01.

                  "Preferred Equity Interest" in any Person, means an Equity
Interest of any class or classes (however designated) which is preferred as to
the payment of dividends or distributions, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over Equity Interests of any other class in such Person.

                  "principal" of a debt security means the principal of the
security, plus, when appropriate, the premium, if any, on the security.

                  "Private Placement Legend" means the legend initially set
forth on the Series A Securities in the form set forth on Exhibit A hereto.

                  "Public Equity Offering" means an underwritten public offering
of common Equity Interests of the Company pursuant to an effective registration
statement filed under the Securities Act (excluding registration statements
filed on Form S-8).

                  "Purchase Amount" has the meaning set forth in the definition
of "Offer to Purchase" above.

                  "Purchase Date" has the meaning set forth in the definition of
"Offer to Purchase" above.

                  "Purchase Price" has the meaning set forth in the definition
of "Offer to Purchase" above.

                  "QIB Global Security" see Section 2.01.

                  "Qualified Equity Interest" means any Equity Interest of the
Company other than any Disqualified Equity Interest.

                  "Qualified Institutional Buyer" or "QIB" means a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act.
<PAGE>   21
                                      -15-

                  "Qualified Subsidiary Indebtedness" means (i) Indebtedness of
Restricted Subsidiaries under one or more senior credit agreements, senior loan
agreements or similar senior facilities, secured or unsecured, entered into from
time to time, including any related notes, guarantees collateral documents,
instruments and agreements executed in connection therewith or (ii) Indebtedness
of Restricted Subsidiaries in an aggregate principal amount not to exceed $25.0
million in the aggregate at any time outstanding.

                  "Rating Agencies" shall mean (i) S&P and (ii) Moody's and
(iii) if S&P or Moody's or both shall not make a rating of the Securities
publicly available, a nationally recognized securities rating agency or
agencies, as the case may be, selected by the Company, which shall be
substituted for S&P or Moody's or both, as the case may be.

                  "Redemption Date," when used with respect to any Security to
be redeemed, means the date fixed for such redemption pursuant to this
Indenture.

                  "Redemption Price," when used with respect to any Security to
be redeemed, means the price fixed for such redemption pursuant to this
Indenture as set forth in the form of Security annexed hereto as Exhibit A or
Exhibit B hereto.

                  "Refinance" means refinance, renew, extend, replace, defease
or refund; and "Refinancing" and "Refinanced" have correlative meanings.

                  "Registered Exchange Offer" means the offer to exchange the
Series B Securities for all of the outstanding Series A Securities in accordance
with the Registration Rights Agreement.

                  "Registrar" see Section 2.03.

                  "Registration" means the Registered Exchange Offer by the
Company or other registration of the Series A Securities under the Securities
Act pursuant to and in accordance with the terms of the Registration Rights
Agreement.

                  "Registration Rights Agreement" means the Registration Rights
Agreement dated as of August 19, 1997 between the Company and the Initial
Purchasers.

                  "Registration Statement" means the registration statement(s)
as defined and described in the Registration Rights Agreement.

                  "Regulation S" means Regulation S under the Securities Act.

                  "Regulation S Global Security" see Section 2.01.

                  "Replacement Assets" means (x) properties and assets (other
than cash or any Equity Interests or other security) that will be used in a
Telecommunications Business of the Company and the Restricted Subsidiaries or
(y) Equity Interests of any Person engaged primarily in a Telecommunications
Business, which Person will become on the date of acquisition thereof a
Restricted Subsidiary as a result of the Company's acquiring such Equity
Interests.

                  "Required Filing Date" see Section 4.09.
<PAGE>   22
                                      -16-

                  "Restricted Payments" see Section 4.11.

                  "Restricted Security" has the meaning set forth in Rule
144(a)(3) under the Securities Act or any successor to such rule; provided,
however, that the Trustee shall be entitled to request and conclusively rely
upon an Opinion of Counsel with respect to whether any Security is a Restricted
Security.

                  "Restricted Subsidiary" means any Subsidiary of the Company
that has not been designated by the Board of Directors of the Company, by a
resolution of the Board of Directors of the Company delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to Section 4.14. Any such designation may be
revoked by a resolution of the Board of Directors of the Company delivered to
the Trustee, subject to the provisions of such covenant.

                  "Revocation" see Section 4.14.

                  "Rule 144A" means Rule 144A under the Securities Act or any
successor thereto.

                  "SEC" means the Securities and Exchange Commission.

                  "Securities" means the Series A Securities and the Series B
Securities treated as a single class of securities, as amended or supplemented
from time to time in accordance with the terms of this Indenture.

                  "Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated by the SEC thereunder.

                  "Securities Amount" see Section 4.16.

                  "Securities Portion of Unutilized Net Cash Proceeds" see
Section 4.16.

                  "Series A Securities" means the 11-1/2% Senior Notes due 2007
of the Company issued pursuant to this Indenture and sold pursuant to the
Purchase Agreement.

                  "Series B Securities" means the 11-1/2% Senior Notes due 2007,
Series B, of the Company to be issued pursuant to this Indenture in exchange for
the Series A Securities pursuant to the Registered Exchange Offer and the
Registration Rights Agreement.

                  "Share Capital" shall mean, at any time of determination, the
stated capital of the Equity Interests (other than Disqualified Stock) and
additional paid-in capital of the Company at such time, all as determined in
accordance with GAAP.

                  "Significant Restricted Subsidiary" means, at any date of
determination, (a) any Restricted Subsidiary that, together with its
Subsidiaries that constitute Restricted Subsidiaries (i) for the most recent
fiscal year of the Company accounted for more than 10.0% of the consolidated
revenues of the Company and the Restricted Subsidiaries or (ii) as of the end of
such fiscal year, owned more than 10.0% of the consolidated assets of the
Company and the Restricted Subsidiaries, all as set forth on the consolidated
financial statements of the Company and the Restricted Subsidiaries for such
year prepared in conformity with GAAP, and (b) any Restricted Subsidiary which,
when aggregated with all other Restricted Subsidiaries that are not otherwise
Sig-
<PAGE>   23
                                      -17-

nificant Restricted Subsidiaries and as to which any event described in Section
6.01(8) or (9) has occurred and is continuing, would constitute a Significant
Restricted Subsidiary under clause (a) of this definition.

                  "Stated Maturity", when used with respect to any Security or
any installment of interest thereon, means the date specified in such Security
as the fixed date on which the principal of such Security or such installment of
interest is due and payable.

                  "Strategic Equity Investments" means the issuance and sale of
Qualified Equity Interests to a Person that has an equity market capitalization,
a net asset value or annual revenues of at least $1.5 billion and owns and
operates business primarily in a Telecommunication Business.

                  "Subordinated Indebtedness" means any Indebtedness of the
Company which is expressly subordinated in right of payment to the Securities.

                  "Subsidiary" means, with respect to any Person, (a) any
corporation of which the outstanding Voting Equity Interests having at least a
majority of the votes entitled to be cast in the election of directors shall at
the time be owned, directly or indirectly, by such Person, or (b) any other
Person of which at least a majority of Voting Equity Interests are at the time,
directly or indirectly, owned by such first named Person.

                  "Surviving Person" means, with respect to any Person involved
in or that makes any Disposition, the Person formed by or surviving such
Disposition or the Person to which such Disposition is made.

                  "Tax" shall mean any tax, duty, levy, impost, assessment or
other governmental charge (including penalties, interest and any other
liabilities related thereto).

                  "Taxing Authority" shall mean any government or political
subdivision or territory or possession of any government or any authority or
agency therein or thereof having power to tax.

                  "Telecommunications Acquisition" means an Acquisition of
properties or assets to be used in a Telecommunications Business or of the
Equity Interests of any Person that becomes a Restricted Subsidiary; provided,
however, that such Person's properties and assets shall consist principally of
properties or assets that will be used in a Telecommunications Business.

                  "Telecommunications Business" means any business owning,
constructing, financing and operating a telephone and/or communications system
located entirely in countries located in Western and Central Europe, or any
business reasonably related thereto, including, without limitation, any business
conducted by the Company or any Restricted Subsidiary on the Issue Date.

                  "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code
Section 77aaa-77bbbb), as amended, as in effect on the date of this Indenture
until such time as this Indenture is qualified under the TIA, and thereafter as
in effect on the date on which this Indenture is qualified under the TIA, except
in each case as provided in Section 9.03.

                  "Total Consolidated Indebtedness" means, as at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and the Restricted Subsidiaries, on a consolidated basis,
outstanding as of such date of determination, after giving effect to any
Incurrence of Indebtedness and the application of the proceeds therefrom giving
rise to such determination.
<PAGE>   24
                                      -18-

                  "Trustee" means the party named as such in this Indenture
until a successor replaces it in accordance with the provisions of this
Indenture and thereafter means such successor.

                  "Trust Officer" means any officer within the corporate trust
department (or any successor group of the Trustee) including any vice president,
assistant vice president, assistant secretary or any other officer or assistant
officer of the Trustee customarily performing functions similar to those
performed by the persons who at that time shall be such officers, and also
means, with respect to a particular corporate trust matter, any other officer to
whom such trust matter is referred because of his knowledge of and familiarity
with the particular subject.

                  "Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to Section 4.14. Any such designation may be revoked
by a resolution of the Board of Directors of the Company delivered to the
Trustee, subject to the provisions of Section 4.14.

                  "Unutilized Net Cash Proceeds" see Section 4.16(a).

                  "U.S. Government Obligations" means direct non-callable
obligations of, or obligations guaranteed by, the United States of America for
the payment of which guarantee or obligations the full faith and credit of the
United States is pledged.

                  "U.S. Person" means a "U.S. person" as defined in Rule 902
under the Securities Act or any successor to such Rule.

                  "Voting Equity Interests" means Equity Interests in a
corporation or other Person with voting power under ordinary circumstances
entitling the holders thereof to elect the Board of Directors or other governing
body of such corporation or Person.

                  "Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.

                  "Wholly Owned Restricted Subsidiary" means any Restricted
Subsidiary all of the outstanding Voting Equity Interests (other than directors'
qualifying shares) of which are owned, directly or indirectly, by the Company.

SECTION 1.02. Incorporation by Reference of Trust Indenture Act.

                  Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:

                  "Commission" means the SEC.

                  "indenture securities" means the Securities.
<PAGE>   25
                                      -19-

                  "indenture security holder" means a Securityholder.

                  "indenture to be qualified" means this Indenture.

                  "indenture trustee" or "institutional trustee" means the
Trustee.

                  "obligor" on the indenture securities means the Company or any
other obligor on the Securities.

                  All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule and
not otherwise defined herein have the meanings assigned to them therein.

SECTION 1.03.  Rules of Construction.

                  Unless the context otherwise requires:

                  (1) a term has the meaning assigned to it;

                  (2) an accounting term not otherwise defined has the meaning
         assigned to it in accordance with generally accepted accounting
         principles in effect from time to time, and any other reference in this
         Indenture to "generally accepted accounting principles" refers to GAAP;

                  (3) "or" is not exclusive;

                  (4) words in the singular include the plural, and words in the
         plural include the singular;

                  (5) provisions apply to successive events and transactions;
         and

                  (6) "herein," "hereof" and other words of similar import refer
         to this Indenture as a whole and not to any particular Article, Section
         or other subdivision.


                                   ARTICLE TWO

                                 THE SECURITIES


SECTION 2.01. Form and Dating.

                  The Series A Securities and the Trustee's certificate of
authentication thereof shall be substantially in the form of Exhibit A hereto,
which is hereby incorporated in and expressly made a part of this Indenture. The
Series B Securities and the Trustee's certificate of authentication thereof
shall be substantially in the form of Exhibit B hereto, which is hereby
incorporated in and expressly made a part of this Indenture. The Securities may
have notations, legends or endorsements required by law, stock exchange rule or
usage. The Company and the Trustee shall approve the form of the Securities and
any notation, legend or endorse-
<PAGE>   26
                                      -20-

ment on them. Each Security shall be dated the date of its issuance and shall
show the date of its authentication.

                  Securities initially offered and sold by the Initial
Purchasers shall, unless the applicable Holder requests Securities in the form
of certificated Securities in registered form ("Physical Securities"), which
shall be in substantially the form set forth in Exhibit A hereto, be issued
initially in the form of one or more permanent Global Securities in registered
form, substantially in the form set forth in Exhibit A hereto, deposited with
the Trustee, as custodian for the Depository, and shall bear the legend set
forth in Exhibit C hereto. One or more separate Global Securities shall be
issued to represent Securities held by (i) Qualified Institutional Buyers (a
"QIB Global Security") and (ii) Persons acquiring Securities in offshore
transactions in reliance on Regulation S (a "Regulation S Global Security"). The
Company shall cause the QIB Global Securities and Regulation S Global Securities
to have separate CUSIP numbers.

                  Upon consummation of the Registration, Series B Securities may
be issued in the form of one or more permanent Global Securities in registered
form, substantially in the form set forth in Exhibit B hereto, deposited with
the Trustee, as custodian for the Depository, and shall bear the legend set
forth on Exhibit C hereto.

                  The aggregate principal amount of any Global Security may from
time to time be increased or decreased by adjustments made on the records of the
Trustee, as custodian for the Depository, as hereinafter provided.

SECTION 2.02. Execution and Authentication.

                  Two Officers, or an Officer and an Assistant Secretary, shall
sign, or one Officer shall sign and one Officer or an Assistant Secretary (each
of whom shall, in each case, have been duly authorized by all requisite
corporate actions) shall attest to, the Securities for the Company by manual or
facsimile signature.

                  If an Officer whose signature is on a Security was an Officer
at the time of such execution but no longer holds that office at the time the
Trustee authenticates the Security, the Security shall be valid nevertheless.

                  A Security shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Security.
The signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.

                  The Trustee shall authenticate (i) Series A Securities for
original issue in the aggregate principal amount not to exceed $265,000,000 and
(ii) Series B Securities from time to time only in exchange for a like principal
amount of Series A Securities in accordance with the Registration Rights
Agreement, in each case upon a written order of the Company in the form of an
Officers' Certificate. The Officers' Certificate shall specify the amount of
Securities to be authenticated, the series of Securities and the date on which
the Securities are to be authenticated. The aggregate principal amount of
Securities outstanding at any time may not exceed $265,000,000, except as
provided in Section 2.07. Upon receipt of a written order of the Company in the
form of an Officers' Certificate, the Trustee shall authenticate Securities in
substitution for Securities originally issued to reflect any name change of the
Company.

                  The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate Securities. Unless otherwise provided
in the appointment, an authenticating agent may authenti-
<PAGE>   27
                                      -21-

cate Securities whenever the Trustee may do so. Each reference in this Indenture
to authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company
and Affiliates of the Company.

                  The Securities shall be issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple thereof.

SECTION 2.03. Registrar and Paying Agent.

                  The Company shall maintain an office or agency in the Borough
of Manhattan, The City of New York, and, so long as the Securities are listed on
the Luxembourg Stock Exchange and the rules of such stock exchange require, in
Luxembourg where (a) Securities may be presented or surrendered for registration
of transfer or for exchange ("Registrar"), (b) Securities may be presented or
surrendered for payment ("Paying Agent") and (c) notices and demands in respect
of the Securities and this Indenture may be served. The Registrar shall keep a
register or registers of the Securities and of their transfer and exchange. The
Company, upon notice to the Trustee, may appoint one or more co-Registrars and
one or more additional Paying Agents. The term "Paying Agent" includes any
additional Paying Agent. Except as provided herein, the Company, or any
Subsidiary may act as Paying Agent, Registrar or co-Registrar.

                  The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture, which shall incorporate the
provisions of the TIA. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of the
name and address of any such Agent. If the Company fails to maintain a Registrar
or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as
such and shall be entitled to appropriate compensation in accordance with
Section 7.07.

                  The Company initially appoints the Trustee as Registrar and
Paying Agent until such time as the Trustee has resigned or a successor has been
appointed.

SECTION 2.04. Paying Agent to Hold Assets in Trust.

                  The Company shall require each Paying Agent other than the
Trustee to agree in writing that each Paying Agent shall hold in trust for the
benefit of Holders or the Trustee all assets held by the Paying Agent for the
payment of principal of, or interest on, the Securities, and shall notify the
Trustee of any Default by the Company in making any such payment. The Company at
any time may require a Paying Agent to distribute all assets held by it to the
Trustee and account for any assets disbursed and the Trustee may at any time
during the continuance of any payment Default, upon written request to a Paying
Agent, require such Paying Agent to distribute all assets held by it to the
Trustee and to account for any assets distributed. Upon distribution to the
Trustee of all assets that shall have been delivered by the Company to the
Paying Agent (if other than the Company), the Paying Agent shall have no further
liability for such assets. If the Company, any Subsidiary or any of their
respective Affiliates acts as Paying Agent, it shall, on or before each due date
of the principal of or interest on the Securities, segregate and hold in trust
for the benefit of the Persons entitled thereto a sum sufficient to pay the
principal or interest so becoming due until such sums shall be paid to such
Persons or otherwise disposed of as herein provided and will promptly notify the
Trustee of its action or failure so to act.
<PAGE>   28
                                      -22-

SECTION 2.05. Securityholder Lists.

                  The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of Holders. If the Trustee is not the Registrar, the Company shall
furnish to the Trustee before each Interest Record Date and at such other times
as the Trustee may request in writing a list as of such date and in such form as
the Trustee may reasonably require of the names and addresses of Holders, which
list may be conclusively relied upon by the Trustee.

SECTION 2.06. Transfer and Exchange.

                  Subject to the provisions of Sections 2.15 and 2.16, when
Securities are presented to the Registrar or a co-Registrar with a request to
register the transfer of such Securities or to exchange such Securities for an
equal principal amount of Securities of other authorized denominations of the
same series, the Registrar or co-Registrar shall register the transfer or make
the exchange as requested if its requirements for such transaction are met;
provided, however, that the Securities surrendered for transfer or exchange
shall be duly endorsed or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Registrar or co-Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing. To
permit registrations of transfers and exchanges, the Company shall execute and
the Trustee shall authenticate Securities at the Registrar's or co-Registrar's
written request. No service charge shall be made for any registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer taxes or other governmental charge
payable upon exchanges or transfers pursuant to Section 2.02, 2.10, 3.06, 4.10,
4.16 or 9.05). The Registrar or co-Registrar shall not be required to register
the transfer or exchange of any Security (i) during a period beginning at the
opening of business 15 days before the mailing of a notice of redemption of
Securities and ending at the close of business on the day of such mailing and
(ii) selected for redemption in whole or in part pursuant to Article Three
hereof, except the unredeemed portion of any Security being redeemed in part.

                  Prior to the registration of any transfer by a Holder as
provided herein, the Company, the Trustee, and any Agent of the Company shall
treat the person in whose name the Security is registered as the owner thereof
for all purposes whether or not the Security shall be overdue, and neither the
Company, the Trustee, nor any such Agent shall be affected by notice to the
contrary. Any Holder of a Global Security shall, by acceptance of such Global
Security, agree that transfers of beneficial interests in such Global Security
may be effected only through a book-entry system maintained by the Depository
(or its agent), and that ownership of a beneficial interest in a Global Security
shall be required to be reflected in a book entry.

SECTION 2.07. Replacement Securities.

                  If a mutilated Security is surrendered to the Trustee or if
the Holder of a Security claims that the Security has been lost, destroyed or
wrongfully taken, the Company shall issue and the Trustee shall authenticate a
replacement Security if the Trustee's requirements for replacement of Securities
are met. Such Holder must provide an indemnity bond or other indemnity,
sufficient in the judgment of both the Company and the Trustee, to protect the
Company, the Trustee and any Agent from any loss which any of them may suffer if
a Security is replaced and evidence to their satisfaction of the apparent loss,
destruction or theft of such Security. The Company may charge such Holder for
its reasonable out-of-pocket expenses in replacing a Security, including
reasonable fees and expenses of counsel.

                  Every replacement Security is an additional obligation of the
Company.
<PAGE>   29
                                      -23-

SECTION 2.08. Outstanding Securities.

                  Securities outstanding at any time are all the Securities that
have been authenticated by the Trustee except those cancelled by it, those
delivered to it for cancellation and those described in this Section 2.08 as not
outstanding. Subject to Section 2.09, a Security does not cease to be
outstanding because the Company or any of its Affiliates holds the Security.

                  If a Security is replaced pursuant to Section 2.07 (other than
a mutilated Security surrendered for replacement), it ceases to be outstanding
unless the Trustee receives proof satisfactory to it that the replaced Security
is held by a bona fide purchaser. A mutilated Security ceases to be outstanding
upon surrender of such Security and replacement thereof pursuant to Section
2.07.

                  If on a Redemption Date, Purchase Date or the Maturity Date
the Paying Agent holds money sufficient to pay all of the principal and interest
due on the Securities payable on that date, then on and after that date such
Securities cease to be outstanding and interest on them ceases to accrue.

SECTION 2.09. Treasury Securities.

                  In determining whether the Holders of the required principal
amount of Securities have concurred in any direction, waiver or consent,
Securities owned by the Company or any of its Affiliates shall be disregarded,
except that, for the purposes of determining whether the Trustee shall be
protected in relying on any such direction, waiver or consent, only Securities
that a Trust Officer of the Trustee actually knows are so owned shall be
disregarded.

SECTION 2.10. Temporary Securities.

                  Until definitive Securities are ready for delivery, the
Company may prepare and the Trustee shall authenticate temporary Securities.
Temporary Securities shall be substantially in the form of definitive Securities
but may have variations that the Company considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare and the
Trustee shall authenticate upon receipt of a written order of the Company
pursuant to Section 2.02 definitive Securities in exchange for temporary
Securities.

SECTION 2.11. Cancellation.

                  The Company at any time may deliver Securities to the Trustee
for cancellation. The Registrar and the Paying Agent shall forward to the
Trustee any Securities surrendered to them for transfer, exchange or payment.
The Trustee, or at the direction of the Trustee, the Registrar or the Paying
Agent, and no one else, shall cancel all Securities surrendered for transfer,
exchange, payment or cancellation and deliver to the Company such cancelled
Securities for disposal. Subject to Section 2.07, the Company may not issue new
Securities to replace Securities that it has paid or delivered to the Trustee
for cancellation. If the Company shall acquire any of the Securities, such
acquisition shall not operate as a redemption or satisfaction of the
Indebtedness represented by such Securities unless and until the same are
surrendered to the Trustee for cancellation pursuant to this Section 2.11. The
Trustee shall cancel all Securities surrendered for transfer, exchange, payment
or cancellation and shall dispose of them in accordance with its normal
procedure.
<PAGE>   30
                                      -24-

SECTION 2.12. Defaulted Interest.

                  If the Company defaults in a payment of principal or interest
on the Securities, it shall pay interest on overdue principal and on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the rate per annum borne by the Securities, to the
extent lawful.

SECTION 2.13. CUSIP Number.

                  The Company in issuing the Securities will use one or more
"CUSIP" numbers and the Trustee shall use the appropriate CUSIP number in
notices of redemption or exchange as a convenience to Holders; provided,
however, that any such notice may state that no representation is made as to the
correctness or accuracy of the CUSIP number printed in the notice or on the
Securities, and that reliance may be placed only on the other identification
numbers printed on the Securities. The Company shall promptly notify the Trustee
of any changes in CUSIP numbers.

SECTION 2.14. Deposit of Moneys.

                  Prior to 10:00 a.m. New York City time on each Interest
Payment Date, Redemption Date, Purchase Date and the Maturity Date, the Company
shall deposit with the Paying Agent in immediately available funds money
sufficient to make cash payments, if any, due on such Interest Payment Date,
Redemption Date, Purchase Date or Maturity Date, as the case may be, in a timely
manner which permits the Paying Agent to remit payment to the Holders on such
Interest Payment Date, Redemption Date, Purchase Date or Maturity Date, as the
case may be.

SECTION 2.15. Book-Entry Provisions for Global Securities.

                  (a) The Global Securities initially shall (i) be registered in
the name of the Depository or the nominee of such Depository, (ii) be delivered
to the Trustee as custodian for such Depository and (iii) bear legends as set
forth in Exhibit C hereto.

                  Members of, or participants in, the Depository
("Participants") shall have no rights under this Indenture with respect to any
Global Security held on their behalf by the Depository, or the Trustee as its
custodian, or under such Global Security, and the Depository may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depository
or impair, as between the Depository and Participants, the operation of
customary practices governing the exercise of the rights of a beneficial owner
of any Security.

                  (b) Transfers of Global Securities shall be limited to
transfers in whole, but not in part, to the Depository, its successors or their
respective nominees. Interests of beneficial owners in the Global Securities may
be transferred or exchanged for Physical Securities in accordance with the rules
and procedures of the Depository and the provisions of Section 2.16. In
addition, Physical Securities shall be transferred to all beneficial owners in
exchange for their beneficial interests in Global Securities if (i) the
Depository notifies the Company that it is unwilling or unable to continue as
Depository for any Global Security and a successor Depository is not appointed
by the Company within 90 days of such notice or (ii) an Event of Default has
occurred and is continuing and the Registrar has received a request from the
Depository to issue Physical Securities.
<PAGE>   31
                                      -25

                  (c) In connection with the transfer of Global Securities as an
entirety to beneficial owners pursuant to paragraph (b) of this Section 2.15,
the Global Securities shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute, and the Trustee shall upon written
instructions from the Company authenticate and make available for delivery, to
each beneficial owner identified by the Depository in exchange for its
beneficial interest in the Global Securities, an equal aggregate principal
amount of Physical Securities of authorized denominations.

                  (d) Any Physical Security constituting a Restricted Security
delivered in exchange for an interest in a Global Security pursuant to paragraph
(b) of this Section 2.15 shall, except as otherwise provided by Section 2.16,
bear the Private Placement Legend.

                  (e) The Holder of any Global Security may grant proxies and
otherwise authorize any Person, including Participants and Persons that may hold
interests through Participants, to take any action which a Holder is entitled to
take under this Indenture or the Securities.

SECTION 2.16. Registration of Transfers and Exchanges.

                  (a) Transfer and Exchange of Physical Securities. When
Physical Securities are presented to the Registrar or co-Registrar with a
request:

                  (i) to register the transfer of the Physical Securities; or

                  (ii) to exchange such Physical Securities for an equal
         principal amount of Physical Securities of other authorized
         denominations,

the Registrar or co-Registrar shall register the transfer or make the exchange
as requested if the requirements under this Indenture as set forth in this
Section 2.16 for such transactions are met; provided, however, that the Physical
Securities presented or surrendered for registration of transfer or exchange:

                 (I) shall be duly endorsed or accompanied by a written
         instrument of transfer in form satisfactory to the Registrar or
         co-Registrar, duly executed by the Holder thereof or his attorney duly
         authorized in writing; and

                (II) in the case of Physical Securities of Series A Securities,
         such Physical Securities shall be accompanied, in the sole discretion
         of the Company, by the following additional information and documents,
         as applicable:

                  (A)      if such Physical Security is being delivered to the
                           Registrar or co-Registrar by a Holder for
                           registration in the name of such Holder, without
                           transfer, a certification from such Holder to that
                           effect (substantially in the form of Exhibit D
                           hereto); or

                  (B)      if such Physical Security is being transferred to a
                           Qualified Institutional Buyer in accordance with Rule
                           144A, a certification to that effect (substantially
                           in the form of Exhibit D hereto); or

                  (C)      if such Physical Security is being transferred to an
                           Institutional Accredited Investor, delivery of a
                           certification to that effect (substantially in the
                           form of Exhibit D hereto) and a transferee
                           certificate for Institutional Accredited Investors
                           substantially
<PAGE>   32
                                      -26-

                           in the form of Exhibit E hereto and an Opinion of
                           Counsel reasonably satisfactory to the Company to the
                           effect that such transfer is in compliance with the
                           Securities Act; or

                  (D)      if such Physical Security is being transferred in
                           reliance on Regulation S, delivery of a certification
                           to that effect (substantially in the form of Exhibit
                           D hereto) and a transferor certificate for Regulation
                           S transfers substantially in the form of Exhibit F
                           hereto and an Opinion of Counsel reasonably
                           satisfactory to the Company to the effect that such
                           transfer is in compliance with the Securities Act; or

                  (E)      if such Physical Security is being transferred in
                           reliance on Rule 144 under the Securities Act,
                           delivery of a certification to that effect
                           (substantially in the form of Exhibit D hereto) and
                           an Opinion of Counsel reasonably satisfactory to the
                           Company to the effect that such transfer is in
                           compliance with the Securities Act; or

                  (F)      if such Physical Security is being transferred in
                           reliance on another exemption from the registration
                           requirements of the Securities Act, a certification
                           to that effect (substantially in the form of Exhibit
                           D hereto) and an Opinion of Counsel reasonably
                           acceptable to the Company to the effect that such
                           transfer is in compliance with the Securities Act.

                  (b) Restrictions on Transfer of a Physical Security for a
Beneficial Interest in a Global Security. A Physical Security may not be
exchanged for a beneficial interest in a Global Security except upon
satisfaction of the requirements set forth below. Upon receipt by the Registrar
or co-Registrar of a Physical Security, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Registrar or
co-Registrar, together with:

                  (A)      in the case of Series A Securities, certification,
                           substantially in the form of Exhibit D hereto, that
                           such Physical Security is being transferred (I) to a
                           Qualified Institutional Buyer, (II) to an
                           Institutional Accredited Investor or (III) in an
                           offshore transaction in reliance on Regulation S and,
                           with respect to (II) or (III), an Opinion of Counsel
                           reasonably acceptable to the Company to the effect
                           that such transfer is in compliance with the
                           Securities Act; and

                  (B)      written instructions directing the Registrar or
                           co-Registrar to make, or to direct the Depository to
                           make, an endorsement on the applicable Global
                           Security to reflect an increase in the aggregate
                           amount of the Securities represented by the Global
                           Security,

then the Registrar or co-Registrar shall cancel such Physical Security and
cause, or direct the Depository to cause, in accordance with the standing
instructions and procedures existing between the Depository and the Registrar or
co-Registrar, the principal amount of Securities represented by the applicable
Global Security to be increased accordingly. If no Global Security representing
Securities held by Qualified Institutional Buyers, Institutional Accredited
Investors or Persons acquiring Securities in offshore transactions in reliance
on Regulation S, as the case may be, is then outstanding, the Company shall
issue and the Trustee shall, upon written instructions from the Company in
accordance with Section 2.02, authenticate such a Global Security in the
appropriate principal amount.
<PAGE>   33
                                      -27-


                  (c) Transfer and Exchange of Global Securities. The transfer
and exchange of Global Securities or beneficial interests therein shall be
effected through the Depository in accordance with this Indenture (including the
restrictions on transfer set forth herein) and the procedures of the Depository
therefor. Upon receipt by the Registrar or Co-Registrar of written instructions,
or such other instruction as is customary for the Depository, from the
Depository or its nominee, requesting the registration of transfer of an
interest in a QIB Global Security, an Accredited Investor Global Security or
Regulation S Global Security, as the case may be, to another type of Global
Security, together with the applicable Global Securities (or, if the applicable
type of Global Security required to represent the interest as requested to be
transferred is not then outstanding, only the Global Security representing the
interest being transferred), the Registrar or Co-Registrar shall cancel such
Global Securities (or Global Security) and the Company shall issue and the
Trustee shall, upon written instructions from the Company in accordance with
Section 2.02, authenticate new Global Securities of the types so cancelled (or
the type so cancelled and applicable type required to represent the interest as
requested to be transferred) reflecting the applicable increase and decrease of
the principal amount of Securities represented by such types of Global
Securities, giving effect to such transfer. If the applicable type of Global
Security required to represent the interest as requested to be transferred is
not outstanding at the time of such request, the Company shall issue and the
Trustee shall, upon written instructions from the Company in accordance with
Section 2.02, authenticate a new Global Security of such type in principal
amount equal to the principal amount of the interest requested to be
transferred.

                  (d)  Transfer of a Beneficial Interest in a Global Security
for a Physical Security.

                 (i) Any Person having a beneficial interest in a Global
         Security may upon request exchange such beneficial interest for a
         Physical Security. Upon receipt by the Registrar or co-Registrar of
         written instructions, or such other form of instructions as is
         customary for the Depository, from the Depository or its nominee on
         behalf of any Person having a beneficial interest in a Global Security
         and upon receipt by the Trustee of a written order or such other form
         of instructions as is customary for the Depository or the Person
         designated by the Depository as having such a beneficial interest
         containing registration instructions and, in the case of any such
         transfer or exchange of a beneficial interest in Series A Securities,
         the following additional information and documents:

                  (A)      if such beneficial interest is being transferred to
                           the Person designated by the Depository as being the
                           beneficial owner, a certification from such Person to
                           that effect (substantially in the form of Exhibit D
                           hereto); or

                  (B)      if such beneficial interest is being transferred to a
                           Qualified Institutional Buyer in accordance with Rule
                           l44A, a certification to that effect (substantially
                           in the form of Exhibit D hereto); or

                  (C)      if such beneficial interest is being transferred to
                           an Institutional Accredited Investor, delivery of a
                           certification to that effect (substantially in the
                           form of Exhibit D hereto) and a transferee
                           certificate for Institutional Accredited Investors
                           substantially in the form of Exhibit E hereto and an
                           Opinion of Counsel reasonably satisfactory to the
                           Company to the effect that such transfer is in
                           compliance with the Securities Act; or

                  (D)      if such beneficial interest is being transferred in
                           reliance on Regulation S, delivery of a certification
                           to that effect (substantially in the form of Exhibit
                           D hereto) and a transferor certificate for Regulation
                           S transfers substantially in the form of Exhibit F
<PAGE>   34
                                      -28-


                           hereto and an Opinion of Counsel reasonably
                           satisfactory to the Company to the effect that such
                           transfer is in compliance with the Securities Act; or

                  (E)      if such beneficial interest is being transferred in
                           reliance on Rule 144 under the Securities Act,
                           delivery of a certification to that effect
                           (substantially in the form of Exhibit D hereto) and
                           an Opinion of Counsel reasonably satisfactory to the
                           Company to the effect that such transfer is in
                           compliance with the Securities Act; or

                  (F)      if such beneficial interest is being transferred in
                           reliance on another exemption from the registration
                           requirements of the Securities Act, a certification
                           to that effect (substantially in the form of Exhibit
                           D hereto) and an Opinion of Counsel reasonably
                           satisfactory to the Company to the effect that such
                           transfer is in compliance with the Securities Act,

         then the Registrar or co-Registrar will cause, in accordance with the
         standing instructions and procedures existing between the Depository
         and the Registrar or co-Registrar, the aggregate principal amount of
         the applicable Global Security to be reduced and, following such
         reduction, the Company will execute and, upon receipt of an
         authentication order in the form of an Officers' Certificate in
         accordance with Section 2.02, the Trustee will authenticate and make
         available for delivery to the transferee a Physical Security in the
         appropriate principal amount.

                (ii) Securities issued in exchange for a beneficial interest in
         a Global Security pursuant to this Section 2.16(d) shall be registered
         in such names and in such authorized denominations as the Depository,
         pursuant to instructions from its direct or indirect participants or
         otherwise, shall instruct the Registrar or co-Registrar in writing. The
         Registrar or co-Registrar shall deliver such Physical Securities to the
         Persons in whose names such Physical Securities are so registered.

                  (e) Restrictions on Transfer and Exchange of Global
Securities. Notwithstanding any other provisions of this Indenture, a Global
Security may not be transferred as a whole except by the Depository to a nominee
of the Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.

                  (f) Private Placement Legend. Upon the transfer, exchange or
replacement of Securities not bearing the Private Placement Legend, the
Registrar or co-Registrar shall deliver Securities that do not bear the Private
Placement Legend. Upon the transfer, exchange or replacement of Securities
bearing the Private Placement Legend, the Registrar or co-Registrar shall
deliver only Securities that bear the Private Placement Legend unless, and the
Trustee is hereby authorized to deliver Securities without the Private Placement
Legend if, (i) there is delivered to the Trustee an Opinion of Counsel
reasonably satisfactory to the Company and the Trustee to the effect that
neither such legend nor the related restrictions on transfer are required in
order to maintain compliance with the provisions of the Securities Act or (ii)
such Security has been sold pursuant to an effective registration statement
under the Securities Act (including pursuant to a Registration).

                  (g) General. By its acceptance of any Security bearing the
Private Placement Legend, each Holder of such a Security acknowledges the
restrictions on transfer of such Security set forth in this Indenture and in the
Private Placement Legend and agrees that it will transfer such Security only as
provided in this Indenture.
<PAGE>   35
                                      -29-


                  The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer imposed
under this Indenture or under applicable law with respect to any transfer of any
interest in any Security (including any transfers between or among Participants
or beneficial owners of interest in any Global Security) other than to require
delivery of such certificates and other documentation or evidence as are
expressly required by, and to do so if and when expressly required by the terms
of, this Indenture, and to examine the same to determine substantial compliance
as to form with the express requirements hereof.

                  The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 2.15 or this Section
2.16. The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time upon the
giving of reasonable written notice to the Registrar.


                                  ARTICLE THREE

                                   REDEMPTION


SECTION 3.01.  Notices to Trustee.

                  If the Company elects to redeem Securities pursuant to
paragraph 5 of the Securities at the applicable redemption price set forth
thereon, it shall notify the Trustee in writing of the Redemption Date and the
principal amount of Securities to be redeemed. The Company shall give such
notice to the Trustee at least 45 days before the Redemption Date (unless a
shorter notice shall be agreed to by the Trustee in writing), together with an
Officers' Certificate stating that such redemption will comply with the
conditions contained herein.

SECTION 3.02.  Selection of Securities to Be Redeemed.

                  If less than all of the Securities are to be redeemed pursuant
to paragraph 5(a) or (b) of the Securities, the Trustee shall select the
Securities to be redeemed in compliance with the requirements of the national
securities exchange, if any, on which the Securities are listed or, if the
Securities are not then listed on a national securities exchange, on a pro rata
basis, by lot or in such other manner as the Trustee shall deem fair and
appropriate. The Trustee shall make the selection from the Securities then
outstanding, subject to redemption and not previously called for redemption.

                  The Trustee may select for redemption pursuant to paragraph
5(a) or (b) of the Securities portions of the principal amount of Securities
that have denominations equal to or larger than $1,000 principal amount.
Securities and portions of them the Trustee so selects shall be in amounts of
$1,000 principal amount or integral multiples thereof. Provisions of this
Indenture that apply to Securities called for redemption also apply to portions
of Securities called for redemption.

SECTION 3.03.  Notice of Redemption.

                  At least 30 days but not more than 60 days before a Redemption
Date, the Company shall mail a notice of redemption by first-class mail to each
Holder whose Securities are to be redeemed at such Holder's registered address;
provided, however, that notice of a redemption pursuant to paragraph 5(b) of the
<PAGE>   36
                                      -30-


Securities shall be mailed to each Holder whose Securities are to be redeemed no
later than 60 days following the consummation of the last Public Equity Offering
or Strategic Equity Investment resulting in gross cash proceeds to the Company,
when aggregated with all prior Public Equity Offerings and Strategic Equity
Investments, of at least $75.0 million.

                  Each notice of redemption shall identify the Securities to be
redeemed (including the CUSIP number thereon) and shall state:

                  (1)      the Redemption Date;

                  (2)      the redemption price;

                  (3)      the name and address of the Paying Agent to which the
         Securities are to be surrendered for redemption;

                  (4)      that Securities called for redemption must be
         surrendered to the Paying Agent to collect the redemption price;

                  (5)      that, unless the Company defaults in making the 
         redemption payment, interest on Securities called for redemption 
         ceases to accrue on and after the Redemption Date and the only 
         remaining right of the Holders is to receive payment of the redemption
         price upon surrender to the Paying Agent; and

                  (6)      if any Security is being redeemed in part, the
         portion of the principal amount of such Security to be redeemed and
         that, after the Redemption Date, upon surrender of such Security, a new
         Security or Securities in principal amount equal to the unredeemed
         portion thereof will be issued.

                  At the Company's request, the Trustee shall give the notice of
redemption on behalf of the Company, in the Company's name and at the Company's
expense.

SECTION 3.04.  Effect of Notice of Redemption.

                  Once a notice of redemption is mailed, Securities called for
redemption become due and payable on the Redemption Date and at the redemption
price. Upon surrender to the Paying Agent, such Securities shall be paid at the
redemption price, plus accrued interest thereon, if any, to the Redemption Date,
but interest installments whose maturity is on or prior to such Redemption Date
shall be payable to the Holders of record at the close of business on the
relevant Interest Record Date.

SECTION 3.05.  Deposit of Redemption Price.

                  Prior to 10:00 a.m. New York City time on the Redemption Date,
the Company shall deposit with the Paying Agent (or if the Company is its own
Paying Agent, shall, on or before the Redemption Date, segregate and hold in
trust) money sufficient to pay the redemption price of and accrued interest, if
any, on all Securities to be redeemed on that date other than Securities or
portions thereof called for redemption on that date which have been delivered by
the Company to the Trustee for cancellation.

                  If any Security surrendered for redemption in the manner
provided in the Securities shall not be so paid on the Redemption Date due to
the failure of the Company to deposit with the Paying Agent money
<PAGE>   37
                                      -31-


sufficient to pay the redemption price thereof, the principal and accrued and
unpaid interest, if any, thereon shall, until paid or duly provided for, bear
interest as provided in Sections 2.12 and 4.01 with respect to any payment
default.

SECTION 3.06.  Securities Redeemed in Part.

                  Upon surrender of a Security that is redeemed in part, the
Trustee shall authenticate for the Holder a new Security equal in principal
amount to the unredeemed portion of the Security surrendered.


                                  ARTICLE FOUR

                                    COVENANTS


SECTION 4.01.  Payment of Securities.

                  The Company shall pay the principal of and interest on the
Securities in the manner provided in the Securities and the Registration Rights
Agreement. An installment of principal or interest shall be considered paid on
the date due if the Trustee or Paying Agent (other than the Company, a
Subsidiary or an Affiliate of the Company) holds on that date money designated
for and sufficient to pay the installment in full and is not prohibited from
paying such money to the Holders of the Securities pursuant to the terms of this
Indenture.

                  The Company shall pay cash interest on overdue principal at
the same rate per annum borne by the Securities. The Company shall pay cash
interest on overdue installments of interest at the same rate per annum borne by
the Securities, to the extent lawful, as provided in Section 2.12.

SECTION 4.02.  Maintenance of Office or Agency.

                  The Company shall maintain in the Borough of Manhattan, The
City of New York, and, so long as the Securities are listed on the Luxembourg
Stock Exchange and the rules of such stock exchange require, in Luxembourg the
office or agency required under Section 2.03. The Company shall give prompt
written notice to the Trustee of the location, and any change in the location,
of such office or agency. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the address of the Trustee set forth in Section 10.02 hereof. The
Company hereby initially designates (i) the Trustee at its address set forth in
Section 10.02 hereof as its office or agency in The Borough of Manhattan, The
City of New York, for such purposes and (ii) Banque Internationale a Luxembourg
S.A., at 69, route d'Esch, L-1470 Luxembourg, as its office or agency in
Luxembourg for such purposes.

SECTION 4.03.  Corporate Existence.

                  Subject to Article Five, the Company shall do or shall cause
to be done all things necessary to preserve and keep in full force and effect
its corporate existence and the corporate, partnership or other existence of
each Restricted Subsidiary in accordance with the respective organizational
documents of each such Restricted Subsidiary and the rights (charter and
statutory) and material franchises of the Company and the Restricted
Subsidiaries; provided, however, that the Company shall not be required to
preserve any such right or franchise, or the corporate existence of any
Restricted Subsidiary, if the Board of Directors of the Company shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and the Restricted Subsidiaries, taken as a whole, and
that the loss thereof is not, and will not be, adverse in any material respect
to the Holders; provided, further, however, that a determination of the Board of
Directors of the
<PAGE>   38
                                      -32-


Company shall not be required in the event of a merger of one or more Wholly
Owned Restricted Subsidiaries of the Company with or into another Wholly Owned
Restricted Subsidiary of the Company or another Person, if the surviving Person
is a Wholly Owned Restricted Subsidiary of the Company organized under the laws
of the United States or a State thereof or of the District of Columbia.

SECTION 4.04.  Payment of Taxes and Other Claims.

                  The Company shall pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (1) all material taxes,
assessments and governmental charges levied or imposed upon the Company or any
Restricted Subsidiary or upon the income, profits or property of the Company or
any Restricted Subsidiary and (2) all lawful claims for labor, materials and
supplies which, in each case, if unpaid, might by law become a material
liability, or Lien upon the property, of the Company or any Restricted
Subsidiary; provided, however, that the Company shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which appropriate provision has been made.

SECTION 4.05.  Notice of Defaults.

                  (a) In the event that any Indebtedness of the Company or any
of its Subsidiaries is declared due and payable before its maturity because of
the occurrence of any default (or any event which, with notice or lapse of time,
or both, would constitute such a default) under such Indebtedness, the Company
shall promptly give written notice to the Trustee of such declaration, the
status of such default or event and what action the Company is taking or
proposes to take with respect thereto.

                  (b) Upon becoming aware of any Default, the Company shall
promptly deliver an Officers' Certificate to the Trustee specifying the Default.

SECTION 4.06.  Maintenance of Properties and Insurance.

                  (a) The Company shall cause all material properties owned by
or leased to it or any Restricted Subsidiary and used or useful in the conduct
of its business or the business of any Restricted Subsidiary to be maintained
and kept in normal condition, repair and working order and supplied with all
necessary equipment and shall cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary, so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section 4.06 shall prevent the Company or any
Restricted Subsidiary from discontinuing the use, operation or maintenance of
any of such properties, or disposing of any of them, if such discontinuance or
disposal is, in the judgment of the Board of Directors or of the board of
directors of the Restricted Subsidiary concerned, or of an officer (or other
agent employed by the Company or of any Restricted Subsidiary) of the Company or
such Restricted Subsidiary having managerial responsibility for any such
property, desirable in the conduct of the business of the Company or any
Restricted Subsidiary, and if such discontinuance or disposal is not adverse in
any material respect to the Holders.

                  (b) The Company shall maintain, and shall cause the Restricted
Subsidiaries to maintain, insurance with responsible carriers against such risks
and in such amounts, and with such deductibles, retentions,
<PAGE>   39
                                      -33-


self-insured amounts and co-insurance provisions, as are customarily carried by
similar businesses of similar size, including property and casualty loss, and
workers' compensation insurance.

SECTION 4.07.  Compliance Certificate.

                  The Company shall deliver to the Trustee within 120 days after
the close of each fiscal year a certificate signed by the principal executive
officer, principal financial officer or principal accounting officer stating
that a review of the activities of the Company has been made under the
supervision of the signing officers with a view to determining whether a Default
has occurred and whether or not the signers know of any Default by the Company
that occurred during such fiscal year. If they do know of such a Default, the
certificate shall describe all such Defaults, their status and the action the
Company is taking or proposes to take with respect thereto. The first
certificate to be delivered by the Company pursuant to this Section 4.07 shall
be for the fiscal year ending December 31, 1997.

SECTION 4.08.  Waiver of Stay, Extension or Usury Laws.

                  The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
or any usury law or other law, which would prohibit or forgive the Company from
paying all or any portion of the principal of and/or interest, if any, on the
Securities as contemplated herein, wherever enacted, now or at any time
hereafter in force, or which may affect the covenants or the performance of this
Indenture; and (to the extent that it may lawfully do so) the Company hereby
expressly waives all benefit or advantage of any such law, and covenants that it
shall not hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power as
though no such law had been enacted.

SECTION 4.09.  Provision of Financial Information.

                  Whether or not the Company is subject to Section 13(a) or
15(d) of the Exchange Act, or any successor provision thereto, the Company shall
file with the SEC (if permitted by SEC practice and applicable law and
regulations) the annual reports, quarterly reports and other documents which the
Company would have been required to file with the SEC pursuant to such Section
13(a) or 15(d) or any successor provision thereto if the Company were so
required, such documents to be filed with the SEC on or prior to the respective
dates (the "Required Filing Dates") by which the Company would have been
required so to file such documents if the Company were so required; provided,
however, that until the Company is subject to Section 13(a) or Section 15(d) of
the Exchange Act or any successor provisions thereto, the Required Filing Dates
for such quarterly reports shall be 75 days following the end of the applicable
fiscal quarter. The Company shall also in any event (a) within 15 days of each
Required Filing Date (whether or not permitted or required to be filed with the
SEC but subject to the proviso in the previous sentence) (i) transmit (or cause
to be transmitted) by mail to all Holders, as their names and addresses appear
in the Note register, without cost to such Holders, and (ii) file with the
Trustee, copies of the annual reports, quarterly reports and other documents
which the Company is required to file with the SEC pursuant to the preceding
sentence, or, if such filing is not so permitted, information and data of a
similar nature, and (b) if, notwithstanding the preceding sentence, filing such
documents by the Company with the SEC is not permitted by SEC practice or
applicable law or regulations, promptly upon written request supply copies of
such documents to any Holder. In addition, for so long as any Securities remain
outstanding, the Company will furnish to the Holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to any
beneficial holder of Securities, if not obtainable from the SEC, information of
<PAGE>   40
                                      -34-


the type that would be filed with the SEC pursuant to the foregoing provisions,
upon the request of any such holder.

SECTION 4.10.  Change of Control.

                  (a) Following the occurrence of a Change of Control (the date
of such occurrence being the "Change of Control Date"), the Company shall notify
the Trustee and Holders of the Securities of such occurrence in the manner
prescribed by this Indenture and shall, within 30 days after the Change of
Control Date, make an Offer to Purchase all Securities then outstanding at a
purchase price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the Purchase Date. The
Company will cause a copy of such notice to be published in a daily newspaper
with general circulation in Luxembourg (which is expected to be the Luxembourg
Wort). The Company's obligations may be satisfied if a third party makes the
Offer to Purchase in the manner, at the times and otherwise in compliance with
the requirements of this Indenture applicable to an Offer to Purchase made by
the Company and purchases all Securities validly tendered and not withdrawn
under such Offer to Purchase. Each Holder shall be entitled to tender all or any
portion of the Securities owned by such Holder pursuant to the Offer to
Purchase, subject to the requirement that any portion of a Security tendered
must be tendered in an integral multiple of $1,000 principal amount.

                  (b) On or prior to the Purchase Date specified in the Offer to
Purchase, the Company shall (i) accept for payment all Securities or portions
thereof validly tendered pursuant to the Offer, (ii) deposit with the Paying
Agent or, if the Company is acting as its own Paying Agent, segregate and hold
in trust as provided in Section 2.04) money sufficient to pay the Purchase Price
of all Securities or portions thereof so accepted and (iii) deliver or cause to
be delivered to the Trustee for cancellation all Securities so accepted together
with an Officers' Certificate stating the Securities or portions thereof
accepted for payment by the Company. The Paying Agent (or the Company, if so
acting) shall promptly mail or deliver to Holders of Securities so accepted,
payment in an amount equal to the Purchase Price for such Securities, and the
Trustee shall promptly authenticate and mail or deliver to each Holder of
Securities a new Security or Securities equal in principal amount to any
unpurchased portion of the Security surrendered as requested by the Holder. Any
Security not accepted for payment shall be promptly mailed or delivered by the
Company to the Holder thereof. The Company shall publicly announce the results
of the Offer on or as soon as practicable after the Purchase Date.

                  (c) If the Company makes an Offer to Purchase, the Company
will comply with all applicable tender offer laws and regulations, including, to
the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and
any other applicable Federal or state securities laws and regulations and any
applicable requirements of any securities exchange on which the Securities are
listed, and any violation of the provisions of this Indenture relating to such
Offer to Purchase occurring as a result of such compliance shall not be deemed a
Default.

SECTION 4.11.  Limitation on Restricted Payments.

                  The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly,

                  (i) declare or pay any dividend or any other distribution on
         any Equity Interests of the Company or any Restricted Subsidiary or
         make any payment or distribution to the direct or indirect holders of
         Equity Interests of the Company or any Restricted Subsidiary (other
         than any dividends, distributions and payments made to the Company or
         any Restricted Subsidiary and dividends or distri-
<PAGE>   41
                                      -35-



         butions payable to any Person solely in Qualified Equity Interests or
         in options, warrants or other rights to purchase Qualified Equity
         Interests);

                  (ii) purchase, redeem or otherwise acquire or retire for value
         any Equity Interests of the Company or any Restricted Subsidiary (other
         than any such Equity Interests owned by the Company or any Restricted
         Subsidiary);

                  (iii) purchase, redeem, defease or retire for value, or make
         any principal payment on, prior to any scheduled maturity, scheduled
         repayment or scheduled sinking fund payment, any Subordinated
         Indebtedness (other than any Subordinated Indebtedness held by any
         Restricted Subsidiary); or

                  (iv) make any Investment (other than Permitted Investments)

(any of the foregoing, a "Restricted Payment"), unless

                  (a) no Default shall have occurred and be continuing at the
         time of or after giving effect to such Restricted Payment;

                  (b) immediately after giving effect to such Restricted
         Payment, the Company would be able to Incur $1.00 of additional
         Indebtedness under Section 4.12(a); and

                  (c) immediately after giving effect to such Restricted
         Payment, the aggregate amount of all Restricted Payments (including the
         Fair Market Value of any non-cash Restricted Payment) declared or made
         on or after the Issue Date (excluding any Restricted Payment described
         in clauses (ii), (iii) or (iv) of the next paragraph) does not exceed
         an amount equal to the sum of the following (the "Basket"):

                          (1) (x) the Cumulative Operating Cash Flow determined
                  at the time of such Restricted Payment less (y) 150% of
                  cumulative Consolidated Interest Expense determined for the
                  period (treated as one accounting period) commencing on the
                  Issue Date and ending on the last day of the most recent
                  fiscal quarter immediately preceding the date of such
                  Restricted Payment for which consolidated financial
                  information of the Company is required to be available, plus

                          (2) the aggregate net cash proceeds received by the
                  Company either (x) as capital contributions to the Company
                  after the Issue Date or (y) from the issue and sale (other
                  than to a Subsidiary) of Qualified Equity Interests after the
                  Issue Date (other than any issuance and sale of Qualified
                  Equity Interests financed, directly or indirectly, using funds
                  (I) borrowed from the Company or any Subsidiary until and to
                  the extent such borrowing is repaid or (II) contributed,
                  extended, guaranteed or advanced by the Company or any
                  Subsidiary (including, without limitation, in respect of any
                  employee stock ownership or benefit plan)), plus

                          (3) the aggregate amount by which Indebtedness (other
                  than any Subordinated Indebtedness) of the Company or any
                  Restricted Subsidiary is reduced on the Company's balance
                  sheet upon the conversion or exchange (other than by a
                  Subsidiary of the Company) subsequent to the Issue Date into
                  Qualified Equity Interests (less the amount of any cash, or
<PAGE>   42
                                      -36-


                  the fair value of property, distributed by the Company or any
                  Restricted Subsidiary upon such conversion or exchange), plus

                          (4) in the case of the disposition or repayment of any
                  Investment that was treated as a Restricted Payment made after
                  the Issue Date, an amount (to the extent not included in the
                  computation of Cumulative Operating Cash Flow) equal to the
                  lesser of: (x) the return of capital with respect to such
                  Investment and (y) the amount of such Investment that was
                  treated as a Restricted Payment, in either case, less the cost
                  of the disposition of such Investment and net of taxes, plus

                          (5) so long as the Designation thereof was treated as
                  a Restricted Payment made after the Issue Date, with respect
                  to any Unrestricted Subsidiary that has been redesignated as a
                  Restricted Subsidiary after the Issue Date in accordance with
                  Section 4.14, the Company's proportionate interest in an
                  amount equal to the excess of (x) the total assets of such
                  Subsidiary, valued on an aggregate basis at the lesser of book
                  value and Fair Market Value, over (y) the total liabilities of
                  such Subsidiary, determined in accordance with GAAP (and
                  provided that such amount shall not in any case exceed the
                  Designation Amount with respect to such Restricted Subsidiary
                  upon its Designation), minus

                          (6) with respect to each Subsidiary of the Company
                  which has been designated as an Unrestricted Subsidiary after
                  the Issue Date in accordance with Section 4.14, the greater of
                  (x) $0 and (y) the Designation Amount thereof (measured as of
                  the Date of Designation).

                  Notwithstanding the foregoing, the GTS Contribution shall not
be taken into account in calculating the Basket.

                  The foregoing provisions will not prevent (i) the payment of
any dividend or distribution on, or redemption of, Equity Interests within 60
days after the date of declaration of such dividend or distribution or the
giving of formal notice of such redemption, if at the date of such declaration
or giving of formal notice such payment or redemption would comply with the
provisions of the Indenture; (ii) the purchase, redemption, retirement or other
acquisition of any Equity Interests of the Company in exchange for, or out of
the net cash proceeds of the substantially concurrent (A) common equity capital
contribution to the Company from any Person (other than a Subsidiary) or (B)
issue and sale (other than to a Subsidiary) of, Qualified Equity Interests;
(iii) any Investment to the extent that the consideration therefor consists of
the net proceeds of the substantially concurrent issue and sale (other than to a
Subsidiary) of Qualified Equity Interests; (iv) the purchase, redemption,
retirement, defeasance or other acquisition of Subordinated Indebtedness made in
exchange for, or out of the net cash proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary) of, (x) Qualified Equity Interests
or (y) other Subordinated Indebtedness having no stated maturity for the payment
of principal thereof prior to the Maturity Date; or (v) any Investment in any
Person principally engaged in a Telecommunications Business; provided, however,
that Investments pursuant to this clause (v) shall not exceed $25.0 million in
the aggregate at any time outstanding; provided, further, however, that in the
case of each of clauses (ii), (iii), (iv) and (v), no Default shall have
occurred and be continuing or would arise therefrom.

SECTION 4.12.  Limitation on Incurrence of Indebtedness.

                  (a) The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, Incur any Indebtedness;
provided, however, that the Company may Incur Indebtedness if,
<PAGE>   43
                                      -37-



at the time of such Incurrence, the Debt to Annualized Operating Cash Flow Ratio
would be less than or equal to 6.0 to 1.0.

                  (b) The foregoing limitations of paragraph (a) of this
covenant will not apply to any of the following, each of which shall be given
independent effect:

                  (i) the Securities, and Permitted Refinancings thereof;

                  (ii) Indebtedness of the Company or any Restricted Subsidiary
         to the extent outstanding on the date of the Indenture, and Permitted
         Refinancings thereof;

                  (iii) Indebtedness of the Company or Qualified Subsidiary
         Indebtedness, in each case, to the extent that the proceeds of or
         credit support provided by such Indebtedness is used to finance the
         cost (including the cost of design, development, construction,
         installation or integration) of network assets, equipment or inventory
         acquired by the Company or a Restricted Subsidiary after the Issue
         Date, and Permitted Refinancings thereof;

                  (iv) (1) Indebtedness of the Company or Qualified Subsidiary
         Indebtedness, in each case, to the extent that the proceeds of or
         credit support provided by such Indebtedness is used to finance a
         Telecommunications Acquisition, or working capital for, or to finance
         the construction of, the business or network acquired and (2) Acquired
         Indebtedness, and, in each case, Permitted Refinancings thereof, but in
         each case only to the extent that (x) the aggregate amount of
         Indebtedness outstanding of the Company and the Restricted Subsidiaries
         after giving effect to the Incurrence of such Indebtedness and the
         application of the proceeds therefrom does not exceed the product of
         2.0 and the Share Capital of the Company at the date of Incurrence of
         such Indebtedness or (y) the aggregate amount of such Indebtedness or
         Acquired Indebtedness, together with all Indebtedness of the Person, if
         any, that is to become a Restricted Subsidiary or be merged or
         consolidated with or into the Company or any Restricted Subsidiary in
         the contemplated transaction outstanding at the time of such
         transaction (whether or not Incurred in connection with, or in
         contemplation of, such transaction), does not exceed the net sum of the
         plant, property and equipment set forth on the Latest Balance Sheet of
         such Person;

                  (v) (1) Indebtedness of any Restricted Subsidiary owed to and
         held by the Company or any Restricted Subsidiary and (2) Indebtedness
         of the Company owed to and held by any Restricted Subsidiary which is
         unsecured and subordinated in right of payment to the payment and
         performance of the Company's obligations under the Securities;
         provided, however, that an Incurrence of Indebtedness that is not
         permitted by this clause (v) shall be deemed to have occurred upon (x)
         any sale or other disposition of any Indebtedness of the Company or any
         Restricted Subsidiary referred to in this clause (v) to any Person
         other than the Company or any Restricted Subsidiary or (y) any
         Restricted Subsidiary that holds Indebtedness of the Company or another
         Restricted Subsidiary ceasing to be a Restricted Subsidiary;

                  (vi) Interest Rate Protection Obligations of the Company or
         any Restricted Subsidiary relating to Indebtedness of the Company or
         such Restricted Subsidiary, as the case may be (which Indebtedness (x)
         bears interest at fluctuating interest rates and (y) is otherwise
         permitted to be Incurred under this covenant); provided, however, that
         the notional principal amount of such Interest Rate Protection
         Obligations does not exceed the principal amount of the Indebtedness to
         which such Interest Rate Protection Obligations relate;
<PAGE>   44
                                      -38-


               (vii) Indebtedness of the Company or any Restricted Subsidiary
         under Currency Agreements to the extent relating to (x) Indebtedness of
         the Company or such Restricted Subsidiary, as the case may be, and/or
         (y) obligations to purchase assets, properties or services incurred in
         the ordinary course of business of the Company or such Restricted
         Subsidiary, as the case may be; provided, however, that such Currency
         Agreements do not increase the Indebtedness or other obligations of the
         Company and the Restricted Subsidiaries outstanding other than as a
         result of fluctuations in foreign currency exchange rates or by reason
         of fees, indemnities or compensation payable thereunder;

              (viii) Indebtedness of the Company and/or any Restricted
         Subsidiary in respect of performance bonds of the Company or any
         Restricted Subsidiary or surety bonds provided by the Company or any
         Restricted Subsidiary incurred in the ordinary course of business and
         on ordinary business terms in connection with the construction or
         operation of a Telecommunications Business; and

                (ix) in addition to the items referred to in clauses (i) through
         (viii) above, Indebtedness of the Company or Qualified Subsidiary
         Indebtedness in an aggregate amount not to exceed $15.0 million at any
         time outstanding.

                  (c) For purposes of determining any particular amount of
Indebtedness under this covenant, guarantees, Liens or obligations with respect
to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included; provided,
however, that the foregoing shall not in any way be deemed to limit the
provisions of Section 4.18.

                  (d) For purposes of determining compliance with this covenant,
in the event that an item of Indebtedness may be Incurred through the first
paragraph of this covenant or by meeting the criteria of one or more of the
types of Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion may,
at the time of such Incurrence, (i) classify such item of Indebtedness under and
comply with either of such paragraphs (or any of such definitions), as
applicable, (ii) classify and divide such item of Indebtedness into more than
one of such paragraphs (or definitions), as applicable, and (iii) elect to
comply with such paragraphs (or definitions), as applicable, in any order.

SECTION 4.13.  Limitations on Restrictions Affecting Restricted Subsidiaries.

                  The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (x) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (y) make loans or advances to, or guarantee any
Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary or (z) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary.

                  The foregoing shall not prohibit (a) any encumbrance or
restriction existing under or by reason of any agreement in effect on the Issue
Date, as any such agreement is in effect on such date or as thereafter amended
or supplemented but only if such encumbrance or restriction is no more
restrictive than in the agreement being amended; (b) customary provisions
contained in an agreement that has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of a Restricted
Subsidiary; provided, however, that (x) such encumbrance or restriction is 
applicable only to such Restricted Subsidiary or assets and (y) such sale or 
disposition is made in accordance with Section 4.16; (c) any encumbrance or re-
<PAGE>   45
                                      -39-


striction existing under or by reason of applicable law; (d) customary
provisions restricting subletting or assignment of any lease governing any
leasehold interest of any Restricted Subsidiary; (e) covenants in purchase money
obligations for property acquired in the ordinary course of business restricting
transfer of such property; (f) covenants in security agreements securing
Indebtedness of a Restricted Subsidiary (to the extent that such Liens were
otherwise incurred in accordance with Section 4.15) that restrict the transfer
of property subject to such agreements; (g) any agreement or other instrument of
a Person acquired by the Company or any Restricted Subsidiary in existence at
the time of such acquisition, which encumbrance or restriction (x) is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the properties or assets of the Person so acquired, and (y) is
not incurred in connection with or in contemplation of such acquisition; or (h)
contained in any agreement entered into after the Issue Date, so long as such
encumbrance or restriction is not materially more disadvantageous to the Holders
than the encumbrances and restrictions in existence at the Issue Date.

SECTION 4.14.  Designation of Unrestricted Subsidiaries.

                  (a) The Company may designate any Subsidiary of the Company as
an "Unrestricted Subsidiary" under this Indenture (a "Designation") only if:

                  (i) no Default shall have occurred and be continuing at the
         time of or after giving effect to such Designation;

                  (ii) at the time of and after giving effect to such
         Designation, the Company could Incur $1.00 of additional Indebtedness
         under Section 4.12(a); and

                  (iii) the Company would be permitted to make an Investment
         (other than a Permitted Investment) at the time of Designation
         (assuming the effectiveness of such Designation) pursuant to the first
         paragraph of Section 4.11 in an amount (the "Designation Amount") equal
         to the Fair Market Value of the Company's proportionate interest in the
         net worth of such Subsidiary on such date calculated in accordance with
         GAAP.

                  All Subsidiaries of Unrestricted Subsidiaries shall be
Unrestricted Subsidiaries.

                  The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, at any time (x) provide credit
support for, subject any of its properties or assets (other than the Equity
Interests of any Unrestricted Subsidiary) to the satisfaction of, or guarantee,
any Indebtedness of any Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary.

                  (b) The Company may revoke any Designation of a Subsidiary as
an Unrestricted Subsidiary (a "Revocation") only if:

                  (i) no Default shall have occurred and be continuing at the
         time of and after giving effect to such Revocation;
<PAGE>   46
                                      -40-



                (ii) all Liens and Indebtedness of such Unrestricted Subsidiary
         outstanding immediately following such Revocation would, if Incurred at
         such time, have been permitted to be Incurred for all purposes of the
         Indenture; and

               (iii) any transaction (or series of related transactions) between
         such Subsidiary and any of its Affiliates that occurred while such
         Subsidiary was an Unrestricted Subsidiary would be permitted by Section
         4.17 as if such transaction (or series of related transactions) had
         occurred at the time of such Revocation (after giving effect to any
         modification to such transaction (or series of related transactions)
         effective at such time).

                  All Designations and Revocations must be evidenced by
resolutions of the Board of Directors of the Company, delivered to the Trustee
certifying compliance with the foregoing provisions.

SECTION 4.15.  Limitation on Liens.

                  The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, Incur any Lien (other than any
Permitted Lien) of any kind against or upon any of their respective properties
or assets now owned or hereafter acquired, or any proceeds, income or profits
therefrom, unless contemporaneously therewith or prior thereto, (i) in the case
of any Lien securing an obligation that ranks pari passu with the Securities,
effective provision is made to secure the Securities equally and ratably with or
prior to such obligation with a Lien on the same collateral and (ii) in the case
of any Lien securing an obligation that is subordinated in right of payment to
the Securities, effective provision is made to secure the Securities with a Lien
on the same collateral that is prior to the Lien securing such subordinated
obligation, in each case, for so long as such obligation is secured by such
Lien.

SECTION 4.16.  Limitation on Asset Sales.

                  The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, make any Asset Sale, unless
(x) the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the assets sold or otherwise disposed of and (y) at least 75% of such
consideration consists of (i) cash or Cash Equivalents, (ii) Replacement Assets,
(iii) publicly traded Equity Interests of a Person who is engaged primarily in a
Telecommunications Business; provided, however, that the Company or such
Restricted Subsidiary shall sell (a "Monetization Sale"), for cash or Cash
Equivalents, such Equity Interests to a third Person (other than to the Company
or a Subsidiary thereof) at a price not less than the Fair Market Value thereof
within 365 days of the consummation of such Asset Sale, or (iv) any combination
of the foregoing clauses (i) through (iii). The amount of any (x) Indebtedness
(other than any Subordinated Indebtedness) of the Company or any Restricted
Subsidiary that is actually assumed by the transferee in such Asset Sale and
from which the Company and the Restricted Subsidiaries are fully released shall
be deemed to be cash for purposes of determining the percentage of cash
consideration received by the Company or such Restricted Subsidiary and (y)
notes or other similar obligations received by the Company or any Restricted
Subsidiary from such transferee that are immediately converted, sold or
exchanged (or are converted, sold or exchanged within 365 days of the related
Asset Sale) by the Company or any Restricted Subsidiary into cash shall be
deemed to be cash, in an amount equal to the net cash proceeds realized upon
such conversion, sale or exchange for purposes of determining the percentage of
cash consideration received by the Company or such Restricted Subsidiary. Any
Net Cash Proceeds from any Asset Sale or any Monetization Sale that are not
invested in Replacement Assets or used to repay and permanently reduce the
commitments under Indebtedness of any Restricted Subsidiary within 365 days of
the
<PAGE>   47
                                      -41-


consummation of such Asset Sale or Monetization Sale shall constitute "Excess
Proceeds" subject to disposition as provided below.

                  Within 40 days after the aggregate amount of Excess Proceeds
equals or exceeds $10.0 million, the Company shall make an Offer to Purchase,
from all Holders, that aggregate principal amount of Securities as can be
purchased with the Note Portion of Excess Proceeds at a price in cash equal to
100% of the principal amount thereof, plus accrued and unpaid interest, if any,
to any purchase date. To the extent that the aggregate amount of principal and
accrued interest of Securities validly tendered and not withdrawn pursuant to an
Offer to Purchase is less than the Excess Proceeds, the Company may use such
surplus for general corporate purposes. If the aggregate amount of principal and
accrued interest of Securities validly tendered and not withdrawn by Holders
thereof exceeds the amount of Securities that can be purchased with the Note
Portion of Excess Proceeds, Securities to be purchased will be selected pro rata
based on the aggregate principal amount of Securities tendered by each Holder.
Upon completion of an Offer to Purchase, the amount of Excess Proceeds with
respect to the applicable Asset Sale or Monetization Sale shall be reset to
zero.

                  In the event that any other Indebtedness of the Company that
ranks pari passu with the Securities (the "Other Debt") requires an offer to
purchase to be made to repurchase such Other Debt upon the consummation of an
Asset Sale, the Company may apply the Excess Proceeds otherwise required to be
applied to an Offer to Purchase to offer to purchase such Other Debt and to an
Offer to Purchase so long as the amount of such Excess Proceeds applied to
purchase the Securities is not less than the Note Portion of Excess Proceeds.
With respect to any Excess Proceeds, the Company shall make the Offer to
Purchase in respect thereof at the same time as the analogous offer to purchase
is made pursuant to any Other Debt and the Purchase Date in respect thereof
shall be the same as the purchase date in respect thereof pursuant to any Other
Debt.

                  For purposes of this covenant, "Note Portion of Excess
Proceeds" means (1) if no Other Debt is being offered to be purchased, the
amount of the Excess Proceeds and (2) if Other Debt is being offered to be
purchased, the amount of the Excess Proceeds equal to the product of (x) the
Excess Proceeds and (y) a fraction the numerator of which is the aggregate
amount of all Securities tendered pursuant to the Offer to Purchase related to
such Excess Proceeds (the "Note Amount") and the denominator of which is the sum
of the Note Amount and the aggregate amount as of the relevant purchase date of
all Other Debt tendered and purchased pursuant to a concurrent offer to purchase
such Other Debt made at the time of such Offer to Purchase.

                  In the event that the Company makes an Offer to Purchase the
Securities, the Company shall comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act, and any violation of the provisions of the
Indenture relating to such Offer to Purchase occurring as a result of such
compliance shall not be deemed a Default or an Event of Default.

SECTION 4.17.  Limitation on Transactions with Affiliates.

                  The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, conduct any business or enter
into any transaction or series of related transactions with or for the benefit
of any Affiliate, any holder of 5% or more of any class of Equity Interests or
any officer, director or employee of the Company or any Restricted Subsidiary
(each, an "Affiliate Transaction"), unless such Affiliate Transaction is on
terms that are no less favorable to the Company or such Restricted Subsidiary,
as the case may be, than could reasonably be obtained at such time in a
comparable transaction with an unaffiliated third party. For any such
transaction that involves value in excess of $5.0 million, the Company shall
deliver to the
<PAGE>   48
                                      -42-


Trustee an Officers' Certificate stating that a majority of the Disinterested
Directors has determined that the transaction satisfies the above criteria and
shall evidence such a determination by a Board Resolution delivered to the
Trustee. For any such transaction that involves value in excess of $12.5
million, the Company shall also obtain a written opinion from an Independent
Financial Advisor to the effect that such transaction is fair, from a financial
point of view, to the Company or such Restricted Subsidiary, as the case may be.

                  Notwithstanding the foregoing, the restrictions set forth in
this covenant shall not apply to (i) transactions between or among the Company
and one or more Restricted Subsidiaries or between or among Restricted
Subsidiaries; (ii) customary directors' fees, indemnification and similar
arrangements, employee salaries, bonuses or employment agreements, compensation
or employee benefit arrangements and incentive arrangements with any officer,
director or employee of the Company or any Restricted Subsidiary entered into in
the ordinary course of business (including customary benefits thereunder); (iii)
transactions pursuant to agreements in effect on the Issue Date, as such
agreements are in effect on the Issue Date or as thereafter amended or
supplemented in a manner not adverse to the Holders; (iv) loans and advances to
officers, directors and employees of the Company or any Restricted Subsidiary
for travel, entertainment, moving and other relocation expenses, in each case
made in the ordinary course of business and consistent with past business
practices; (v) any transactions between the Company or any Restricted
Subsidiary, on the one hand, and any Affiliate of the Company engaged primarily
in a Telecommunications Business, on the other hand, (x) in the ordinary course
of business and consistent with commercially reasonable practices or (y)
approved by a majority of the Disinterested Directors; (vi) any payment pursuant
to any tax sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; provided that such payment is not greater
than that which the Company would be required to pay as a stand-alone taxpayer;
(vii) the pledge of Equity Interests of Unrestricted Subsidiaries to support the
Indebtedness thereof; and (viii) payment of dividends in respect of Equity
Interests of the Company or any Restricted Subsidiary permitted under Section
4.11.

SECTION 4.18.  Limitation on Issuances of Guarantees by Restricted Subsidiaries.

                  The Company shall not cause or permit any Restricted
Subsidiary, directly or indirectly, to guarantee any Indebtedness of the Company
("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
pursuant to which such Restricted Subsidiary guarantees (a "Subsidiary
Guarantee") all of the Company's obligations under the Securities and the
Indenture and (ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee. If the Guaranteed Indebtedness is (A)
pari passu with the Securities, then the guarantee of such Guaranteed
Indebtedness shall be pari passu with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated to the Securities, then the guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated to the
Securities.

                  Any Subsidiary Guarantee by a Restricted Subsidiary shall
provide by its terms that it shall be automatically and unconditionally released
and discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of the Company, of all of the Equity Interests of the Company or any
Restricted Subsidiary in, or all or substantially all the assets of, such
Restricted Subsidiary (which sale, exchange or transfer is made in accordance
with this Indenture) or (ii) the release or discharge of the guarantee which
resulted in the creation of such Subsidiary Guarantee, except a discharge or
release by or as a result of payment under such guarantee.
<PAGE>   49
                                      -43-


SECTION 4.19. Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries.

                  The Company shall not sell, and shall not cause or permit any
Restricted Subsidiary, directly or indirectly, to issue or sell, any Equity
Interests of a Restricted Subsidiary, except (i) to the Company or a Wholly
Owned Restricted Subsidiary; (ii) if, immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary; or (iii) in the case of issuance of Equity Interests by a
non-Wholly Owned Restricted Subsidiary if, after giving effect to such issuance,
the Company maintains its direct or indirect percentage of beneficial and
economic ownership of such non-Wholly Owned Restricted Subsidiary.

SECTION 4.20.  Additional Amounts.

                  (a) All payments made by the Company under or with respect to
the Securities will be made free and clear of and without withholding or
deduction for or on account of any present of future Taxes imposed or levied by
or on behalf of any Taxing Authority within the Netherlands, or within any other
jurisdiction in which the Company is organized or engaged in business for tax
purposes, unless the Company is required to withhold or deduct Taxes by law or
by the interpretation or administration thereof. If the Company is required to
withhold or deduct any amount for or on account of Taxes imposed by a Taxing
Authority within the Netherlands, or within any other jurisdiction in which the
Company is organized or engaged in business for tax purposes, from any payment
made under or with respect to the Securities, the Company will pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each holder of Securities (including Additional Amounts)
after such withholding or deduction will equal the amount the holder would have
received if such Taxes had not been withheld or deducted; provided, however,
that no Additional Amounts will be payable with respect to any Tax that would
not have been imposed, payable or due (i) but for the existence of any present
or former connection between the holder (or the beneficial owner of, or person
ultimately entitled to obtain an interest in, such Securities) and the
Netherlands or other jurisdiction in which the Company is organized or engaged
in business for tax purposes other than the mere holding of the Securities; (ii)
but for the failure to satisfy any certification, identification or other
reporting requirements whether imposed by statute, treaty, regulation or
administrative practice, provided that the Company has delivered a request to
the holder to comply with such requirements at least 30 days prior to the date
by which such compliance is required; (iii) if the presentation of Securities
(where presentation is required) for payment has occurred within 30 days after
the date such payment was due and payable or was duly provided for, whichever is
later; or (iv) if the beneficial owner of, or person ultimately entitled to
obtain an interest in, such Securities had been the holder of the Securities and
would not be entitled to the payment of Additional Amounts (excluding the impact
of the book-entry procedures described in Section 2.15). In addition, Additional
Amounts will not be payable with respect to any Tax which is payable otherwise
than by withholding from payments of, or in respect of principal of, or any
interest on, the Securities.

SECTION 4.21.  Deposit of Funds with Escrow Agent.

                  (a) On the Issue Date, the Company shall deposit with the
Escrow Agent funds that together with the proceeds from the investment thereof
will be sufficient to pay the first four scheduled interest payments on the
Securities (excluding any Additional Amounts or Additional Interest). All
Collateral shall be held in the Escrow Account until permitted to be disbursed
pursuant to the Escrow Agreement and then shall be disbursed strictly in
accordance with the terms thereof.
<PAGE>   50
                                      -44-


                  (b) Pending release of the Escrow Funds as provided in the
Escrow Agreement, the Escrow Funds will be invested in Cash Equivalents as
specifically directed in writing by the Company. Any interest or other profit
resulting from such investment will be deposited in the Escrow Account.


                                  ARTICLE FIVE

                         MERGERS; SUCCESSOR CORPORATION


SECTION 5.01.  Mergers, Sale of Assets, etc.

                  The Company shall not consolidate with or merge with or into
(whether or not the Company is the Surviving Person) any other Person and the
Company shall not, and shall not cause or permit any Restricted Subsidiary to,
sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the property and assets of the Company and the Restricted
Subsidiaries, taken as a whole, to any Person or Persons (other than any
Restricted Subsidiary), in each case, in a single transaction or series of
related transactions, unless: (i) either (x) the Company shall be the Surviving
Person or (y) the Surviving Person (if other than the Company) shall be a
corporation organized and validly existing under the laws of The Netherlands,
the United States of America or any State thereof or the District of Columbia,
and shall, in any such case, expressly assume by a supplemental indenture, the
due and punctual payment of the principal of and interest on the Securities and
the performance and observance of every covenant of this Indenture, the Escrow
Agreement and the Registration Rights Agreement to be performed or observed on
the part of the Company; (ii) immediately after giving effect to such
transaction, no Default shall have occurred and be continuing; and (iii)
immediately after giving effect to such transaction, the Surviving Person (as
the Company) could Incur at least $1.00 of additional Indebtedness under Section
4.12(a).

                  For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of
transactions) of all or substantially all the properties and assets of one or
more Restricted Subsidiaries the Equity Interests of which constitutes all or
substantially all the properties and assets of the Company shall be deemed to be
the transfer of all or substantially all the properties and assets of the
Company.

SECTION 5.02.  Successor Corporation Substituted.

                  In the event of any transaction (other than a lease) described
in and complying with the conditions listed in the first paragraph of this
covenant in which the Company is not the Surviving Person and the Surviving
Person is to assume all the Obligations of the Company under the Securities,
this Indenture, the Escrow Agreement and the Registration Rights Agreement
pursuant to a supplemental indenture, such Surviving Person shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
and the Company shall be discharged from its Obligations under the Securities,
this Indenture, the Escrow Agreement and the Registration Rights Agreement.
<PAGE>   51
                                      -45-



                                   ARTICLE SIX

                              DEFAULT AND REMEDIES


SECTION 6.01.  Events of Default.

                  Each of the following shall be an "Event of Default" for
purposes of this Indenture:

                  (1) failure to pay principal of any Security when due;

                  (2) failure to pay any interest on any Security when due,
         continued for 30 days or more;

                  (3) failure to pay on the Purchase Date the Purchase Price for
         any Security validly tendered pursuant to an Offer to Purchase;

                  (4) failure to perform or comply with any of the provisions of
         Section 5.01;

                  (5) failure to perform any other covenant, warranty or
         agreement of the Company under this Indenture or the Escrow Agreement
         or in the Securities, and the Default continues for the period and
         after the notice specified in the last paragraph of this Section 6.01;

                  (6) there shall be, with respect to any issue or issues of
         Indebtedness of the Company or any Restricted Subsidiary having an
         outstanding principal amount of $10.0 million or more in aggregate for
         such issues of all such Persons, whether such Indebtedness now exists
         or shall hereafter be created, (x) an event of default that has caused
         the holders thereof (or their representative) (I) to declare such
         Indebtedness to be due and payable prior to its scheduled maturity and
         such Indebtedness has not been discharged in full or such acceleration
         has not been rescinded or annulled within 45 days following such
         acceleration and/or (II) to commence judicial proceeding to foreclose
         upon, or to exercise remedies under applicable law or applicable
         security documents to take ownership of, the property or assets
         securing such Indebtedness and/or (y) the failure to make a principal
         payment at the final (but not any interim) fixed maturity and such
         defaulted payment shall not have been made, waived or extended within
         45 days of such payment default;

                  (7) there shall have been any final judgment or judgments
         against the Company or any Restricted Subsidiary in an amount of $10.0
         million or more which remain undischarged or unstayed for a period of
         60 consecutive days;

                  (8) the Company or any Significant Restricted Subsidiary
         pursuant to or within the meaning of any Bankruptcy Law:

                           (A) admits in writing its inability to pay its debts
                  generally as they become due,

                           (B) commences a voluntary case or proceeding,

                           (C) consents to the entry of an order for relief
                  against it in an involuntary case or proceeding,
<PAGE>   52
                                      -46-


                           (D) consents or acquiesces in the institution of a
                  bankruptcy or insolvency proceeding against it,

                           (E) consents to the appointment of a Custodian of it
                  or for all or substantially all of its property, or

                           (F) makes a general assignment for the benefit of its
                  creditors, or any of them takes any action to authorize or
                  effect any of the foregoing;

                  (9) a court of competent jurisdiction enters an order or
         decree under any Bankruptcy Law that:

                           (A) is for relief against the Company or any
                  Significant Restricted Subsidiary in an involuntary case or
                  proceeding,

                           (B) appoints a Custodian of the Company or any
                  Significant Restricted Subsidiary or for all or substantially
                  all of its property, or

                           (C) orders the liquidation of the Company or any
                  Significant Restricted Subsidiary, and in each case the order
                  or decree remains unstayed and in effect for 60 days;
                  provided, however, that if the entry of such order or decree
                  is appealed and dismissed on appeal, then the Event of Default
                  hereunder by reason of the entry of such order or decree shall
                  be deemed to have been cured; or

                  (10) the Company challenges the Lien on the Collateral under
         the Escrow Agreement prior to such time as the Collateral is to be
         released to the Company, or the Collateral becomes subject to any Lien
         other than the Lien under the Escrow Agreement.

                  The term "Bankruptcy Law" means Title 11, U.S. Code or any
similar Federal, state or foreign law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law.

                  A Default under clause (5) is not an Event of Default until
the Trustee notifies the Company, or the Holders of at least 25% in aggregate
principal amount of the outstanding Securities notify the Company and the
Trustee, of the Default in writing and the Company does not cure the Default
within 30 days after receipt of the notice. The notice must specify the Default,
demand that it be remedied and state that the notice is a "Notice of Default."
Such notice shall be given by the Trustee if so requested by the Holders of at
least 25% in principal amount of the Securities then outstanding. When a Default
is cured, it ceases.

SECTION 6.02.  Acceleration.

                  If an Event of Default with respect to the Securities (other
than an Event of Default specified in clause (8) or (9) of Section 6.01 with
respect to the Company) occurs and is continuing, the Trustee or the Holders of
at least 25% in aggregate principal amount of the outstanding Securities by
notice in writing to the Company may declare the unpaid principal of and accrued
interest to the date of acceleration on all outstanding Securities to be due and
payable immediately and, upon any such declaration, such principal amount and
accrued interest, notwithstanding anything contained in this Indenture or the
Securities to the contrary, shall become immediately due and payable.
<PAGE>   53
                                      -47-


                  If an Event of Default specified in clause (8) or (9) of
Section 6.01 with respect to the Company occurs, all unpaid principal of and
accrued interest on all outstanding Securities shall ipso facto become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.

                  After a declaration of acceleration, but before a judgment or
decree of the money due in respect of the Securities has been obtained, the
Holders of not less than a majority in aggregate principal amount of the
Securities then outstanding by written notice to the Trustee may rescind an
acceleration and its consequences if all existing Events of Default (other than
the nonpayment of principal of and interest on the Securities which has become
due solely by virtue of such acceleration) have been cured or waived and if the
rescission would not conflict with any judgment or decree. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.

SECTION 6.03.  Other Remedies.

                  If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy by proceeding at law or in equity to collect the
payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities, this Indenture or the Escrow
Agreement.

                  The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the proceeding.
A delay or omission by the Trustee or any Securityholder in exercising any right
or remedy maturing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the 
extent permitted by law.

                  Upon a declaration of acceleration of the Securities in
accordance with Section 6.02, the Trustee shall foreclose on all Collateral and
take all other actions permitted of a secured party under the UCC or otherwise.

SECTION 6.04.  Waiver of Past Default.

                  Subject to Sections 2.09, 6.07 and 9.02, prior to the
declaration of acceleration of the Securities, the Holders of not less than a
majority in aggregate principal amount of the outstanding Securities by written
notice to the Trustee may waive an existing Default and its consequences, except
a Default in the payment of principal of or interest on any Security as
specified in Section 6.01(1) or (2) or a Default in respect of any term or
provision of this Indenture that may not be amended or modified without the
consent of each Holder affected as provided in Section 9.02. The Company shall
deliver to the Trustee an Officers' Certificate stating that the requisite
percentage of Holders have consented to such waiver and attaching copies of such
consents. In case of any such waiver, the Company, the Trustee and the Holders
shall be restored to their former positions and rights hereunder and under the
Securities, respectively. This paragraph of this Section 6.04 shall be in lieu
of Section 316(a)(1)(B) of the TIA and such Section 316(a)(1)(B) of the TIA is
hereby expressly excluded from this Indenture and the Securities, as permitted
by the TIA.

                  Upon any such waiver, such Default shall cease to exist and be
deemed to have been cured and not to have occurred, and any Event of Default
arising therefrom shall be deemed to have been cured and not to have occurred
for every purpose of this Indenture and the Securities, but no such waiver shall
extend to any subsequent or other Default or impair any right consequent
thereon.
<PAGE>   54
                                      -48-



SECTION 6.05.  Control by Majority.

                  Subject to Section 2.09, the Holders of a majority in
principal amount of the outstanding Securities may direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on it. However, the Trustee may refuse
to follow any direction that conflicts with law, this Indenture or the Escrow
Agreement, that the Trustee determines may be unduly prejudicial to the rights
of another Securityholder, or that may involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee which is not inconsistent with such direction. In the
event the Trustee takes any action or follows any direction pursuant to this
Indenture, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against any loss or expense caused by taking such action
or following such direction. This Section 6.05 shall be in lieu of Section
316(a)(1)(A) of the TIA, and such Section 316(a)(1)(A) of the TIA is hereby
expressly excluded from this Indenture and the Securities, as permitted by the
TIA.

SECTION 6.06.  Limitation on Suits.

                  A Securityholder may not pursue any remedy with respect to
this Indenture or the Securities
unless:

                  (i) the Holder gives to the Trustee written notice of a
         continuing Event of Default;

                  (ii) the Holders of at least 25% in aggregate principal amount
         of the outstanding Securities make a written request to the Trustee to
         pursue a remedy;

                  (iii) such Holder or Holders offer and, if requested, provide
         to the Trustee indemnity reasonably satisfactory to the Trustee against
         any loss, liability or expense;

                  (iv) the Trustee does not comply with the request within 60
         days after receipt of the request; and

                  (v) during such 60-day period the Holders of a majority in
         principal amount of the outstanding Securities (excluding Affiliates of
         the Company) do not give the Trustee a direction which, in the opinion
         of the Trustee, is inconsistent with the request.

                  A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over such
other Securityholder.

SECTION 6.07.  Rights of Holders to Receive Payment.

                  Notwithstanding any other provision of this Indenture, the
right of any Holder to receive payment of principal of or interest on a
Security, on or after the respective due dates therefor, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall not
be impaired or affected without the consent of the Holder.

SECTION 6.08.  Collection Suit by Trustee.

                  If an Event of Default in payment of principal or interest
specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust
<PAGE>   55
                                      -49-


against the Company or any other obligor on the Securities for the whole amount
of principal and accrued interest remaining unpaid, together with interest
overdue on principal and to the extent that payment of such interest is lawful,
interest on overdue installments of interest, in each case at the rate per annum
borne by the Securities and such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.

SECTION 6.09.  Trustee May File Proofs of Claim.

                  The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Securityholders allowed in any judicial proceedings relative to the Company (or
any other obligor upon the Securities), its creditors or its property and shall
be entitled and empowered to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceedings is hereby authorized by each
Securityholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Securityholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agent and
counsel, and any other amounts due the Trustee under Section 7.07. Nothing
herein contained shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Securityholder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Securityholder in any such proceeding.

SECTION 6.10.  Priorities.

                  If the Trustee collects any money or property pursuant to this
Article Six or the Escrow Agreement, it shall pay out the money or property in
the following order:

                  First: to the Trustee for amounts due under Section 7.07;

                  Second: to Holders for amounts due and unpaid on the
         Securities for principal and interest, ratably, without preference or
         priority of any kind, according to the amounts due and payable on the
         Securities for principal and interest, respectively; and

                  Third: to the Company.

                  The Trustee, upon prior written notice to the Company, may fix
a record date and payment date for any payment to Securityholders pursuant to
this Section 6.10.

SECTION 6.11.  Undertaking for Costs.

                  In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees and expenses, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made by
the party litigant. This Section 6.11 shall not apply to a suit by the Trustee,
a suit by a Holder or group of Holders of more than 10% in aggregate principal
amount of the outstanding Securities, or to any suit instituted by any Holder
for the
<PAGE>   56
                                      -50-


enforcement or the payment of the principal or interest on any Securities on or
after the respective due dates therefor.


                                  ARTICLE SEVEN

                                     TRUSTEE


SECTION 7.01.  Duties of Trustee.

                  (a) If a Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent person
would exercise or use under the circumstances in the conduct of such person's
own affairs.

                  (b) Except during the continuance of a Default:

                  (1) The Trustee shall not be liable except for the performance
         of such duties as are specifically set forth herein; and

                  (2) In the absence of bad faith on its part, the Trustee may
         conclusively rely, as to the truth of the statements and the
         correctness of the opinions expressed therein, upon certificates or
         opinions conforming to the requirements of this Indenture or the Escrow
         Agreement; however, in the case of any such certificates or opinions
         which by any provision hereof are specifically required to be furnished
         to the Trustee, the Trustee shall examine such certificates and
         opinions to determine whether or not they conform to the requirements
         of this Indenture or the Escrow Agreement.

                  (c) The Trustee shall not be relieved from liability for its
own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:

                  (1) This paragraph does not limit the effect of paragraph (b)
         of this Section 7.01;

                  (2) The Trustee shall not be liable for any error of judgment
         made in good faith by a Trust Officer, unless it is proved that the
         Trustee was negligent in ascertaining the pertinent facts; and

                  (3) The Trustee shall not be liable with respect to any action
         it takes or omits to take in good faith in accordance with a direction
         received by it pursuant to Section 6.05.

                  (d) No provision of this Indenture or the Escrow Agreement
shall require the Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties hereunder or to take
or omit to take any action under this Indenture or take any action at the
request or direction of Holders if it shall have reasonable grounds for
believing that repayment of such funds is not assured to it or it does not
receive from such Holders an indemnity or security satisfactory to it in its
sole discretion against such risk, liability, loss, fee or expense which might
be incurred by it in compliance with such request or direction.

                  (e) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section
7.01.
<PAGE>   57
                                      -51-


                  (f) The Trustee shall not be liable for interest on any money
received by it. Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.

SECTION 7.02.  Rights of Trustee.

                  Subject to Section 7.01:

                  (a) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper person. The Trustee
need not investigate any fact or matter stated in the document.

                  (b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate and/or an Opinion of Counsel, which shall
conform to the provisions of Section 10.05. The Trustee shall not be liable for
any action it takes or omits to take in good faith in reliance on such
certificate or opinion.

                  (c) The Trustee may act through attorneys and agents of its
selection and shall not be responsible for the misconduct or negligence of any
agent or attorney (other than an agent who is an employee of the Trustee)
appointed with due care.

                  (d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it reasonably believes to be authorized or
within its rights or powers.

                  (e) The Trustee may consult with counsel of its selection and
the advice or opinion of such counsel as to matters of law shall be full and
complete authorization and protection from liability in respect of any action
taken, omitted or suffered by it hereunder in good faith and in accordance with
the advice or opinion of such counsel.

                  (f) Any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a Board
Resolution.

                  (g) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture or the Escrow Agreement
at the request or direction of any of the Securityholders pursuant to this
Indenture, unless such Securityholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or direction.

                  (h) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company, personally or by agent
or attorney.

                  (i) The Trustee shall not be deemed to have notice of any
Event of Default unless a Trust Officer of the Trustee has actual knowledge
thereof or unless the Trustee shall have received written notice thereof at the
Corporate Trust Office of the Trustee, and such notice references the Securities
and this Indenture.
<PAGE>   58
                                      -52-


SECTION 7.03.  Individual Rights of Trustee.

                  The Trustee in its individual or any other capacity may become
the owner or pledgee of Securities and may otherwise deal with the Company or
its Affiliates with the same rights it would have if it were not Trustee,
subject to Section 7.10 hereof. Any Agent may do the same with like rights.
However, the Trustee is subject to Sections 7.10 and 7.11.

SECTION 7.04.  Trustee's Disclaimer.

                  The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture, the Escrow
Agreement or the Securities, it shall not be accountable for the Company's use
of the proceeds from the Securities, and it shall not be responsible for any
statement of the Company in this Indenture or any document issued in connection
with the sale of Securities or any statement in the Securities other than the
Trustee's certificate of authentication.

SECTION 7.05.  Notice of Defaults.

                  If a Default occurs and is continuing and the Trustee actually
knows of such Default, the Trustee shall mail to each Securityholder notice of
the Default within 30 days after the occurrence thereof. Except in the case of a
Default in payment of principal of or interest on any Security or a Default in
complying with any of the provisions of the Escrow Agreement, the Trustee may
withhold the notice if and so long as a committee of its Trust Officers in good
faith determines that withholding the notice is in the interest of
Securityholders. This Section 7.05 shall be in lieu of the proviso to Section
315(b) of the TIA and such proviso to Section 315(b) of the TIA is hereby
expressly excluded from this Indenture and the Securities, as permitted by the
TIA.

SECTION 7.06.  Reports by Trustee to Holders.

                  If required by TIA Section 313(a), within 60 days after each
September 1 beginning with September 1, 1998, the Trustee shall mail to each
Securityholder a report dated as of such September 1 that complies with TIA
Section 313(a). The Trustee also shall comply with TIA Section 313(b), (c) and
(d).

                  A copy of each such report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange, if any, on
which the Securities are listed.

                  The Company shall promptly notify the Trustee in writing if
the Securities become listed on any stock exchange or of any delisting thereof.

SECTION 7.07.  Compensation and Indemnity.

                  The Company shall pay to the Trustee from time to time such
compensation as the Company and the Trustee shall from time to time agree in
writing for its services. The Trustee's compensation shall not be limited by any
law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable disbursements, expenses
and advances (including fees, disbursements and expenses of its agents and
counsel) incurred or made by it in addition to the compensation for its services
except any such disbursements, expenses and advances as may be attributable to
the Trustee's negligence or bad faith. Such expenses shall include the
reasonable compensation, disbursements and expenses of the Trus-
<PAGE>   59
                                      -53-


tee's agents, accountants, experts and counsel and any taxes or other expenses
incurred by a trust created pursuant to Section 8.01 hereof.

                  The Company shall indemnify the Trustee, its agents and
officers, for, and hold it harmless against any and all loss, damage, claims,
liability or expense, including taxes (other than franchise taxes imposed on the
Trustee and taxes based upon, measured by or determined by the income of the
Trustee), arising out of or in connection with the acceptance or administration
of the trust or trusts hereunder, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder, except to the extent that
such loss, damage, claim, liability or expense is due to its own negligence or
bad faith. The Trustee shall notify the Company promptly of any claim asserted
against the Trustee for which it may seek indemnity. However, the failure by the
Trustee to so notify the Company shall not relieve the Company of its
obligations hereunder. The Company shall defend the claim and the Trustee shall
cooperate in the defense (and may employ its own counsel) at the Company's
expense; provided, however, that the Company's reimbursement obligation with
respect to counsel employed by the Trustee will be limited to the reasonable
fees and expenses of such counsel.

                  The Company need not pay for any settlement made without its
written consent, which consent shall not be unreasonably withheld. The Company
need not reimburse any expense or indemnify against any loss or liability
incurred by the Trustee as a result of the violation of this Indenture by the
Trustee.

                  To secure the Company's payment obligations in this Section
7.07, the Trustee shall have a Lien prior to the Securities against all money or
property held or collected by the Trustee, in its capacity as Trustee, except
money or property held in trust to pay principal of or interest on particular
Securities or the Purchase Price or redemption price of any Securities to be
purchased or pursuant to an Offer to Purchase or redeemed.

                  When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(8) or (9) occurs, the expenses
(including the reasonable fees and expenses of its agents and counsel) and the
compensation for the services shall be preferred over the status of the Holders
in a proceeding under any Bankruptcy Law and are intended to constitute expenses
of administration under any Bankruptcy Law. The Company's obligations under this
Section 7.07 and any claim arising hereunder shall survive the resignation or
removal of any Trustee, the discharge of the Company's obligations pursuant to
Article Eight and any rejection or termination under any Bankruptcy Law, and the
termination of this Indenture.

SECTION 7.08.  Replacement of Trustee.

                  The Trustee may resign at any time by so notifying the Company
in writing. The Holders of a majority in principal amount of the outstanding
Securities may remove the Trustee by so notifying the Trustee and the Company in
writing and may appoint a successor Trustee with the Company's consent. The
Company may remove the Trustee if:

                  (1) the Trustee fails to comply with Section 7.10;

                  (2) the Trustee is adjudged a bankrupt or an insolvent under
         any Bankruptcy Law;

                  (3) a custodian or other public officer takes charge of the
         Trustee or its property; or

                  (4) the Trustee becomes incapable of acting.
<PAGE>   60
                                      -54-


                  If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being referred
to herein as the retiring Trustee), the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
Holders of a majority in principal amount of the Securities may appoint a
successor Trustee to replace the successor Trustee appointed by the Company.

                  A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. As promptly as
practicable after that, the retiring Trustee shall transfer, after payment of
all sums then owing to the Trustee pursuant to Section 7.07, all property held
by it as Trustee to the successor Trustee, subject to the Lien provided in
Section 7.07, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have the rights, powers and duties of
the Trustee under this Indenture. A successor Trustee shall mail notice of its
succession to each Securityholder.

                  If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of at least 10% in principal amount of the outstanding
Securities may petition, at the expense of the Company, any court of competent
jurisdiction for the appointment of a successor Trustee.

                  If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.

                  Notwithstanding replacement of the Trustee pursuant to this
Section 7.08, the Company's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.

SECTION 7.09.  Successor Trustee by Merger, etc.

                  If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation or banking corporation, the resulting, surviving or transferee
corporation or banking corporation without any further act shall be the
successor Trustee.

SECTION 7.10.  Eligibility; Disqualification.

                  This Indenture shall always have a Trustee which shall be
eligible to act as Trustee under TIA Sections 310(a)(1) and 310(a)(2). The
Trustee shall have a combined capital and surplus of at least $50,000,000 as set
forth in its most recent published annual report of condition. If the Trustee
has or shall acquire any "conflicting interest" within the meaning of TIA
Section 310(b), the Trustee and the Company shall comply with the provisions of
TIA Section 310(b); provided, however, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which other
securities or certificates of interest or participation in other securities of
the Company are outstanding if the requirements for such exclusion set forth in
TIA Section 310(b)(1) are met. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section 7.10, the Trustee
shall resign immediately in the manner and with the effect hereinbefore
specified in this Article Seven.

SECTION 7.11.  Preferential Collection of Claims Against Company.

                  The Trustee shall comply with TIA Section 311(a), excluding
any creditor relationship listed in TIA Section 311(b). A Trustee who has
resigned or been removed shall be subject to TIA Section 311(a) to the extent
indicated therein.
<PAGE>   61
                                      -55-


                                  ARTICLE EIGHT

                             DISCHARGE OF INDENTURE


SECTION 8.01.  Termination of Company's Obligations.

                  The Company may terminate its substantive obligations in
respect of the Securities by delivering all outstanding Securities to the
Trustee for cancellation and paying all sums payable by it on account of
principal of and interest on all Securities or otherwise. In addition to the
foregoing, the Company may terminate its obligation under Sections 4.04, 4.06,
4.08, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18, 4.19 and 4.20 (and
no Default with respect to such Sections under Section 6.01(5) shall thereafter
apply), by (i) depositing with the Trustee, under the terms of an irrevocable
trust agreement, money or U. S. Government Obligations sufficient (without
reinvestment) to pay all remaining indebtedness on the Securities at maturity or
an earlier redemption, (ii) delivering to the Trustee either an Opinion of
Counsel or a ruling directed to the Trustee from the Internal Revenue Service to
the effect that the Holders of the Securities will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit and termination
of obligations, (iii) delivering to the Trustee an Opinion of Counsel to the
effect that the Company's exercise of its option under this paragraph will not
result in any of the Company, the Trustee or the trust created by the Company's
deposit of funds pursuant to this provision becoming or being deemed to be an
"investment company" under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and (iv) delivering to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating compliance with all
conditions precedent provided for herein. In addition, the Company may, provided
that no Default has occurred and is continuing or would arise therefrom (or,
with respect to a Default specified in Section 6.01(8) or (9), occurs at any
time on or prior to the 91st calendar day after the date of such deposit (it
being understood that this condition shall not be deemed satisfied until after
such 91st day)), terminate all of its substantive obligations in respect of the
Securities (including its obligations to pay the principal of and interest on
the Securities) by (i) depositing with the Trustee, under the terms of an
irrevocable trust agreement, money or U.S. Government Obligations sufficient
(without reinvestment) to pay all remaining indebtedness on the Securities at
maturity or upon earlier redemption, (ii) delivering to the Trustee either a
ruling directed to the Trustee from the Internal Revenue Service to the effect
that the Holders of the Securities will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and termination of
obligations or an Opinion of Counsel addressed to the Trustee based upon such a
ruling or based on a change in the applicable Federal tax law since the date of
this Indenture to such effect, (iii) delivering to the Trustee an Opinion of
Counsel to the effect that the Company's exercise of its option under this
paragraph will not result in any of the Company, the Trustee or the trust
created by the Company's deposit of funds pursuant to this provision becoming or
being deemed to be an "investment company" under the Investment Company Act and
(iv) delivering to the Trustee an Officers' Certificate and an Opinion of
Counsel each stating compliance with all conditions precedent provided for
herein.

                  Notwithstanding the foregoing paragraph, the Company's
obligations under Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.10, 2.12, 2.13
and 4.01 (but not with respect to termination of substantive obligations
pursuant to the third sentence of the foregoing paragraph), 4.02, 7.07, 7.08,
8.03 and 8.04 shall survive until the Securities are no longer outstanding.
Thereafter the Company's obligations in Sections 7.07, 8.03 and 8.04 shall
survive.
<PAGE>   62
                                      -56-


                  After such delivery or irrevocable deposit and delivery of an
Officers' Certificate and Opinion of Counsel, the Trustee upon request shall
acknowledge in writing the discharge of the Company's obligations under the
Securities and this Indenture except for those surviving obligations specified
above.

                  The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the U. S. Government
Obligations deposited pursuant to this Section 8.01 or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of outstanding Securities.

SECTION 8.02.  Application of Trust Money.

                  The Trustee shall hold in trust money or U. S. Government
Obligations deposited with it pursuant to Section 8.01, and shall apply the
deposited money and the money from United States Government Obligations in
accordance with this Indenture solely to the payment of principal of and
interest on the Securities.

SECTION 8.03.  Repayment to Company.

                  Subject to Sections 7.07 and 8.01, the Trustee shall promptly
pay to the Company upon written request any excess money held by it at any time.
The Trustee shall pay to the Company upon written request any money held by it
for the payment of principal or interest that remains unclaimed for two years;
provided, however, that the Trustee before being required to make any payment
may at the expense of the Company cause to be published once in a newspaper of
general circulation in The City of New York and in a newspaper of general
circulation in Luxembourg or mail to each Holder entitled to such money notice
that such money remains unclaimed and that, after a date specified therein which
shall be at least 30 days from the date of such publication or mailing, any
unclaimed balance of such money then remaining shall be repaid to the Company.
After payment to the Company, Securityholders entitled to money must look to the
Company for payment as general creditors unless an applicable abandoned property
law designates another person and all liability of the Trustee or Paying Agent
with respect to such money shall thereupon cease.

SECTION 8.04.  Reinstatement.

                  If the Trustee is unable to apply any money or U.S. Government
Obligations in accordance with Section 8.01 by reason of any legal proceeding or
by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, the Company's
obligations under this Indenture and the Securities shall be revived and
reinstated as though no deposit had occurred pursuant to Section 8.01 until such
time as the Trustee is permitted to apply all such money or U.S. Government
Obligations in accordance with Section 8.01; provided, however, that if the
Company has made any payment of interest on or principal of any Securities
because of the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money or U.S. Government Obligations held by the Trustee.
<PAGE>   63
                                      -57-


                                  ARTICLE NINE

                       AMENDMENTS, SUPPLEMENTS AND WAIVERS


SECTION 9.01.  Without Consent of Holders.

                  The Company, when authorized by a resolution of its Board of
Directors, and the Trustee may amend or supplement this Indenture or the
Securities without notice to or consent of any Securityholder:

                  (i) to cure any ambiguity, defect or inconsistency; provided,
         however, that such amendment or supplement does not materially
         adversely affect the rights of any Holder;

                  (ii) to effect the assumption by a successor Person of all
         obligations of the Company under the Securities, this Indenture, the
         Registration Rights Agreement and the Escrow Agreement in connection
         with any transaction complying with Article Five of this Indenture;

                  (iii) to provide for uncertificated Securities in addition to
         or in place of certificated Securities;

                  (iv) to comply with any requirements of the SEC in order to
         effect or maintain the qualification of this Indenture under the TIA;

                  (v) to make any change that would provide any additional
         benefit or rights to the Holders;

                  (vi) to make any other change that does not materially
         adversely affect the rights of any Holder under this Indenture;

                  (vii) to add to the covenants of the Company for the benefit
         of the Holders, or to surrender any right or power herein conferred
         upon the Company; or

                  (viii) to secure the Securities pursuant to the requirements
         of Section 4.20 or otherwise;

provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel stating that such amendment or supplement complies with the provisions
of this Section 9.01.

SECTION 9.02.  With Consent of Holders.

                  Subject to Section 6.07, the Company, when authorized by a
resolution of its Board of Directors, and the Trustee may amend or supplement
this Indenture or the Securities with the written consent of the Holders of a
majority in principal amount of the outstanding Securities. Subject to Section
6.07, the Holders of a majority in principal amount of the outstanding
Securities may waive compliance by the Company with any provision of this
Indenture or the Securities. However, without the consent of the Holder of each
Security affected, an amendment, supplement or waiver, including a waiver
pursuant to Section 6.04, may not:

                  (1) change the maturity of the principal of any such Security;
<PAGE>   64
                                      -58-


                  (2) alter the optional redemption or repurchase provisions of
         any such Security or this Indenture in a manner adverse to the Holders
         of such Security;

                  (3) reduce the principal amount of any such Security;

                  (4) reduce the rate of or extend the time for payment of
         interest on any such Security;

                  (5) change the place or currency of payment of the principal
         of or interest on any such Security;

                  (6) modify any provisions of Section 6.04 (other than to add
         sections of this Indenture or the Securities subject thereto) or 6.07
         or this Section 9.02 (other than to add sections of this Indenture or
         the Securities which may not be amended, supplemented or waived without
         the consent of each Securityholder affected);

                  (7) reduce the percentage of the principal amount of
         outstanding Securities necessary for amendment to or waiver of
         compliance with any provision of this Indenture or the Securities or
         for waiver of any Default in respect thereof;

                  (8) waive a default in the payment of the principal of or
         interest on or redemption payment with respect to any such Security
         (except a rescission of acceleration of the Securities by the Holders
         as provided in Section 6.02 and a waiver of the payment default that
         resulted from such acceleration);

                  (9) modify the ranking or priority of such Security;

                  (10) modify the provisions of any covenant (or the related
         definitions in this Indenture) requiring the Company to make any Offer
         to Purchase in a manner materially adverse to the Holders; or

                  (11) modify the provisions of the Escrow Agreement or this
         Indenture relating to the Collateral from the Lien under the Escrow
         Agreement or permit any other obligation to be secured by the
         Collateral.

                  It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.

                  After an amendment, supplement or waiver under this Section
9.02 becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental indenture.

SECTION 9.03.  Compliance with Trust Indenture Act.

                  Every amendment to or supplement of this Indenture or the
Securities shall comply with the TIA as then in effect.
<PAGE>   65
                                      -59-


SECTION 9.04.  Revocation and Effect of Consents.

                  Until an amendment or waiver becomes effective, a consent to
it by a Holder is a continuing consent by the Holder and every subsequent Holder
of that Security or portion of that Security that evidences the same debt as the
consenting Holder's Security, even if notation of the consent is not made on any
Security. Subject to the following paragraph, any such Holder or subsequent
Holder may revoke the consent as to such Holder's Security or portion of such
Security by notice to the Trustee or the Company received before the date on
which the Trustee receives an Officers' Certificate certifying that the Holders
of the requisite principal amount of Securities have consented (and not
theretofore revoked such consent) to the amendment, supplement or waiver.

                  The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders of Securities entitled to
consent to any amendment, supplement or waiver. If a record date is fixed, then,
notwithstanding the last sentence of the immediately preceding paragraph, those
persons who were Holders of Securities at such record date (or their duly
designated proxies), and only those persons, shall be entitled to consent to
such amendment, supplement or waiver or to revoke any consent previously given,
whether or not such persons continue to be Holders of such Securities after such
record date. No such consent shall be valid or effective for more than 90 days
after such record date.

                  After an amendment, supplement or waiver becomes effective, it
shall bind every Securityholder, unless it makes a change described in any of
clauses (1) through (11) of Section 9.02. In that case the amendment, supplement
or waiver shall bind each Holder of a Security who has consented to it and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security.

SECTION 9.05.  Notation on or Exchange of Securities.

                  If an amendment, supplement or waiver changes the terms of a
Security, the Trustee may require the Holder of the Security to deliver it to
the Trustee. The Trustee may place an appropriate notation on the Security about
the changed terms and return it to the Holder. Alternatively, if the Company or
the Trustee so determines, the Company in exchange for the Security shall issue
and the Trustee shall authenticate a new Security that reflects the changed
terms. Failure to make the appropriate notation or issue a new Security shall
not affect the validity and effect of such amendment, supplement or waiver.

SECTION 9.06.  Trustee to Sign Amendments, etc.

                  The Trustee shall be entitled to receive, and shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
any amendment, supplement or waiver authorized pursuant to this Article Nine is
authorized or permitted by this Indenture and that such amendment, supplement or
waiver constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms (subject to customary exceptions). The
Trustee may, but shall not be obligated to, execute any such amendment,
supplement or waiver which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise. In signing any amendment,
supplement or waiver, the Trustee shall be entitled to receive an indemnity
reasonably satisfactory to it.
<PAGE>   66
                                      -60-


                                   ARTICLE TEN

                                  MISCELLANEOUS


SECTION 10.01.  Trust Indenture Act Controls.

                  This Indenture is subject to the provisions of the TIA that
are required to be a part of this Indenture, and shall, to the extent
applicable, be governed by such provisions. If any provision of this Indenture
modifies any TIA provision that may be so modified, such TIA provision shall be
deemed to apply to this Indenture as so modified. If any provision of this
Indenture excludes any TIA provision that may be so excluded, such TIA provision
shall be excluded from this Indenture.

                  The provisions of TIA Sections 310 through 317 that
impose duties on any Person (including the provisions automatically deemed
included unless expressly excluded by this Indenture) are a part of and govern
this Indenture, whether or not physically contained herein.

SECTION 10.02.  Notices.

                  Any notice or communication shall be sufficiently given if in
writing and delivered in person, by facsimile and confirmed by overnight
courier, or mailed by first-class mail addressed as follows:

         if to the Company:

                  Hermes Europe Railtel B.V.
                  Terhulpsesteenweg 6A
                  1560 Hoeilaart
                  Belgium

                  Attention:  Chief Executive Officer

                  Facsimile:   32-2-658-5100
                  Telephone:  32-2-658-5200

         with a copy to:

                  Global TeleSystems Group, Inc.
                  1751 Pinnacle Drive
                  North Tower  12th Floor
                  McLean, Virginia   22102

                  Attention:  Chief Executive Officer

                  Facsimile:   (703) 847-0663
                  Telephone:  (703) 918-4500

                  and
<PAGE>   67
                                      -61-



                  Shearman & Sterling
                  599 Lexington Avenue
                  New York, New York  10022-6069

                  Attention:  John D. Morrison, Jr.

                  Facsimile:   (212) 848-4000
                  Telephone:  (212) 848-7179

         if to GTS:

                  Global TeleSystems Group, Inc.
                  1751 Pinnacle Drive
                  North Tower  12th Floor
                  McLean, Virginia   22102

                  Attention:  Chief Executive Officer

                  Facsimile:   (703) 847-0663
                  Telephone:  (703) 918-4500

         with a copy to:

                  Shearman & Sterling
                  599 Lexington Avenue
                  New York, New York  10022-6069

                  Attention:  David J. Beveridge

                  Facsimile:   (212) 848-4000
                  Telephone:  (212) 848-7179

         if to the Trustee:

                  The Bank of New York
                  101 Barclay Street
                  New York, New York  10286

                  Attention:  Corporate Trust Trustee Administration

                  Facsimile:   (212) 815-5915
                  Telephone:  (212) 815-4701
<PAGE>   68
                                      -62-



         if to the Luxembourg Paying and Transfer Agent:

                  Banque Internationale a Luxembourg
                  69, route d'Esch
                  L-1470 Luxembourg

                  Facsimile:   (352) 4590-4227
                  Telephone:  (352) 4590-3550

                  The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.

                  Any notice or communication mailed, first-class, postage
prepaid, to a Holder including any notice delivered in connection with TIA
Section 310(b), TIA Section 313(c), TIA Section 314(a) and TIA Section 315(b),
shall be mailed to him at his address as set forth on the Security Register and
shall be sufficiently given to him if so mailed within the time prescribed. To
the extent required by the TIA, any notice or communication shall also be mailed
to any Person described in TIA Section 313(c).

                  Failure to mail a notice or communication to a Securityholder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders. Except for a notice to the Trustee, which is deemed given only
when received, if a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.

SECTION 10.03.  Communications by Holders with Other Holders.

                  Securityholders may communicate pursuant to TIA Section 312(b)
with other Securityholders with respect to their rights under this Indenture or
the Securities. The Company, the Trustee, the Registrar and any other person
shall have the protection of TIA Section 312(c).

SECTION 10.04.  Certificate and Opinion as to Conditions Precedent.

                  Upon any request or application by the Company to the Trustee
to take or refrain from taking any action under this Indenture, the Company
shall furnish to the Trustee at the request of the Trustee:

                 (1) an Officers' Certificate in form and substance satisfactory
         to the Trustee stating that, in the opinion of the signers, all
         conditions precedent, if any, provided for in this Indenture relating
         to the proposed action have been complied with; and

                 (2) an Opinion of Counsel in form and substance satisfactory to
         the Trustee stating that, in the opinion of such counsel, all such
         conditions precedent have been complied with.

SECTION 10.05.  Statements Required in Certificate or Opinion.

                  Each certificate (other than the certificates provided
pursuant to Section 4.07) or opinion with respect to compliance with a condition
or covenant provided for in this Indenture shall include:

                  (1) a statement that the person making such certificate or
         opinion has read such covenant or condition;
<PAGE>   69
                                      -63-



                  (2) a brief statement as to the nature and scope of the
         examination or investigation upon which the statements or opinions
         contained in such certificate or opinion are based;

                  (3) a statement that, in the opinion of such person, he has
         made such examination or investigation as is necessary to enable him to
         express an informed opinion as to whether such covenant or condition
         has been complied with; and

                  (4) a statement as to whether, in the opinion of such person,
         such condition or covenant has been complied with; provided, however,
         that with respect to matters of fact an Opinion of Counsel may rely on
         an Officers' Certificate or certificates of public officials.

SECTION 10.06.  Rules by Trustee, Paying Agent, Registrar.

                  The Trustee may make reasonable rules for action by or at a
meeting of Securityholders. The Paying Agent or Registrar may make reasonable
rules for its functions.

SECTION 10.07.  Governing Law.

                  The laws of the State of New York shall govern this Indenture
and the Securities without regard to principles of conflicts of law.

SECTION 10.08.  No Recourse Against Others.

                  A director, officer, employee, incorporator or stockholder of
the Company or any of its Affiliates, as such, shall not have any liability for
any obligations of the Company or any of its Affiliates under the Securities or
this Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Security waives and
releases all such liability.

SECTION 10.09.  Successors.

                  All agreements of the Company in this Indenture and the
Securities shall bind its successor. All agreements of the Trustee in this
Indenture shall bind its successor.

SECTION 10.10.  Counterpart Originals.

                  The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.

SECTION 10.11.  Severability.

                  In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby, and a Holder shall have no claim therefor against any party
hereto.
<PAGE>   70
                                      -64-


SECTION 10.12.  No Adverse Interpretation of Other Agreements.

                  This Indenture may not be used to interpret another indenture,
loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan
or debt agreement may not be used to interpret this Indenture.

SECTION 10.13.  Legal Holidays.

                  If a payment date is a not a Business Day at a place of
payment, payment may be made at that place on the next succeeding Business Day,
and no interest shall accrue for the intervening period.

SECTION 10.14. Agent for Service; Submission to Jurisdiction; Waiver of
Immunities.

                  By the execution and delivery of this Indenture, the Company
(i) acknowledges that it has, by separate written instruments, designated and
appointed CT Corporation System, 1633 Broadway, New York, NY 10019 ("CT
Corporation System") (and any successor entity), as its authorized agent upon
which process may be served in any suit or proceeding arising out of or relating
to this Indenture that may be instituted in any federal or state court in the
Borough of Manhattan, City of New York, State of New York or brought under
federal or state securities laws, and represent and warrant that CT Corporation
System has accepted such designation, (ii) submit to the jurisdiction of any
such court in any such suit or proceeding and (iii) agree that service of
process upon CT Corporation System and written notice of said service to the
Company, in accordance with Section 10.02 shall be deemed in every respect
effective service of process upon the Company in any such suit or proceeding.
The Company further agrees to take any and all action, including the execution
and filing of any and all such documents and instruments, as may be necessary to
continue such designation and appointment of CT Corporation System in full force
and effect for as long as any of the Securities remain outstanding (subject to
the limitation set forth in clause (i)); provided, however, that the Company
may, and to the extent CT Corporation System ceases to be able to be served on
the basis contemplated herein shall, by written notice to the Trustee, designate
such additional or alternative agent for service of process under this Section
10.14 that (i) maintains an office located in the Borough of Manhattan, City of
New York, State of New York, and (ii) is either (x) United States counsel for
the Company or (y) a corporate service company which acts as agent for service
of process for other persons in the ordinary course of its business. Such
written notice shall identify the name of such agent for service of process and
the address of the office of such agent for service of process in the Borough of
Manhattan, City of New York, State of New York.

                  To the extent that the Company has or hereafter may acquire
any immunity from jurisdiction of any court of (i) any jurisdiction in which the
Company owns or leases property or assets, (ii) the United States or the State
of New York or (iii) the Netherlands or from any legal process (whether through
service of notice, attachment prior to judgment, attachment in aid of execution,
execution or otherwise) with respect to itself or its property and assets or
this Agreement or any of the Notes or actions to enforce judgments in respect of
any thereof, the Company hereby irrevocably waives such immunity in respect of
its obligations under the above-referenced documents, to the extent permitted by
law.

SECTION 10.15.  Judgment Currency.

                  The Company hereby agrees to indemnify the Trustee, its
directors, its officers and each person, if any, who controls the Trustee within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any loss incurred by such person as a result of any judgment or order being
given or made against the Company for any U.S. dollar amount due under this
Agreement and such judgment or order being
<PAGE>   71
                                      -65-


expressed and paid in a currency (the "Judgment Currency") other than United
States dollars and as a result of any variation as between (i) the rate of
exchange at which the United States dollar amount is converted into the Judgment
Currency for the purpose of such judgment or order and (ii) the spot rate of
exchange in The City of New York at which such party on the date of payment of
such judgment or order is able to purchase United States dollars with the amount
of the Judgment Currency actually received by such party. The foregoing
indemnity shall continue in full force and effect notwithstanding any such
judgment or order as aforesaid. The term "spot rate of exchange" shall include
any premiums and costs of exchange payable in connection with the purchase of,
or conversion into, United States dollars.


                                 ARTICLE ELEVEN

                             COLLATERAL AND SECURITY


SECTION 11.01.  Escrow Agreement.

                  The due and punctual payment of the first four scheduled
interest payments on the Securities when and as the same shall be due and
payable on an Interest Payment Date or by acceleration shall be secured as
provided in the Escrow Agreement which the Company and the Trustee have entered
into simultaneously with the execution of this Indenture. Upon the acceleration
of the maturity of the Securities, the Trustee shall foreclose upon the
Collateral. Each Holder of Securities, by its acceptance thereof, consents and
agrees to the terms of the Escrow Agreement (including, without limitation, the
provisions providing for foreclosure and disbursement of Collateral) as the same
may be in effect or may be amended from time to time in accordance with its
terms and the terms hereof and authorizes and directs the Escrow Agent and the
Trustee to enter into the Escrow Agreement and to perform its obligations and
exercise its rights thereunder in accordance therewith. The Company shall
deliver to the Trustee copies of the Escrow Agreement, and shall do or cause to
be done all such acts and things as may be necessary or proper, or as may be
required by the provisions of the Escrow Agreement, to assure and confirm to the
Trustee the security interest in the Collateral contemplated by the Escrow
Agreement or any part thereof, as from time to time constituted, so as to render
the same available for the security and benefit of this Indenture with respect
to, and of, the Securities, according to the intent and purposes expressed in
the Escrow Agreement. The Company shall take any and all actions reasonably
required to cause the Escrow Agreement to create and maintain (to the extent
possible under applicable law), as security for the obligations of the Company
hereunder, a first priority and exclusive security interest in and on all the
Collateral, in favor of the Trustee for the benefit of the Holders of
Securities, superior to and prior to the rights of all third Persons and subject
to no other Liens. The Trustee shall have no responsibility for perfecting or
maintaining the perfection of the Trustee's security interest in the Collateral
or for filing any instrument, document or notice in any public office at any
time or times.

SECTION 11.02.  Recording and Opinions.

                  (a) The Company shall furnish to the Trustee simultaneously
with the execution and delivery of this Indenture an Opinion of Counsel either
(i) stating that in the opinion of such counsel all action has been taken with
respect to the recording, registering and filing of this Indenture, financing
statements or other instruments necessary to make effective the security
interest intended to be created by the Escrow Agreement and reciting the details
of such action, or (ii) stating that in the opinion of such counsel no such
action is necessary to make such security interest effective.
<PAGE>   72
                                      -66-


                  (b) The Company shall furnish to the Trustee on each
anniversary of the Issue Date (upon receipt of written notice from Escrow Agent)
until the date upon which the balance of Escrow Funds shall have been reduced to
zero, an Opinion of Counsel, dated as of such date, either (i) stating that (A)
in the opinion of such counsel, action has been taken with respect to the
recording, registering, filing, re-recording, re-registering and refiling of all
supplemental indentures, financing statements, continuation statements or other
instruments of further assurance as is necessary to maintain the Lien of the
Escrow Agreement and reciting the details of such action or referring to prior
Opinions of Counsel in which such details are given and (B) based on relevant
laws as in effect on the date of such Opinion of Counsel, all financing
statements and continuation statements have been executed and filed that are
necessary as of such date and during the succeeding 12 months fully to preserve
and protect, to the extent such protection and preservation are possible by
filing, the rights of the Holders of Securities and the Trustee hereunder and
under the Escrow Agreement with respect to the security interests in the
Collateral or (ii) stating that, in the opinion of such counsel, no such action
is necessary to maintain such Lien and assignment.


SECTION 11.03.  Release of Collateral.

                  (a) Subject to subsections (b), (c) and (d) of this Section
11.03, the Collateral may be released from the security interest created by the
Escrow Agreement only in accordance with the provisions of the Escrow Agreement.

                  (b) Except to the extent that any security interest on
proceeds of Collateral is automatically released by operation of Section 9-306
of the Uniform Commercial Code or other similar law, no Collateral shall be
released from the security interest created by the Escrow Agreement pursuant to
the provisions of the Escrow Agreement, other than to the Holders pursuant to
the terms thereof.

                  (c) At any time when an Event of Default shall have occurred
and be continuing and the maturity of the Securities shall have been accelerated
(whether by declaration or otherwise), no Collateral shall be released pursuant
to the provisions of the Escrow Agreement, and no release of Collateral in
contravention of this Section 11.03(c) shall be effective as against the Holders
of Securities, except for the disbursement of all Escrow Funds (as defined in
the Escrow Agreement) and other Collateral to the Trustee pursuant to Section
6(c) of the Escrow Agreement.

                  (d) The release of any Collateral from the security interests
created by this Indenture and the Escrow Agreement shall not be deemed to impair
the security under this Indenture in contravention of the provisions hereof if
and to the extent the Collateral is released pursuant to the terms hereof or
pursuant to the terms of the Escrow Agreement. To the extent applicable, the
Company shall cause TIA Section 314(d) relating to the release of property or
securities from the security interest of the Escrow Agreement to be complied
with. Any certificate or opinion required by TIA Section 314(d) may be made by
an Officer of the Company except in cases where TIA Section 314(d) requires that
such certificate or opinion be made by an independent Person, which Person shall
be an independent engineer, appraiser or other expert selected or approved by
the Trustee in the exercise of reasonable care.

SECTION 11.04. Authorization of Actions to Be Taken by the Trustee Under the
Escrow Agreement.

                  Subject to the provisions of Section 7.01 and Section 7.02,
the Trustee may, without the consent of the Holders of Securities, on behalf of
the Holders of Securities, take all actions it deems necessary or appropriate in
order to (a) enforce any of the terms of the Escrow Agreement and (b) collect
and receive any
<PAGE>   73
                                      -67-


and all amounts payable in respect of the obligations of the Company hereunder.
The Trustee shall have power to institute and maintain such suits and
proceedings as it may deem expedient to prevent any impairment of the Collateral
by any acts that may be unlawful or in violation of the Escrow Agreement or this
Indenture, and such suits and proceedings as the Trustee may deem expedient to
preserve or protect its interests and the interests of the Holders of Securities
in the Collateral (including power to institute and maintain suits or
proceedings to restrain the enforcement of or compliance with any legislative or
other governmental enactment, rule or order that may be unconstitutional or
otherwise invalid if the enforcement of, or compliance with, such enactment,
rule or order would impair the security interest hereunder or be prejudicial to
the interests of the Holders of Securities or of the Trustee).

SECTION 11.05. Authorization of Receipt of Funds by the Trustee Under the Escrow
Agreement.

                  The Trustee is authorized to receive any funds for the benefit
of the Holders of Securities disbursed under the Escrow Agreement, and to make
further distributions of such funds to the Holders of Securities according to
the provisions of this Indenture.

SECTION 11.06.  Termination of Security Interest.

                  Upon the earliest to occur of (i) the date upon which the
balance of Escrow Funds and other Collateral shall have been reduced to zero,
(ii) the payment of the first four scheduled interest payments on the
Securities, (iii) legal defeasance pursuant to Section 8.01 and (iv) covenant
defeasance pursuant to Section 8.01, the Trustee shall, at the written request
of the Company, release the security interest in the Collateral pursuant to this
Indenture and the Escrow Agreement upon the Company's compliance with the
provisions of the TIA pertaining to release of collateral.


                                 ARTICLE TWELVE

                   COVENANT OF GLOBAL TELESYSTEMS GROUP, INC.


SECTION 12.01.  GTS Contribution.

                  GTS shall consummate, or shall cause to be consummated, the
GTS Contribution on or prior to September 30, 1997. This obligation of GTS will
constitute "Senior Indebtedness" under that certain indenture noted as of July
14, 1997 between GTS and The Bank of New York relating to GTS' Senior
Subordinated Convertible Bonds due 2000, and will be incurred pursuant to clause
(c) of the second paragraph of the "Limitation of Indebtedness" covenant. If GTS
fails to comply with the foregoing covenant, the Holders and the Company shall
each be entitled to commence proceedings against GTS and to seek to compel
performance and any other remedies available under law.

                  GTS agrees that this covenant is part of the consideration for
purchase of the Securities.

                            [Signature Pages Follow]
<PAGE>   74
                                       S-1



                                   SIGNATURES


                  IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed as of the date first written above.

                                       HERMES EUROPE RAILTEL B.V.




                                       By: /s/ PETER MAGNUS
                                           -----------------------
                                           Name: Peter Magnus
                                           Title: Attorney-in-fact


                                       GLOBAL TELESYSTEMS GROUP, INC.
                                         (the undersigned agrees to be bound by
                                         this Indenture with respect only to
                                         Article Twelve hereof)




                                       By: /s/ WILLIAM H. SEIPPEL
                                           -------------------------------
                                          Name: William H. Seippel
                                          Title: Executive Vice President
                                                 of Finance and Chief
                                                 Financial Officer

                                       THE BANK OF NEW YORK,
                                         as Trustee




                                       By: /s/ MING SHIANG
                                           ------------------------------
                                          Name: Ming Shiang
                                          Title: Assistant Vice-President

<PAGE>   75
                                                                       EXHIBIT A


                           [FORM OF SERIES A SECURITY]


                  "THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER
         THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
         AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
         TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
         BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING
         SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN,
         THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
         BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"),
         (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE
         WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT IS AN
         INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2),
         (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "IAI") (2)
         AGREES THAT IT WILL NOT, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT
         (A) TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) TO A PERSON WHOM THE
         SELLER REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR
         FOR THE ACCOUNT OF A QIB IN A TRANSACTION MEETING THE REQUIREMENTS OF
         RULE 144A, (C) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF
         RULE 904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE
         REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) TO AN IAI THAT,
         PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER
         CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
         TRANSFER OF THIS NOTE (THE FORM OF WHICH CAN BE OBTAINED FROM THE
         TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL
         AMOUNT OF NOTES LESS THAN $265,000, AN OPINION OF COUNSEL ACCEPTABLE TO
         THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES
         ACT, (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION
         REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF
         COUNSEL ACCEPTABLE TO THE COMPANY) OR (G) PURSUANT TO AN EFFECTIVE
         REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE
         APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY
         OTHER APPLICABLE JURISDICTION AND (3) AGREES THAT IT WILL DELIVER TO
         EACH PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A
         NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE
         TERMS "OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS
         GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE
         INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO
         REGIS-


                                       A-1
<PAGE>   76
         TER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING.


                                      A-2
<PAGE>   77
                           HERMES EUROPE RAILTEL B.V.
                          11-1/2% Senior Note due 2007

                                                                     CUSIP No.:
No.                                                                      $

                  HERMES EUROPE RAILTEL B.V., a Netherlands limited company (the
"Company", which term includes any successor corporation), for value received
promises to pay to or registered assigns, the principal sum of Dollars, on
August 15, 2007.

                  Interest Payment Dates: February 15 and August 15, commencing
February 15, 1998.

                  Interest Record Dates:  February 1 and August 1

                  Reference is made to the further provisions of this Security
contained herein, which will for all purposes have the same effect as if set
forth at this place.


                                      A-3
<PAGE>   78
                  IN WITNESS WHEREOF, the Company has caused this Security to be
signed manually or by facsimile by its duly authorized officer.

                                       HERMES EUROPE RAILTEL B.V.


                                       By:_______________________________
                                          Name:
                                          Title:

Attest:__________________________
       Name:
       Title:





                [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]

                  This is one of the 11-1/2% Senior Notes due 2007, described in
the within-mentioned Indenture.



Dated:            , 1997
                                       THE BANK OF NEW YORK,
                                         as Trustee


                                       By:______________________________
                                          Authorized Signatory


                                      A-4
<PAGE>   79
                              (REVERSE OF SECURITY)

                           HERMES EUROPE RAILTEL B.V.


                          11-1/2% Senior Note due 2007


1.       Interest.

                  HERMES EUROPE RAILTEL B.V., a Netherlands limited company (the
"Company"), promises to pay interest on the principal amount of this Security at
the rate per annum shown above. Cash interest on the Securities will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from August 19, 1997. The Company will pay interest semi-annually in
arrears on each Interest Payment Date, commencing February 15, 1998. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.

                  The Company shall pay interest on overdue principal from time
to time on demand at the rate borne by the Securities and on overdue
installments of interest (without regard to any applicable grace periods) at the
rate borne by the Securities to the extent lawful.

2.       Method of Payment.

                  The Company shall pay interest on the Securities (except
defaulted interest) to the persons who are the registered Holders at the close
of business on the Interest Record Date immediately preceding the Interest
Payment Date even if the Securities are cancelled on registration of transfer or
registration of exchange after such Interest Record Date. Holders must surrender
Securities to a Paying Agent to collect principal payments. The Company shall
pay principal and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts ("U.S. Legal
Tender"). However, the Company may pay principal and interest by wire transfer
of Federal funds (provided that the Paying Agent shall have received wire
instructions on or prior to the relevant Interest Record Date), or interest by
check payable in such U.S. Legal Tender. The Company may deliver any such
interest payment to the Paying Agent or to a Holder at the Holder's registered
address.

3.       Paying Agent and Registrar.

                  Initially, The Bank of New York (the "Trustee") will act as
Paying Agent and Registrar in the Borough of Manhattan, The City of New York,
and Banque Internationale a Luxembourg S.A. will act as Paying Agent and
Registrar in Luxembourg. The Company may change any Paying Agent or Registrar
without notice to the Holders. The Company or any of its Subsidiaries may,
subject to certain exceptions, act as Registrar.

4.       Indenture.

                  The Company issued the Securities under an Indenture, dated as
of August 19, 1997 (the "Indenture"), among the Company, Global TeleSystems
Group, Inc. and the Trustee. Capitalized terms herein are used as defined in the
Indenture unless otherwise defined herein. The terms of the Securities include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture


                                      A-5
<PAGE>   80
Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on
the date of the Indenture until such time as the Indenture is qualified under
the TIA, and thereafter as in effect on the date on which the Indenture is
qualified under the TIA. Notwithstanding anything to the contrary herein, the
Securities are subject to all such terms, and holders of Securities are referred
to the Indenture and the TIA for a statement of them. This is one of the Series
A Securities referred to in the Indenture. The Series A Securities and the
Series B Securities referred to in the Indenture are general obligations of the
Company limited in aggregate principal amount to $265,000,000.

5.       Optional Redemption.

         (a) The Securities will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time, on or after August 15, 2002
at the redemption prices (expressed as a percentage of principal amount) set
forth below, plus accrued and unpaid interest thereon, if any, to the redemption
date if redeemed during the twelve-month period commencing on of the years set
forth below:

<TABLE>
<CAPTION>
                                                        Redemption
                     Year                                   Price
                     ----                               ---------
<S>                                                      <C>
                     2002                                105.750%
                     2003                                103.833%
                     2004                                101.917%
                     2005 and thereafter                 100.000%
</TABLE>

         (b) Redemption Upon Public Equity Offering or Strategic Equity
Investment.

                  At any time, or from time to time, prior to August 15, 2000,
the Company may redeem Securities at a redemption price equal to 111.5% of the
principal amount of the Securities so redeemed, plus accrued and unpaid interest
thereon, if any, to the redemption date, with the net cash proceeds of one or
more Public Equity Offerings or Strategic Equity Investments resulting in
aggregate gross cash proceeds to the Company of at least $75 million; provided,
however, that at least two-thirds of the principal amount of Securities
originally issued would remain outstanding immediately after giving effect to
any such redemption (excluding any Securities owned by the Company or any of its
Affiliates) (it being understood that the foregoing shall not apply to proceeds
received in connection with the GTS Contribution). Notice of any such redemption
must be given within 60 days after the date of the last Public Equity Offering
or Strategic Equity Investment resulting in gross cash proceeds to the Company,
when aggregated with all prior Public Equity Offerings and Strategic Equity
Investments, of at least $75.0 million.

         (c) Redemption for Changes in Withholding Taxes.

                  The Company may, at any time, at its option, redeem all (but
not less than all) of the Securities then outstanding at 100% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption, if the Company has become or would become obligated to pay, on the
next date on which any amount would be payable with respect to the Securities,
any Additional Amounts as a result of change in law (including any regulations
promulgated thereunder) or in the interpretation or administration thereof, if
such change is announced and becomes effective on or after the Issue Date.


                                      A-6
<PAGE>   81
6.       Notice of Redemption.

                  Notice of redemption will be mailed by first-class mail at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at its registered address; provided,
however, that notice of redemption pursuant to paragraph 5(b) of this Security
will be mailed to each Holder of Securities to be redeemed no later than 60 days
following the consummation of the last Public Equity Offering resulting in gross
cash proceeds to the Company, when aggregated with all prior Public Equity
Offerings, of at least $75.0 million. The Trustee may select for redemption
portions of the principal amount of Securities that have denominations equal to
or larger than $1,000 principal amount. Securities and portions of them the
Trustee so selects shall be in amounts of $1,000 principal amount or integral
multiples thereof.

                  If any Security is to be redeemed in part only, the notice of
redemption that relates to such Security shall state the portion of the
principal amount thereof to be redeemed. A new Security in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Security. On and after the Redemption
Date, interest will cease to accrue on Securities or portions thereof called for
redemption so long as the Company has deposited with the Paying Agent for the
Securities funds in satisfaction of the redemption price pursuant to the
Indenture.

7.       Change of Control Offer.

                  Upon the occurrence of a Change of Control, the Company will
be required to offer to purchase all outstanding Securities at a purchase price
in cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the Purchase Date.

8.       Limitation on Disposition of Assets.

                  Upon the occurrence of certain Asset Sales, the Company is,
subject to certain conditions, obligated to make an offer to purchase Securities
at a purchase price in cash equal to 100% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the Purchase Date.

9.       Denominations; Transfer; Exchange.

                  The Securities are in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. A Holder shall
register the transfer of or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay certain transfer
taxes or similar governmental charges payable in connection therewith as
permitted by the Indenture. The Registrar need not register the transfer of or
exchange any Securities or portions thereof selected for redemption, except the
unredeemed portion of any security being redeemed in part.

10.      Persons Deemed Owners.

                  The registered Holder of a Security shall be treated as the
owner of it for all purposes.


                                      A-7
<PAGE>   82
11.      Unclaimed Funds.

                  If funds for the payment of principal or interest remain
unclaimed for two years, the Trustee and the Paying Agent will repay the funds
to the Company at its written request. After that, all liability of the Trustee
and such Paying Agent with respect to such funds shall cease.

12.      Legal Defeasance and Covenant Defeasance.

                  The Company may be discharged from its obligations under the
Indenture and the Securities except for certain provisions thereof, and may be
discharged from obligations to comply with certain covenants contained in the
Indenture and the Securities, in each case upon satisfaction of certain
conditions specified in the Indenture.

13.      Amendment; Supplement; Waiver.

                  Subject to certain exceptions, the Indenture and the
Securities may be amended or supplemented with the written consent of the
Holders of at least a majority in aggregate principal amount of the Securities
then outstanding, and any existing Default or compliance with any provision may
be waived with the consent of the Holders of a majority in aggregate principal
amount of the Securities then outstanding. Without notice to or consent of any
Holder, the parties thereto may amend or supplement the Indenture and the
Securities to, among other things, cure any ambiguity, defect or inconsistency,
provide for uncertificated Securities in addition to or in place of certificated
Securities, effect the assumption by a successor person of all obligations of
the Company under Securities, the Indenture, the Registration Rights Agreement
and the Escrow Agreement in connection with any transaction complying with
Article Five of the Indenture or comply with any requirements of the SEC in
connection with the qualification of the Indenture under the TIA, or make any
other change that does not materially adversely affect the rights of any Holder
of a Security.

14.      Restrictive Covenants.

                  The Indenture contains certain covenants that, among other
things, limit the ability of the Company and the Restricted Subsidiaries to make
restricted payments, to incur indebtedness, to create liens, to sell assets, to
permit restrictions on dividends and other payments to become applicable to
Restricted Subsidiaries, to consolidate, merge or sell all or substantially all
of its assets, to engage in transactions with affiliates or certain other
related persons. The limitations are subject to a number of important
qualifications and exceptions. The Company must annually report to the Trustee
on compliance with such limitations.

15.      Defaults and Remedies.

                  If an Event of Default (other than certain events of
bankruptcy, insolvency or reorganization affecting the Company) occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount of Securities then outstanding by notice in writing to the Company may
declare all the Securities to be due and payable immediately in the manner and
with the effect provided in the Indenture. If certain events of bankruptcy,
insolvency or reorganization affecting the Company occur under the Indenture,
the Securities will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder of Securities.
Holders of Securities may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee is not obligated to enforce the Indenture
or the Securities unless it has received indemnity reasonably satisfactory to
it. The Indenture permits, subject to certain limitations therein provided,
Holders of a majority in aggregate principal amount of the Securities then
outstanding


                                      A-8
<PAGE>   83
to direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of Securities notice of certain continuing Defaults if it
determines that withholding notice is in their interest.

16.      Trustee Dealings with Company.

                  The Trustee under the Indenture, in its individual or any
other capacity, may become the owner or pledgee of Securities and may otherwise
deal with the Company, its Subsidiaries or their respective Affiliates as if it
were not the Trustee.

17.      No Recourse Against Others.

                  No stockholder, director, officer, employee or incorporator,
as such, of the Company or any of its Affiliates shall have any liability for
any obligation of the Company or any of its Affiliates under the Securities or
the Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder of a Security by accepting a Security
waives and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.

18.      Authentication.

                  This Security shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on this Security.

19.      Abbreviations and Defined Terms.

                  Customary abbreviations may be used in the name of a Holder of
a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).

20.      CUSIP Numbers.

                  Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company has caused CUSIP numbers
to be printed on the Securities as a convenience to the Holders of the
Securities. No representation is made as to the accuracy of such numbers as
printed on the Securities and reliance may be placed only on the other
identification numbers printed hereon.

21.      Governing Law.

                  The laws of the State of New York shall govern the Indenture
and this Security without regard to principles of conflicts of laws.


                                      A-9
<PAGE>   84
                                 ASSIGNMENT FORM


I or we assign and transfer this Security to

________________________________________________________________________________

________________________________________________________________________________
(Print or type name, address and zip code of assignee or transferee)

________________________________________________________________________________
(Insert Social Security or other identifying number of assignee or transferee)

and irrevocably appoint_________________________________________________________
agent to transfer this Security on the books of the Company.  The agent may
substitute another to act for him.


Dated:___________________          Signed:       ______________________________
                                           (Signed exactly as name appears
                                           on the other side of this Security)

Signature Guarantee:____________________________________________________________
                         Participant in a recognized Signature Guarantee
                         Medallion Program (or other signature guarantor program
                         reasonably acceptable to the Trustee)
<PAGE>   85
                       OPTION OF HOLDER TO ELECT PURCHASE


                  If you want to elect to have this Security purchased by the
Company pursuant to Section 4.10 or Section 4.16 of the Indenture, check the
appropriate box:

Section 4.10 [      ]
Section 4.16 [      ]

                  If you want to elect to have only part of this Security
purchased by the Company pursuant to Section 4.10 or Section 4.16 of the
Indenture, state the amount: $_____________

Dated:___________________    Your Signature:____________________________________
                                            (Signed exactly as name appears
                                            on the other side of this Security)

Signature Guarantee:____________________________________________________________
                         Participant in a recognized Signature Guarantee
                         Medallion Program (or other signature guarantor program
                         reasonably acceptable to the Trustee)
<PAGE>   86
                                                                       EXHIBIT B


                           (FORM OF SERIES B SECURITY)

                           HERMES EUROPE RAILTEL B.V.

                     11-1/2% Senior Note due 2007, Series B

                                                                      CUSIP No.:
No.                                                                      $


                  HERMES EUROPE RAILTEL B.V., a Netherlands limited company (the
"Company", which term includes any successor corporation), for value received
promises to pay to or registered assigns, the principal sum of Dollars, on
August 15, 2007.

                  Interest Payment Dates: February 15 and August 15, commencing
February 15, 1998.

                  Interest Record Dates:  February 1 and August 1

                  Reference is made to the further provisions of this Security
contained herein, which will for all purposes have the same effect as if set
forth at this place.


                                      B-1
<PAGE>   87
                  IN WITNESS WHEREOF, the Company has caused this Security to be
signed manually or by facsimile by its duly authorized officer.

                                          HERMES EUROPE RAILTEL B.V.


                                          By:___________________________________
                                             Name:
                                             Title:

Attest:____________________________
       Name:
       Title:





                [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]

                  This is one of the 11-1/2% Senior Notes due 2007, Series B,
described in the within-mentioned Indenture.



Dated:           , 1997
                                          THE BANK OF NEW YORK,
                                            as Trustee


                                          By:___________________________________
                                             Authorized Signatory


                                      B-2
<PAGE>   88
                              (REVERSE OF SECURITY)

                           HERMES EUROPE RAILTEL B.V.


                     11-1/2% Senior Note due 2007, Series B


1.       Interest.

                  HERMES EUROPE RAILTEL B.V., a Netherlands limited company (the
"Company"), promises to pay interest on the principal amount of this Security at
the rate per annum shown above. Cash interest on the Securities will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from August 19, 1997. The Company will pay interest semi-annually in
arrears on each Interest Payment Date, commencing February 15, 1998. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.

                  The Company shall pay interest on overdue principal from time
to time on demand at the rate borne by the Securities and on overdue
installments of interest (without regard to any applicable grace periods) at the
rate borne by the Securities to the extent lawful.

2.       Method of Payment.

                  The Company shall pay interest on the Securities (except
defaulted interest) to the persons who are the registered Holders at the close
of business on the Interest Record Date immediately preceding the Interest
Payment Date even if the Securities are cancelled on registration of transfer or
registration of exchange after such Interest Record Date. Holders must surrender
Securities to a Paying Agent to collect principal payments. The Company shall
pay principal and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts ("U.S. Legal
Tender"). However, the Company may pay principal and interest by wire transfer
of Federal funds (provided that the Paying Agent shall have received wire
instructions on or prior to the relevant Interest Record Date), or interest by
check payable in such U.S. Legal Tender. The Company may deliver any such
interest payment to the Paying Agent or to a Holder at the Holder's registered
address.

3.       Paying Agent and Registrar.

                  Initially, The Bank of New York (the "Trustee") will act as
Paying Agent and Registrar in the Borough of Manhattan, The City of New York,
and Banque Internationale a Luxembourg S.A. will act as Paying Agent and
Registrar in Luxembourg. The Company may change any Paying Agent or Registrar
without notice to the Holders. The Company or any of its Subsidiaries may,
subject to certain exceptions, act as Registrar.

4.       Indenture.

                  The Company issued the Securities under an Indenture, dated as
of August 19, 1997 (the "Indenture"), among the Company, Global TeleSystems
Group, Inc. and the Trustee. Capitalized terms herein are used as defined in the
Indenture unless otherwise defined herein. The terms of the Securities include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture


                                      B-3
<PAGE>   89
Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on
the date of the Indenture until such time as the Indenture is qualified under
the TIA, and thereafter as in effect on the date on which the Indenture is
qualified under the TIA. Notwithstanding anything to the contrary herein, the
Securities are subject to all such terms, and holders of Securities are referred
to the Indenture and the TIA for a statement of them. This is one of the Series
A Securities referred to in the Indenture. The Series A Securities and the
Series B Securities referred to in the Indenture are general obligations of the
Company limited in aggregate principal amount to $265,000,000.

5.       Optional Redemption.

         (a) The Securities will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time, on or after August 15, 2002
at the redemption prices (expressed as a percentage of principal amount) set
forth below, plus accrued and unpaid interest thereon, if any, to the redemption
date if redeemed during the twelve-month period commencing on of the years set
forth below:

<TABLE>
<CAPTION>
                                                       Redemption
                     Year                                  Price
                     ----                              ---------
<S>                                                     <C>
                     2002                               105.750%
                     2003                               103.833%
                     2004                               101.917%
                     2005 and thereafter                100.000%
</TABLE>

         (b) Redemption Upon Public Equity Offering or Strategic Equity
Investment.

                  At any time, or from time to time, prior to August 15, 2000,
the Company may redeem Securities at a redemption price equal to 111.5% of the
principal amount of the Securities so redeemed, plus accrued and unpaid interest
thereon, if any, to the redemption date, with the net cash proceeds of one or
more Public Equity Offerings or Strategic Equity Investments resulting in
aggregate gross cash proceeds to the Company of at least $75 million; provided,
however, that at least two-thirds of the principal amount of Securities
originally issued would remain outstanding immediately after giving effect to
any such redemption (excluding any Securities owned by the Company or any of its
Affiliates) (it being understood that the foregoing shall not apply to proceeds
received in connection with the GTS Contribution). Notice of any such redemption
must be given within 60 days after the date of the last Public Equity Offering
or Strategic Equity Investment resulting in gross cash proceeds to the Company,
when aggregated with all prior Public Equity Offerings and Strategic Equity
Investments, of at least $75.0 million.

         (c)  Redemption for Changes in Withholding Taxes.

                  The Company may, at any time, at its option, redeem all (but
not less than all) of the Securities then outstanding at 100% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption, if the Company has become or would become obligated to pay, on the
next date on which any amount would be payable with respect to the Securities,
any Additional Amounts as a result of change in law (including any regulations
promulgated thereunder) or in the interpretation or administration thereof, if
such change is announced and becomes effective on or after the Issue Date.



                                       B-4
<PAGE>   90
6.       Notice of Redemption.

                  Notice of redemption will be mailed by first-class mail at
least 30 days but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at its registered address; provided,
however, that notice of redemption pursuant to paragraph 5(b) of this Security
will be mailed to each Holder of Securities to be redeemed no later than 60 days
following the consummation of the last Public Equity Offering resulting in gross
cash proceeds to the Company, when aggregated with all prior Public Equity
Offerings, of at least $75.0 million. The Trustee may select for redemption
portions of the principal amount of Securities that have denominations equal to
or larger than $1,000 principal amount. Securities and portions of them the
Trustee so selects shall be in amounts of $1,000 principal amount or integral
multiples thereof.

                  If any Security is to be redeemed in part only, the notice of
redemption that relates to such Security shall state the portion of the
principal amount thereof to be redeemed. A new Security in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Security. On and after the Redemption
Date, interest will cease to accrue on Securities or portions thereof called for
redemption so long as the Company has deposited with the Paying Agent for the
Securities funds in satisfaction of the redemption price pursuant to the
Indenture.

7.       Change of Control Offer.

                  Upon the occurrence of a Change of Control, the Company will
be required to offer to purchase all outstanding Securities at a purchase price
in cash equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the Purchase Date.

8.       Limitation on Disposition of Assets.

                  Upon the occurrence of certain Asset Sales, the Company is,
subject to certain conditions, obligated to make an offer to purchase Securities
at a purchase price in cash equal to 100% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the Purchase Date.

9.       Denominations; Transfer; Exchange.

                  The Securities are in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. A Holder shall
register the transfer of or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and to pay certain transfer
taxes or similar governmental charges payable in connection therewith as
permitted by the Indenture. The Registrar need not register the transfer of or
exchange any Securities or portions thereof selected for redemption, except the
unredeemed portion of any security being redeemed in part.

10.      Persons Deemed Owners.

                  The registered Holder of a Security shall be treated as the
owner of it for all purposes.



                                      B-5
<PAGE>   91
11.      Unclaimed Funds.

                  If funds for the payment of principal or interest remain
unclaimed for two years, the Trustee and the Paying Agent will repay the funds
to the Company at its written request. After that, all liability of the Trustee
and such Paying Agent with respect to such funds shall cease.

12.      Legal Defeasance and Covenant Defeasance.

                  The Company may be discharged from its obligations under the
Indenture and the Securities except for certain provisions thereof, and may be
discharged from obligations to comply with certain covenants contained in the
Indenture and the Securities, in each case upon satisfaction of certain
conditions specified in the Indenture.

13.      Amendment; Supplement; Waiver.

                  Subject to certain exceptions, the Indenture and the
Securities may be amended or supplemented with the written consent of the
Holders of at least a majority in aggregate principal amount of the Securities
then outstanding, and any existing Default or compliance with any provision may
be waived with the consent of the Holders of a majority in aggregate principal
amount of the Securities then outstanding. Without notice to or consent of any
Holder, the parties thereto may amend or supplement the Indenture and the
Securities to, among other things, cure any ambiguity, defect or inconsistency,
provide for uncertificated Securities in addition to or in place of certificated
Securities, effect the assumption by a successor person of all obligations of
the Company under Securities, the Indenture, the Registration Rights Agreement
and the Escrow Agreement in connection with any transaction complying with
Article Five of the Indenture or comply with any requirements of the SEC in
connection with the qualification of the Indenture under the TIA, or make any
other change that does not materially adversely affect the rights of any Holder
of a Security.

14.      Restrictive Covenants.

                  The Indenture contains certain covenants that, among other
things, limit the ability of the Company and the Restricted Subsidiaries to make
restricted payments, to incur indebtedness, to create liens, to sell assets, to
permit restrictions on dividends and other payments to become applicable to
Restricted Subsidiaries, to consolidate, merge or sell all or substantially all
of its assets, to engage in transactions with affiliates or certain other
related persons. The limitations are subject to a number of important
qualifications and exceptions. The Company must annually report to the Trustee
on compliance with such limitations.

15.      Defaults and Remedies.

                  If an Event of Default (other than certain events of
bankruptcy, insolvency or reorganization affecting the Company) occurs and is
continuing, the Trustee or the Holders of at least 25% in aggregate principal
amount of Securities then outstanding by notice in writing to the Company may
declare all the Securities to be due and payable immediately in the manner and
with the effect provided in the Indenture. If certain events of bankruptcy,
insolvency or reorganization affecting the Company occur under the Indenture,
the Securities will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder of Securities.
Holders of Securities may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee is not obligated to enforce the Indenture
or the Securities unless it has received indemnity reasonably satisfactory to
it. The Indenture permits, subject to certain limitations therein provided,
Holders of a majority in aggregate principal amount of the Securities then
outstanding


                                      B-6
<PAGE>   92
to direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of Securities notice of certain continuing Defaults if it
determines that withholding notice is in their interest.

16.      Trustee Dealings with Company.

                  The Trustee under the Indenture, in its individual or any
other capacity, may become the owner or pledgee of Securities and may otherwise
deal with the Company, its Subsidiaries or their respective Affiliates as if it
were not the Trustee.

17.      No Recourse Against Others.

                  No stockholder, director, officer, employee or incorporator,
as such, of the Company or any of its Affiliates shall have any liability for
any obligation of the Company or any of its Affiliates under the Securities or
the Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder of a Security by accepting a Security
waives and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.

18.      Authentication.

                  This Security shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on this Security.

19.      Abbreviations and Defined Terms.

                  Customary abbreviations may be used in the name of a Holder of
a Security or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).

20.      CUSIP Numbers.

                  Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company has caused CUSIP numbers
to be printed on the Securities as a convenience to the Holders of the
Securities. No representation is made as to the accuracy of such numbers as
printed on the Securities and reliance may be placed only on the other
identification numbers printed hereon.

21.      Governing Law.

                  The laws of the State of New York shall govern the Indenture
and this Security without regard to principles of conflicts of laws.



                                      B-7
<PAGE>   93


                                 ASSIGNMENT FORM


I or we assign and transfer this Security to

________________________________________________________________________________

________________________________________________________________________________
(Print or type name, address and zip code of assignee or transferee)

________________________________________________________________________________
(Insert Social Security or other identifying number of assignee or transferee)

and irrevocably appoint_________________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.


Dated:___________________             Signed:______________________________
                                             (Signed exactly as name appears
                                             on the other side of this Security)

Signature Guarantee:____________________________________________________________
                         Participant in a recognized Signature Guarantee
                         Medallion Program (or other signature guarantor program
                         reasonably acceptable to the Trustee)
<PAGE>   94
                       OPTION OF HOLDER TO ELECT PURCHASE


                  If you want to elect to have this Security purchased by the
Company pursuant to Section 4.10 or Section 4.16 of the Indenture, check the
appropriate box:

Section 4.10 [      ]
Section 4.16 [      ]

                  If you want to elect to have only part of this Security
purchased by the Company pursuant to Section 4.10 or Section 4.16 of the
Indenture, state the amount: $_____________

Dated:___________________     Your Signature:___________________________________
                                            (Signed exactly as name appears
                                             on the other side of this Security)

Signature Guarantee:____________________________________________________________
                         Participant in a recognized Signature Guarantee
                         Medallion Program (or other signature guarantor program
                         reasonably acceptable to the Trustee)
<PAGE>   95
                                                                       EXHIBIT C


                      FORM OF LEGEND FOR GLOBAL SECURITIES

                  Any Global Security authenticated and delivered hereunder
shall bear a legend (which would be in addition to any other legends required in
the case of a Restricted Security) in substantially the following form:

                  THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
         INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
         DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
         SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A
         PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED
         CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS
         SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE
         DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE
         DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY
         BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
         INDENTURE.

                  UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
         REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
         ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
         EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
         NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
         AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO.
         OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
         OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
         OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
         OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.


                                      C-1
<PAGE>   96
                                                                       EXHIBIT D

                    CERTIFICATE TO BE DELIVERED UPON EXCHANGE
                    OR REGISTRATION OF TRANSFER OF SECURITIES

         Re:      11-1/2% Senior Notes due 2007
                  (the "Securities"), of Hermes Europe Railtel B.V.

                  This Certificate relates to $_______ principal amount of
Securities held in the form of* ___ a beneficial interest in a Global Security
or* _______ Physical Securities by_____________________ (the "Transferor").

The Transferor:*

         |_| has requested by written order that the Registrar deliver in
exchange for its beneficial interest in the Global Security held by the
Depositary a Physical Security or Physical Securities in definitive, registered
form of authorized denominations and an aggregate number equal to its beneficial
interest in such Global Security (or the portion thereof indicated above); or

         |_| has requested that the Registrar by written order to exchange or
register the transfer of a Physical Security or Physical Securities.

                  In connection with such request and in respect of each such
Security, the Transferor does hereby certify that the Transferor is familiar
with the Indenture relating to the above captioned Securities and the
restrictions on transfers thereof as provided in Section 2.06 of such Indenture,
and that the transfer of the Securities does not require registration under the
Securities Act of 1933, as amended (the "Act"), because*:

         |_| Such Security is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 2.06 of the Indenture).

         |_| Such Security is being transferred to a "qualified institutional
buyer" (as defined in Rule 144A under the Act), in reliance on Rule 144A.

         |_| Such Security is being transferred to an institutional "accredited
investor" (within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule
501 under the Act) which delivers a certificate to the Trustee in the form of
Exhibit E to the Indenture. An opinion of counsel to the effect that such
transfer does not require registration under the Securities Act accompanies this
certification.

         |_| Such Security is being transferred in reliance on Regulation S
under the Act. An opinion of counsel to the effect that such transfer does not
require registration under the Securities Act accompanies this certification.

         |_| Such Security is being transferred in reliance on Rule 144 under
the Act. An opinion of counsel to the effect that such transfer does not require
registration under the Securities Act accompanies this certification.

         |_| Such Security is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Act other than Rule
144A or Rule 144 or Regulation S under the Act to a person other than an
institutional "accredited investor." An opinion of counsel to the effect that
such transfer does not require registration under the Securities Act accompanies
this certification.

                                              _________________________________
                                              [INSERT NAME OF TRANSFEROR]


                                       D-1
<PAGE>   97
                                              By:_____________________________
                                                 [Authorized Signatory]
Date:    _____________
         *Check applicable box.


                                      D-2
<PAGE>   98
                                                                       EXHIBIT E

                            Form of Certificate To Be
                          Delivered in Connection with
                 Transfers to Institutional Accredited Investors

                                                           ---------------, ----



Attention:  Corporate Trust Administration

         Re:      Hermes Europe Railtel B.V. (the "Company")
                  Indenture (the "Indenture") relating to 11-1/2%
                  Senior Notes due 2007


Ladies and Gentlemen:

                  In connection with our proposed purchase of $ aggregate
principal amount of 11-1/2% Senior Notes due 2007 (the "Notes") of Hermes Europe
Railtel B.V., a Netherlands limited company (the "Company"), we confirm that:

                  1. We understand that the Notes have not been registered under
             the Securities Act of 1933, as amended (the "Securities Act"), and
             may not be sold except as permitted in the following sentence. We
             understand and agree, on our own behalf and on behalf of any
             accounts for which we are acting as hereinafter stated, (x) that
             such Notes are being offered only in a transaction not involving
             any public offering within the meaning of the Securities Act and
             (y) that if we decide to resell, pledge or otherwise transfer such
             Notes within two years after the date of the original issuance of
             the Notes or if within three months after we cease to be an
             affiliate (within the meaning of Rule 144 under the Securities Act)
             of the Company, such Notes may be resold, pledged or transferred
             only (i) to the Company, (ii) so long as the Notes are eligible for
             resale pursuant to Rule 144A under the Securities Act ("Rule
             144A"), to a person whom we reasonably believe is a "qualified
             institution buyer" (as defined in Rule 144A) ("QIB") that purchases
             for its own account or for the account of a QIB to whom notice is
             given that the resale, pledge or transfer is being made in reliance
             on Rule 144A (as indicated by the box checked by the transferor on
             the Certificate of Transfer on the reverse of the certificate for
             the Notes), (iii) in an offshore transaction in accordance with
             Regulation S under the Securities Act (as indicated by the box
             checked by the transferor on the Certificate of Transfer on the
             reverse of the Note if the Note is not in book-entry form), and, if
             such transfer is being effected by certain transferors prior to the
             expiration of the "40 day restricted period" (within the meaning of
             Rule 903(c)(2) of Regulation S under the Securities Act), a
             certificate that my be obtained from the Trustee is delivered by
             the transferee, (iv) to an institution that is an "accredited
             investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
             Securities Act (as indicated by the box checked by the transferor
             on the Certificate of Transfer on the reverse of the certificate
             for the Notes) which has certified to the Company and the Trustee
             for the Notes that it is such an accredited investor and is
             acquiring the Notes for investment purposes and not for
             distribution (provided that no Notes purchased from a foreign
             purchaser or from any person other than a QIB or an institutional
             accredited investor pursuant to this clause (iii) shall be
             permitted to transfer any Notes so purchased to an institutional
             accredited investor pursuant to this


                                      E-1
<PAGE>   99
             clause (iv) prior to the expiration of the "applicable restricted
             period" (within the meaning of Regulation S under the Securities
             Act)), (v) pursuant to an exemption from registration under the
             Securities Act provided by Rule 144 (if applicable) under the
             Securities Act, or (vi) pursuant to an effective registration
             statement under the Securities Act, in each case in accordance with
             any applicable securities laws of any state of the United States,
             and we will notify any purchaser of the Notes from us of the above
             resale restriction, if then applicable. We further understand that
             in connection with any transfer of the Notes by us that the Company
             and the Trustee for the Notes may request, and if so requested we
             will furnish, such certificates, legal opinions and other
             information as they may reasonably require to confirm that any such
             transfer complies with the foregoing restrictions.

                  2. We are able to fend for ourselves in the transactions
             contemplated by this Offering Memorandum, we have such knowledge
             and experience in financial and business matters as to be capable
             of evaluating the merits and risks of our investment in the Notes,
             and we and any accounts for which we are acting are each able to
             bear the economic risk of our or its investment and can afford the
             complete loss of such investment.

                  3. We understand that the minimum principal amount of Notes
             that may be purchased by an investor is $250,000.

                  4. We understand that the Company, Donaldson, Lufkin &
             Jenrette Securities Corporation, UBS Securities LLC and Lehman
             Brothers Inc., as the initial purchasers of the Securities
             ("Initial Purchasers"), and others will rely upon the truth and
             accuracy of the foregoing acknowledgments, representations and
             agreements and we agree that if any of the acknowledgments,
             representations and warranties deemed to have been made by us by
             our purchase of Notes, for our own account or of one or more
             accounts as to each of which we exercise sole investment
             discretion, are no longer accurate, we shall promptly notify the
             Company and the Initial Purchasers.

                  5. We are acquiring the Notes purchased by us for investment
             purposes and not for distribution of our own account or for one or
             more accounts as to each of which we exercise sole investment
             discretion and we are or such account is an institutional
             "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or
             (7) of Regulation D under the Securities Act).


                                      E-2
<PAGE>   100
                  6. You are entitled to rely upon this letter and you are
             irrevocably authorized to produce this letter or a copy hereof to
             any interested party in any administrative or legal proceeding or
             official inquiry with respect to the matters covered hereby.

                                       Very truly yours,


                                       ________________________________________
                                                 (Name of Purchaser)

                                       By:  ___________________________________

                                       Date: __________________________________


                                      E-3
<PAGE>   101
                                                                       EXHIBIT F

                            Form of Certificate To Be
                             Delivered in Connection
                           with Regulation S Transfers

                                                           ---------------, ----




Attention:  Corporate Trust Administration

Re:      Hermes Europe Railtel B.V. (the "Company") 11-1/2%
         Senior Notes due 2007 (the "Securities")

Ladies and Gentlemen:

                  In connection with our proposed sale of $____________
aggregate principal amount of the Securities, we confirm that such sale has been
effected pursuant to and in accordance with Regulation S under the Securities
Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent
that:

                  (1) the offer of the Securities was not made to a person in
         the United States;

                  (2) either (a) at the time the buy offer was originated, the
         transferee was outside the United States or we and any person acting on
         our behalf reasonably believed that the transferee was outside the
         United States, or (b) the transaction was executed in, on or through
         the facilities of a designated off-shore securities market and neither
         we nor any person acting on our behalf knows that the transaction has
         been prearranged with a buyer in the United States;

                  (3) no directed selling efforts have been made in the United
         States in contravention of the requirements of Rule 903(b) or Rule
         904(b) of Regulation S, as applicable;

                  (4) the transaction is not part of a plan or scheme to evade
         the registration requirements of the Securities Act; and

                  (5) we have advised the transferee of the transfer
         restrictions applicable to the Securities.

                  You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Defined terms used herein without
definition have the respective meanings provided in Regulation S.

                                           Very truly yours,

                                           [Name of Transferor]

                                           By:    _________________________


                                      F-1

<PAGE>   1
                                                                Exhibit 10.2


                    Registration Rights Letter Agreement



                                                                January 19, 1996
                                                                        ---



The Open Society Institute
888 Seventh Avenue
Suite 3100
New York, NY 10106

Chatterjee Fund Management, L.P.
888 Seventh Avenue
Suite 3100
New York, NY 10106

Gentlemen:

                We refer to the Senior Note Purchase Agreement (the "Note 
Purchase Agreement"), the Warrant Agreement (as defined in the Note Purchase
Agreement) and the Notes (as defined in the Note Purchase Agreement), each
dated as of the date hereof, and executed among the undersigned (the
"Company"), the Open Society Institute ("OSI") and Chatterjee Fund Management,
L.P. ("CFM," and together with OSI, the "Rights Holders" and, individually, a
"Rights Holder"). Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Note Purchase Agreement, or, as
indicated herein, the Stock Purchase Agreement.

                In connection with the purchase of the Notes, the issuance of 
the Warrants and the transactions contemplated by the Note Purchase Agreement
and the Warrant Agreement, and in consideration for and as an inducement to the
purchase of the Notes by the Rights Holders, we hereby grant to each Rights
Holder, with respect to all shares of the Company's Common Stock that either
Rights Holder may acquire (whether by exercise of the Warrants or otherwise),
on a most-favored-nation basis, all of the registration rights and (with
respect to all such shares of the Company's Common Stock and, in addition, with
respect to and upon the issuance of the Warrants) all rights of first offer
granted to any stockholder pursuant to the Stock Purchase Agreement (the "Stock
Purchase Agreement"), dated as of June 15, 1995 (a form of which is attached as
Exhibit A), executed by the Company and certain stockholders, which rights are
no less favorable than the rights provided to any of the Company's stockholders
pursuant to any other stock purchase agreement,
<PAGE>   2
                                                                               2

any other agreement, or otherwise. Such rights include, without limitation, (A)
unlimited rights to demand registration after the Company qualifies as an S-3
Registrant (limited to one such registration in any 12 month period), as set
forth in Section 6.2 of the Stock Purchase Agreement; (B) unlimited piggyback
registration rights, as set forth in Section 6.3 thereof; (C) the Company's
payment of all expenses (with certain exceptions) incurred with respect to such
registrations, as set forth in Section 6.4 thereof; and (D) the right of first
offer to purchase a pro rata share of any issue of "New Securities" as defined
in the Stock Purchase Agreement, which right shall not expire prior to an
initial public offering of the Company, as set forth in Section 8.11 of the
Stock Purchase Agreement.

                In the event that the Company effects or causes to be effected
any amendments to the Stock Purchase Agreement that would diminish or restrict
in any way the registration rights or the rights of first offer granted to
stockholders under the Stock Purchase Agreement, such amendment shall in no way
diminish, restrict or otherwise apply to or affect the registration rights,
rights of first offer to purchase New Securities or any other rights granted to
each Rights Holder hereunder and under the Stock Purchase Agreement as now in
effect. In the event the Company amends the Stock Purchase Agreement to
increase or enhance the registration rights or rights of first offer of any
stockholder, or if the Company otherwise agrees to enhance or increase such
rights, or if such rights are increased or enhanced for any other reason or in
any other manner, each Rights Holder will automatically and immediately benefit
from and receive such increased or enhanced rights with no further action
required by either such Rights Holder, and this agreement shall be deemed to be
amended to incorporate such increased or enhanced rights. The Company shall
notify each Rights Holder immediately in writing of any such amendments or
other agreements or occurrences.

                In addition to any other transfer rights granted to each Rights
Holder pursuant to the terms of the Stock Purchase Agreement, either Rights
Holder may assign or transfer its rights under this agreement to any
transferees to which the Warrants, either of the Notes, as the case may be, or
shares of Common Stock have been transferred in accordance with the Note
Purchase Agreement or the Warrant Agreement.

                Notwithstanding any provision of the Stock Purchase Agreement 
or any other document or agreement to the
<PAGE>   3
                                                                               3

contrary, each Rights Holder and its transferees shall, immediately upon the
issuance of the Warrants, be entitled to the full benefit of and shall be
entitled to exercise all rights of first offer granted hereby or otherwise with
respect to any issue of New Securities, whether or not any of the Warrants have
been exercised by either Rights Holder.
<PAGE>   4
                This letter agreement shall be governed by and construed in 
accordance with the laws of the State of New York, and may be executed in
counterparts by the parties hereto, each of which counterparts shall be an
original and all of which taken together shall constitute one and the same
letter agreement.

                                        Very truly yours,

                                        Global Telesystems Group, Inc.

                                        By: /s/ NS Molberger
                                           ---------------------------------
                                           Name NS Molberger


Accepted and Agreed to by:

The Open Society Institute

By: /s/ ARYEH NEIER
   ---------------------------------
   Name: ARYEH NEIER

Chatterjee Fund Management, L.P.

By: /s/ P. Chatterjee
   ---------------------------------
   Name: P. Chatterjee


<PAGE>   1
                                                                Exhibit 10.3


                               WARRANT AGREEMENT

        WARRANT AGREEMENT, dated as of January 19, 1996 (the "Agreement"),
among Global Telesystems Group, Inc., a Delaware corporation (the "Company"),
The Open Society Institute ("OSI") and Chatterjee Fund Management, L.P. ("CFM"
and together with OSI and permitted assignees of OSI and CFM, the "Holders" and
individually, a "Holder").

        WHEREAS the Company proposes to issue and deliver its warrant
certificates ("Warrant Certificates") evidencing an aggregate of 2,222,222
warrants (the "Warrants"), each to purchase one share of common stock, par
value $0.0001 per share, of the Company ("Company Stock") in connection with
the Senior Promissory Notes dated as of the date hereof (the "Notes") in the
aggregate principal amount of thirty million ($30,000,000) dollars, issued by
the Company to the Holders, pursuant to, and subject to the terms and
conditions of, that certain Senior Note Purchase Agreement, dated as of the
date hereof (as it may be amended, supplemented or otherwise modified from time
to time, the "Note Purchase Agreement"), among the Company and the Holders.
        
        NOW THEREFORE, in consideration of the foregoing and for the purpose of
defining the terms and provisions of the Warrants and the respective rights and
obligations thereunder of the Company and each Holder, the Company and each
Holder agree as follows:

        1.      Certain Definitions.  The following terms, as used in this
Agreement, have the following meanings:

                (a)     "Affiliate" has the meaning set forth in the Note
Purchase Agreement.

                (b)     "Business Day" means any day other than a Saturday,
Sunday or day on which banks in New York city are closed for general business.

                (c)     "Common Stock" has the meaning set forth in the 
preamble.

                (d)     "Exercise Period" means the period beginning on the
date of issuance of the Warrants and ending at 5 p.m. New York City time on the
sixth anniversary of such date.

                (e)     "Exercise Price" means $15.40 per share subject to a
reduction to $14.00 per share if all amounts payable under the Notes have not
been repaid in full on or 
<PAGE>   2
                                                                              2


before December 31, 1996 and subject to further adjustment as provided in
Section 4.

                (f)     "Expiration Date" for the Warrants means the last day
of the Exercise Period.

                (g)     "Holder" has the meaning set forth in the preamble.

                (h)     "Notes" has the meaning set forth in the Recital.

                (i)     "Notes Purchase Agreement" has the meaning set forth in
the Recital.

                (j)     "Person" means any individual, corporation, limited
liability company, partnership, limited liability company, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

                (k)     "Register" has the meaning set forth in Section 7(b) of
this Agreement.

                (l)     "Transfer Restriction Termination Date" has the meaning
set forth in Section 7(a) of this Agreement.

                (m)     "Underlying Common Stock" means the shares of Common
Stock purchasable by the Holder upon the exercise of the Warrants.

                (n)     "Warrants" has the meaning set forth in the preamble.

                (o)     "Warrants Certificates" means the certificates
evidencing the Warrants.

        2.      Issue of Warrants. The Warrant Certificates shall be in
registered form only and substantially in the form attached hereto as Exhibit
A (including legends and endorsements as set forth in Exhibit A and as are not
inconsistent with the provisions of this Agreement, the Notes and the Note
Purchase Agreement) and shall be dated the date on which signed by an
authorized signatory of the Company. Warrant Certificates evidencing the
Warrants may be executed by any authorized officer of the Company. Warrant
Certificates evidencing 1,851,852 Warrants shall be delivered in the name of
OSI and Warrant Certificates evidencing 370,370 Warrants shall be delivered in
the name of CFM upon execution of this Agreement.
<PAGE>   3
                                                                              3



        3.      Exercise Price, Exercise of Warrants.

                (a)     Exercise Price. Each Warrant shall entitle the
respective Holder of such Warrant, subject to the provisions of this Agreement,
to purchase one share of Common Stock at a purchase price per share equal to
the Exercise Price.

                (b)     Exercise of Warrants Generally.

                        (1)     Exercise During Exercise Period. All Warrants
not exercised during the Exercise Period shall expire at 5 p.m. New York City
time on the Expiration Date.

                        (2)     Liquidation Event. If, at any time prior to the
Expiration Date, the Company is to be liquidated, the Company shall give
written notice thereof to the Holder at the earliest practicable time; provided,
however, that, if the Company is to be liquidated in accordance with the
provisions of its Certificate of Incorporation, such notice shall be given no
less than 30 days prior to the date on which such liquidation is expected to
become effective.

                        (3)     Method of Exercise; Payment of Exercise Price.
In order to exercise any or all of the Warrants represented by a Warrant
Certificate, the Holder thereof must surrender the Warrant Certificate to the
Company for exercise, with the reverse side of the Warrant Certificate duly
executed, together with any required payment of the Exercise Price for each
share of Underlying Common Stock to which such Holder is entitled, each such
payment of the Exercise Price to be made by check or wire transfer in
immediately available funds to an account designated by the Company; provided
that such Holder, in its sole discretion, may deduct or offset from such
payment any amounts outstanding under the Notes (to the extent such amounts are
then due and payable (after giving effect to applicable grace periods) to such
Holder). If a Holder elects to deduct or offset from such payments all or a
portion of the principal amount outstanding under the Note held by such Holder,
such Holder shall surrender its Note to the Company and if, following such
deduction or offset, any principal amount remains outstanding to such Holder,
the Company shall simultaneously issue to such Holder a note payable to the
order of such Holder in a principal amount equal to such remaining outstanding
amount with terms and provisions otherwise identical to the terms and
provisions of such Holder's original Note. If a Holder elects to exercise only
a portion of the Warrants represented by the Warrant Certificate or
Certificates registered in the Register in its name, then the remaining portion
of such Warrants shall be registered in the Register in such name or names
(subject to the limitation set forth in Section 7) as 
<PAGE>   4
                                                                               4


may be directed in writing by such Holder and shall be returned to such Holder
in the form of a new Warrant Certificate for the number of Warrants that were
not surrendered and with terms and provisions otherwise identical to the terms
and provisions of such Holder's original Warrant Certificate. Upon surrender
of a Warrant Certificate and the payment of the Exercise Price in conformity
with the foregoing provisions, the Company shall promptly, but in no event
later than five Business Days after the Payment of the Exercise Price of the
Warrants by such Holder, issue to the Holder of such Warrant Certificate share
certificates representing the Underlying Common Stock to which such Holder or
the name or names of such Affiliates of such Holder as may be directed in
writing by the latter, and shall deliver such share certificates to the Person
or Persons entitled to receive the same. Such shares shall be deemed issued and
outstanding on the date the Warrant is exercised and the Exercise Price is
paid to the Company, and the share certificates shall be dated as of such date
and the Holder shall be entitled to exercise all of the rights of a shareholder
as of such date.

     (c) Exercise by Surrender of Warrant; Cashless Exercise. In addition to
the method of exercise set forth in Section 3(b)(3) above and in lieu of any
cash payment required thereunder, each Holder, at its sole discretion, shall
have the right at any time and from time to time to exercise the Warrants in
full or in part (provided that any exercise in part shall be in a minimum
amount of 50,000 Warrants or such lesser number of Warrants as may then be held
by such Holder) by surrendering its Warrant Certificate in the manner specified
in Section 3(b)(3) in exchange for the number of shares of Common Stock equal
to the product of (x) the number of shares as to which the Warrants are being
exercised multiplied by (y) a fraction, the numerator of which is the
difference between the fair market value of a share at exercise (as defined
hereafter) of the Common Stock less the Exercise Price and the denominator of
which is such fair market value. As used herein, "fair market value" shall mean
(A) (x) the average of the closing prices of the Common Stock sales on all
domestic exchanges on which the Common Stock may at the time be listed, or, (y)
if, there shall have been no sales on any such exchange on any day, the average
of the highest bid and lowest asked prices on all such exchanges at the end of
such day, or, (B) if on any day the Common Stock shall not be so listed, (x)
the average of the representative bid and asked prices quoted in the NASDAQ
System as of 3:30 p.m. New York City time, or (y) if on any day the Common
Stock shall not be quoted in the NASDAQ System, the average of the high and 
low bid and asked prices on such day in the domestic over-the-counter market 
as reported by the National Quotation
<PAGE>   5
                                                                               5




Bureau, Incorporation or any similar successor organization, in each case under
(A) and (B) above averaged over the period of 15 consecutive Business Days
immediately prior to the date of exercise; provided that if the Common Stock is
listed on any domestic exchange the term "Business Days" as used in this
sentence shall mean business days on which such exchange is open for trading.
If at any time the Common Stock is not listed on any domestic exchange or
quoted in the NASDAQ System or the domestic over-the-counter market, the fair
market value shall be the fair market value as of the date of exercise,
determined by a reputable investment banking firm selected by the Holder
exercising its Warrants pursuant to this Section 3(c) and acceptable to the
Company.

        4.      Adjustments. The Exercise Price and the number of shares of
Common Stock issuable upon exercise of each Warrant shall be subject to
adjustment from time to time as follows:

                (a)     In the event, at any time and from time to time, the
Company shall issue additional shares of Common Stock (or securities
convertible into or exchangeable for Common Stock) in a stock dividend, stock
distribution or subdivision paid with respect to Common Stock, or declare any
dividend or other distribution payable with additional shares of Common Stock
(or securities convertible into or exchangeable for Common Stock) with respect
to Common Stock or effect a split or subdivision of the outstanding shares of
Common Stock, the Exercise Price shall, concurrently with the effectiveness of
such stock dividend, stock distribution or subdivision, or the earlier
declaration thereof, be proportionately decreased, and the number of Underlying
Common Stock shall be proportionately adjusted so that, to avoid dilution of
each Holder's position, each Holder shall thereafter be entitled to receive at
such adjusted price an additional number of shares of the Company's Common
Stock which such Holder would have owned or would have been entitled to receive
upon or by reason of any of the events described above, had the Warrants been
exercised immediately prior to the happening of such event. If a dividend is
declared and such dividend is not paid, the Exercise Price shall again be
adjusted to be the Exercise Price in effect immediately prior to such record
date.

                (b)     If, at any time, the Company issues any additional
shares of Common Stock (or other securities convertible into or exchangeable
for Common Stock) for a price lower than $15.40 per share, the Exercise Price
with respect to the Warrants shall be automatically and immediately reduced to
such lower price, without any action or request on the part of either Holder.
The Company shall notify each Holder of such reduced Exercise Price in writing
prior to any such issuance of additional shares of Common
<PAGE>   6
                                                                               6


Stock (or other securities convertible into or exchangeable for Common Stock);
provided that, if the Company should enter into any agreement in connection
with such issuance of additional shares of Common Stock (or other securities
convertible into or exchangeable for Common Stock), the Company shall
immediately notify each Holder in writing thereof and, upon such issuance of
shares of Common Stock (or other securities convertible into or exchangeable
for Common Stock), the Exercise Price shall be automatically reduced to such
reduced Exercise Price, effective retroactively to the effective date of such
agreement, whether or not the Warrants have been exercised during the time
period between the effective date of such agreement and the date of such
issuance (and if the Warrants have been exercised during such period, the
Company shall promptly pay to such Holder the difference between the payment
made by such Holder on such exercise and the payment that would have been
required if the Warrants were exercised at such reduced Exercise Price).
Notwithstanding the foregoing, the Exercise Price shall not be reduced as
contemplated by this Section 4(b) in connection with the issuance by the Company
of compensatory stock options to the extent that (i) the exercise price of such
compensatory stock options is not more than ten percent (10%) lower than $15.40
and (ii) such compensatory stock options, in the aggregate, shall represent a
right to purchase not more than two percent (2%) of the Common Stock in any
year (provided that in fiscal year [1995/1996] such compensatory stock options
issued to the Company's employees shall represent a right to purchase in total
not more than 850,000 shares of the Common Stock.

                (c)     In the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, the Exercise Price shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased and the number of Underlying Common Stock shall be proportionately
adjusted so that each Holder of any Warrant exercised after such date shall be
entitled to receive, upon payment of the same aggregate amount as would have
been payable before such before such date, the aggregate number of shares of
Common Stock which each Holder would have owned upon such exercise and been
entitled to receive, if such Warrant had been exercised immediately prior to the
happening of such combination or consolidation.

                (d)     In the event of any consolidation or merger of the
Company with or into another corporation or the conveyance of all or
substantially all of the assets of the Company to another corporation or entity
(other than any merger or sale which does not result in any reclassification
or change in the relative right or preference of the 
<PAGE>   7
                                                                              7



outstanding shares), the Warrants shall thereafter be exercisable for the
number of shares of capital stock or other securities or property that was
delivered at the time of such consolidation, merger or conveyance to a holder
of shares of Common Stock equal in number to the shares of Underlying Common
Stock that would have been deliverable to such Holder if such Holder had
exercised the Warrants immediately prior to such consolidation, merger or
conveyance; and, in any such case, appropriate adjustment shall be made in the
application of the provisions herein set forth with respect to the rights and
interests of each Holder thereafter, to the end that the provisions set forth
herein (including provisions with respect to adjustments in the Exercise Price)
shall thereafter be applicable, as nearly as may be practicable, in relation to
any shares of stock or other property thereafter deliverable upon the exercise
of Warrants. At the request of either Holder, the resulting or surviving entity
in any such consolidation or merger, if other than the Company, shall
acknowledge in writing such Holder's rights hereunder.

        5.      Loss or Mutilation. Upon receipt by the Company of a notice of
the ownership of and the loss, theft, destruction or mutilation of any Warrant
Certificate and of indemnity satisfactory to the Company, and (in the case of
mutilation) upon surrender and cancellation thereof, then, in the absence of
notice to the Company that the Warrants represented thereby have been acquired
by a bona fide purchaser, the Company shall deliver to the Holder of such
Warrant Certificate, in exchange for or in lieu of the lost, stolen, destroyed
or mutilated Warrant Certificate, a new Warrant Certificate of the same tenor
and for a like aggregate number of Warrants.

        6.      Reservation and Authorization of Common Stock. The Company
shall, at all times until the Warrants have been exercised or have expired,
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued shares of Common Stock as is sufficient for the
purpose permitting the exercise in full of all outstanding Warrants.

        7.      Limitations on Transfer; Warrant Transfer Books.

                (a)     Subject to the following provisions of this Section 7,
the Warrants may be sold, transferred, pledged, assigned, hypothecated or
otherwise dispose of (collectively, "transferred") to Affiliates of each of OSI
or CFM or to TCG or its Affiliates at any time after the earlier of (i) the
date on which the Shareholder Financing is consummated and (ii) the date on
which the Shareholder Financing can no longer be consummated due to the failure
by
<PAGE>   8
                                                                              8

 
Capital Research International to either (x) provide a written commitment in
respect of such financing within the applicable time period or (y) disburse such
financing to the Company within the applicable time period; provided that if at
any time prior to the Transfer Restriction Termination Date, any such transferee
ceases to be an Affiliate of OSI or CFM or TCG, it shall promptly transfer the
Warrants to OSI, CFM or TCG or to an Affiliate of OSI, CFM or TCG. In addition
to such transfers, but subject to the following provisions of this Section 7,
the Warrants may be transferred by any Holder thereof to any Person, whether or
not such Person is an Affiliate of OSI, CFM or TCG after the earlier of (A)
January 19, 1999, or (B) the date on which the Underlying Common Stock has been
registered under an effective registration statement with the Securities and
Exchange Commission ("SEC") (such earlier date being the "Transfer Restriction
Termination Date"). Transfers of the Warrants under this Section 7 shall be in a
minimum amount of 50,000 Warrants or such lesser number of Warrants as may then
be held by the Holder thereof.

        (b)     The Company shall cause to be kept at the Principal executive 
office of the Company a register (the "Register") in which the Company shall
provide for the registration of Warrant Certificates and transfers or exchanges
of Warrants as herein provided.

        (c)     In order to effect any Transfer of any Warrants under this 
Section 7, the Warrant Certificate evidencing such Warrants shall be
surrendered at the principal executive office of the Company for registration
of transfer in the Register. Every Warrant Certificate surrendered for
registration of transfer shall be duly endorsed and the Form of Assignment
contained therein completed and duly executed by the Holder thereof. In
addition, upon the surrender of a Warrant Certificate for registration of
transfer prior to the Transfer Restriction Termination Date, there shall be
delivered to the Company a certificate of an officer of the surrendering Holder
certifying (i) that the transferee is OSI, CFM or TCG or an Affiliate of OSI,
CFM or TCG, (ii) that the transfer is not in violation of this Agreement and
(iii) that the transfer is pursuant to an exemption from registration under the
Securities Act of 1933. Prior to the registration of the Underlying Common
Stock pursuant to an effective registration statement filed with the SEC, the
Company may also require, upon the surrender of a Warrant Certificate for
registration of transfer to any Person other than OSI, CFM or TCG or an
Affiliate of OSI, CFM, or TCG, delivery of an opinion of counsel, reasonably
satisfactory to the Company, stating that an exemption from registration under
the Securities Act of 1933, as amended, is available in connection with such
transfer and that the proposed
 
                              
<PAGE>   9

                                                                               9

transferee is not an (i) an "investment company," or a company "controlled" by
an "investment company," within the meaning of the Investment Company Act of
1940, as amended, (ii) a "holding company" or a "subsidiary" of a "holding
company," or an "affiliate" of a "holding company," as such terms are defined
in the Public Utility Holding Company Act of 1935, as amended, or (iii) a
"public utility," as such term is defined in the Federal Power Act, as amended.

                 (d)   Upon the Company's receipt of a duly endorsed Warrant
Certificate (with the Form of Assignment contained therein duly executed),
together with any certificate or opinion required to be delivered therewith to
the Company pursuant to Section 7(c), the Company shall (i) accept such Warrant
Certificate and (ii) record the information contained therein in the Register.
Within five Business Days after such receipt, the Company, at its own expense,
shall execute and deliver to the transferee thereof, in exchange for the
surrendered Warrant Certificate, a new Warrant Certificate registered in the
name of such transferee and evidencing the number of Warrants transferred to
such transferee, and if the transferring Holder has retained any Warrants, a
new Warrant Certificate registered in the name of such transferring Holder and
evidencing the number of Warrants retained by it hereunder. Such new Warrant
Certificate shall be signed by an authorized officer of the Company, shall be
dated and effective as of the effective date specified in the Form of
Assignment for such transfer and shall otherwise be in substantially the form
of Exhibit A hereto. Upon surrender for registration of transfer of any Warrant
Certificate in accordance with Section 7(c) and acceptance and recording
thereof by the Company in the Register in accordance with this Section 7(d),
(x) the transferee thereunder shall be a party hereto, and shall have all the
rights and obligations of a Holder hereunder and shall be entitled to the
benefits of a Holder under this Agreement and (y) the Holder transferor
thereunder shall, to the extent that rights and obligations hereunder have been
assigned by it, relinquish the rights and be released from the obligations
under this Agreement (and, in the case of a transfer of all or the remaining
portion of a transferring Holder's rights and obligations under this Agreement,
such Holder shall cease to be a party hereto).

                 (e)   At the option of any Holder, Warrant Certificates may be
exchanged by surrendering such Warrant Certificate, duly endorsed by the Holder
thereof, at the principal executive office of the Company. Whenever any Warrant
Certificate is so surrendered for exchange by a Holder, the Company, at its own
expense, shall execute and deliver to such Holder a new Warrant Certificate
registered in the name of such Holder and evidencing the same number of
<PAGE>   10
                                                                              10

Warrants as the surrendered Warrant Certificate. Each new Warrant Certificate
issued under this Section 7(e) upon surrender of a Warrant Certificate for
exchange shall be the valid obligation of the Company, evidencing the same
obligations, and entitled to the same benefits under this Agreement, as the
Warrant Certificate surrendered for exchange.

                 (f)   No service charge shall be made for any registration of
transfer of, or exchange of, any Warrant Certificate; provided, however, that
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection such registration of
transfer or exchange.

           8.    No Voting or Dividend Rights. Prior to the exercise of the
Warrants, the Holder shall not be entitled to any rights of a shareholder of
the Company, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive right, but the
Holder shall receive all notices sent to shareholders of the Company, including
any notice of meetings of shareholders, and shall have the right to attend or
observe such meetings and the Holder shall be entitled to the full benefit of
and to exercise all rights of first offer as set forth in the Registration
Rights Agreement (as defined in the Note Purchase Agreement).

           9.    Cancellation of all Prior Warrant Agreements and Warrant
Certificates/Relinquishment of Warrants.

                 (a)   Cancellation of All Prior Warrant Agreements and Warrant
Certificates. The execution of this Agreement by the Holders represents good and
valuable consideration for the full release and discharge by OSI of the Company
from, and full cancellation of, all of the Company's obligations to issue shares
of Common Stock under (i) the December 8 Warrant Agreement (as defined in the
Note Purchase Agreement), (ii) the December 20 Warrant Agreement (as defined in
the Note Purchase Agreement), (iii) Warrant Certificate No. 1 of the Company
issued to OSI on December 8, 1995 and (iv) Warrant Certificate No. 2 of
the Company issued to OSI on December 20, 1995, and all such Warrant Agreements
and Warrants are hereby canceled and shall be of no further force and effect.
Upon execution of this Agreement by the Purchasers, the Purchasers shall deliver
such cancelled Warrants to the Company

                 (b)   Relinquishment of Warrants. Subject to the following
provisions of this Section 9(b), if the Company shall make any mandatory
prepayment of the Notes pursuant to Section 10.2 of the Note Purchase
Agreement, the Holders shall promptly (but in no event later than five
<PAGE>   11
                                                                              11

Business Days following the date of such prepayment) relinquish for
cancellation in the aggregate 74,074 of the Warrants for each $1 million in
principal amount of the Notes so prepaid, by surrendering the Warrant
Certificates evidencing such Warrants at the principal executive office of the
Company; provided that such Warrants shall be relinquished for cancellation by
the Holders on a pro rata basis, based on the proportion (expressed as a
percentage) that the total principal amount outstanding under each Note bears
to the total aggregate principal amount outstanding under both of the Notes.
Within five Business Days of the Company's receipt of any Warrant Certificate
surrendered by a Holder pursuant to this Section 9(b), the Company shall, at
its own expense, execute and deliver to such Holder a new Warrant Certificate
registered in the name of such Holder and evidencing the number of Warrants not
relinquished for cancellation hereunder and, upon execution and delivery of
such new Warrant Certificate, the Company shall mark the surrendered Warrant
Certificate "Cancelled." Each new Warrant Certificate issued under this Section
9(b) shall be executed by an authorized officer of the Company, shall be dated
the date on which executed by such authorized officer, and shall otherwise be
in substantially the form of Exhibit A hereto.

           10.   Notices. Any notice, demand or delivery authorized by this
Agreement shall be in writing and shall be sufficiently given or made upon
receipt thereof, if made by personal delivery or facsimile transmission (with
confirmed receipt thereof) followed by a hard copy, or four Business Days after
mailed, if sent by first-class mail, postage prepaid, or on the next Business
Day, if sent by overnight courier, addressed to the Holder or the Company, as
the case may be, at their respective addresses below, or such other address as
shall have been furnished in accordance with this Section 10 to the party
giving or making such notice, demand or delivery:

                 (a)   If to the Company, to it at:

                       Global TeleSystems Group, Inc.
                       1751 Pinnacle Drive
                       North Tower 12th Floor
                       McLean, Virginia 22102

                       Attention: General Counsel
<PAGE>   12
                                                                              12

                 (b)   If to OSI, at:

                       The Open Society Institute
                       888 Seventh Avenue, Suite 3100
                       New York, New York 10106

                       Attention: Kenneth Anderson, Esq.

                 (c)   If to CFM, at

                       Chatterjee Fund Management, L.P.
                       888 Seventh Avenue, Suite 3100
                       New York, New York 10106

                       Attention: Kenneth Anderson, Esq.

                       Provided that notices to OSI or CFM shall be deemed to 
                       be delivered to OSI and CFM if sent to TCG in 
                       accordance with the provisions of this Section 10 at:

                       888 Seventh Avenue, Suite 3000
                       New York, New York 10106

                       Attention: Peter Hurwitz, Esq.

                       In each case of delivery or deemed delivery to OSI or 
                       CFM, with a copy to:

                       Soros Fund Management
                       888 Seventh Avenue, Suite 3300
                       New York, New York 10106

                       Attention: Michael Neus, Esq.
                                  and Peter Hurwitz, Esq.

           11.   Applicable Law. This Agreement and each Warrant Certificate
issued hereunder shall be governed by, the laws of the State of New York
excluding (to the greatest extent a New York court would permit) any rule of
law that would cause application of the laws of any jurisdiction other than the
State of New York. The Company and the Holders hereby submit to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement and the transactions contemplated hereby. The Company irrevocably
waives, to the fullest extent permitted by law, any objection which it may
<PAGE>   13
                                                                              13

now or hereafter have to the laying of the venue of any such proceeding brought
in such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum.

           12.   Successors and Assigns. The provisions of this Agreement shall
inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.

           13.   Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement in any number of separate counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

           14.   Captions and Headings. The captions and headings used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

           15. Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and each Holder.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon the Holders, each future holder of the Warrants and the Company.

           16.   Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provisions shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
<PAGE>   14
           IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.

                                  
                                  GLOBAL TELESYSTEMS GROUP, INC.

                                  By   /s/ N.S. Molberger
                                     ----------------------------------------
                                     Name: N.S. Molberger


                                  THE OPEN SOCIETY INSTITUTE

                                  By   /s/ Arveh Neier
                                     ----------------------------------------
                                     Name: ARVEH NEIER




                                  CHATTERJEE FUND MANAGEMENT, L.P.

                                  By   /s/ P. Chatterjee
                                     ----------------------------------------
                                     Name: P. Chatterjee
                                           



<PAGE>   15
                                                                       EXHIBIT A

                      FORM OF FACE OF WARRANT CERTIFICATE

           THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER
            SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN
          REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
           "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT
           TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii)
          TO THE EXTENT APPLICABLE PURSUANT TO RULE 144 UNDER THE ACT
               (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE
              DISPOSITION OF SECURITIES), OR (iii) PURSUANT TO AN
                   EXEMPTION FROM REGISTRATION UNDER THE ACT.

                   THIS WARRANT CERTIFICATE AND THE WARRANTS
                    REPRESENTED HEREBY ARE TRANSFERABLE ONLY
                 IN ACCORDANCE WITH THE PROVISIONS SET FORTH IN
                    THE WARRANT AGREEMENT REFERRED TO BELOW
                        (INCLUDING, WITHOUT LIMITATION,
                      REGISTRATION OF THE TRANSFER TO THE
                     TRANSFEREE IN THE COMPANY'S REGISTER)

                       WARRANTS TO PURCHASE COMMON STOCK
                       OF GLOBAL TELESYSTEMS GROUP, INC.

No.__________                            ___________________________Warrants

                 This certifies that ____________________________________ is the
owner of the number of Warrants set forth above, each of which represents the
right to purchase from GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation
(the "Company"), one share of common stock, par value $0.0001 per share, of the
Company ("Common Stock"), subject to adjustment as set forth in the Warrant
Agreement referred to below, at the exercise price (the "Exercise Price")
of $15.40, subject to a reduction to $14.00 if all amounts payable under the
Notes have not been repaid in full on or before December 31, 1996 and subject to
further adjustment as set forth in the Warrant Agreement. As provided in
the Warrant Agreement and subject to the terms and conditions
<PAGE>   16
                                                                             A-2

set forth therein, the Warrants are exercisable by surrender of this Warrant
Certificate at the office of the Company at Global TeleSystems Group, Inc.,
1751 Pinnacle Drive, North Tower, 12th Floor, McLean, Virginia 22102, with the
Exercise Subscription Form on the reverse hereof duly executed and with payment
in full (by check or wire transfer in immediately available funds to an account
designated by the Company) of the Exercise Price for the number of shares of
Common Stock as to which the Warrant(s) represented by this Warrant Certificate
are exercised, or by surrender of this Warrant Certificate at the same address
in lieu of cash payment. The Warrants will expire at 5 p.m. New York City time,
and this Warrant Certificate shall be void and all rights represented hereby
shall cease, on the Expiration Date.

           This Warrant Certificate is issued under and in accordance with the
Warrant Agreement, dated as of January _, 1996, as it may be amended,
supplemented or otherwise modified from time to time (as so amended,
supplemented or modified, the "Warrant Agreement"), among the Company, The Open
Society Institute and Chatterjee Fund Management, L.P.  and subject to the
terms and provisions contained therein, to all of which terms and provisions
the holder of this Warrant Certificate consents by acceptance hereof. The
Warrant Agreement is hereby incorporated herein by reference and made a part
hereof.   Reference is hereby
<PAGE>   17
                                                                             A-3

made to the Warrant Agreement for a full description of the rights, limitations
of rights, obligations, duties and immunities thereunder of the Company and the
Holders of the Warrants. Capitalized defined terms used herein have the same
meanings as in the Warrant Agreement. Copies of the Warrant Agreement are on
file at the office of the Company and may be obtained by writing to the Company
at the following address: Global TeleSystems Group, Inc., 1751 Pinnacle Drive,
North Tower, 12th Floor, McLean, Virginia 22102, attention of the General
Counsel.

           The number of shares of the Common Stock of the Company purchasable
upon the exercise of each Warrant and the Exercise Price are subject to
adjustment as set forth in the Warrant Agreement.

           All shares of Common Stock issuable by the Company upon the exercise
of Warrants and the payment of the Exercise Price therefor shall be validly
issued, fully paid and nonassessable.

           Subject to the terms of the Warrant Agreement, this Warrant
Certificate and all rights hereunder are transferable by the Holder hereof, in
whole or in part, upon surrender of this Warrant Certificate duly endorsed and
with the Form of Assignment contained herein completed and duly executed by
such Holder, together with certificates and opinions as are required by the
Warrant Agreement, and upon, payment of any necessary transfer tax or other
governmental
<PAGE>   18

                                                                             A-4

charge imposed upon such transfer. As set forth in the Warrant Agreement, upon
any partial transfer, the Company shall issue and deliver to such Holder a new
Warrant Certificate or Certificates with respect to any portion not so
transferred. 

Dated: January _, 1996

                                             GLOBAL TELESYSTEMS GROUP, INC.

                                             By
                                               -----------------------------
                                               Name:
                                               Title:
<PAGE>   19
                                                                             A-5

                     FORM OF REVERSE OF WARRANT CERTIFICATE
                           EXERCISE SUBSCRIPTION FORM

                 (To be executed only upon exercise of Warrant)

To: Global TeleSystems Group, Inc.

                 The undersigned irrevocably exercises ________ of the Warrants
evidenced by this warrant Certificate for the purchase of shares of Common
Stock, par value $0.0001 per share, of GLOBAL TELESYSTEMS GROUP, INC. and
herewith:

_______          (a)      makes payment of $__________(such payment being made
         by bank check or wire transfer in immediately available funds to the
         account designated by Global TeleSystems Group, Inc. and constituting
         the Exercise Price (as defined in the Warrant Agreement) for the
         shares as to which the Warrants evidenced by this Warrant Certificate
         are exercised); or

_______          (b)      surrenders this Warrant Certificate in lieu of cash
         payment in accordance with the terms of Section 3(c) of the Warrant
         Agreement, all on the terms and conditions specified in this Warrant
         Certificate and the Warrant Agreement herein referred to.

                 The undersigned hereby irrevocably surrenders this Warrant
Certificate and all right, title and interest therein to Global TeleSystems
Group, Inc. and directs that the shares of Common Stock deliverable upon the
exercise of
<PAGE>   20
                                                                             A-6

said Warrants be registered or placed in the name and at the address specified
below and delivered thereto.

Date:              ,
     -------------- ----------

                                               -----------------------------
                                               Signature of Owner

                                               -----------------------------
                                               (Street Address)

                                               -----------------------------
                                               (City) (State) (Zip Code)

Securities and/or check to be issued to:

Please insert identifying number:

Name:

Street Address:

City, State and Zip Code:

Any unexercised Warrants evidenced by 
the within Warrant Certificate to be issued to:

Please insert identifying number:

Name:

Street Address:

City, State and Zip Code:



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

1)       The signature must correspond with the name as written upon the face
         of this Warrant Certificate in every particular, without alteration or
         enlargement or any change whatsoever.
<PAGE>   21
                                                                             A-7

                               FORM OF ASSIGNMENT

                 FOR VALUE RECEIVED, the undersigned registered holder of this
Warrant Certificate hereby sells, assigns and transfers, effective as of _____,
unto the Assignee(s) named below (including the undersigned with respect to any
Warrants constituting a part of the Warrants evidenced by this Warrant
Certificate not being assigned hereby) all of the right of the undersigned
under this Warrant Certificate, with respect to the number of Warrants set
forth below:

         Names of                          Identifying              Number of
         Assignees        Address      Number of Assignee(s)        Warrants

and does hereby irrevocably constitute and appoint ______________________ the 
undersigned's attorney to make such transfer on the  books of Global
TeleSystems Group, Inc. maintained for that purpose, with full power of
substitution. The assignment is subject in all respects to the terms of the
Warrant Agreement referred to in the Warrant Certificate of which this Form of
Assignment is a part.

                 The Assignee represents and warrants that it is not (a) an 
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended, (b) a
"holding company" or a "subsidiary" of a "holding company", or an "affiliate"
of a "holding company", as such terms are
<PAGE>   22
                                                                             A-8

defined in the Public Utility Holding Company Act of 1935, as amended or (c) a
"public utility", as such term is defined in the Federal Power Act, as amended.

Dated:              ,
      -------------- --------


                                               -----------------------------
                                               [Assignor]     


- -----------------------------
[Assignee]

         


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

1)       The signature must correspond with the name as written upon the face
         of this Warrant Certificate in every particular, without alteration or
         enlargement or any change whatsoever.

<PAGE>   1
                                                                Exhibit 10.4


                         Joint Venture Letter Agreement

                                                                January 19, 1996

The Open Society Institute
888 Seventh Avenue
Suite 3100
New York, NY 10106

Chatterjee Fund Management, L.P.
888 Seventh Avenue
Suite 3000
New York, NY 10106

Ladies and Gentlemen:


         We refer to that certain Senior Note Purchase Agreement (the "Note
Purchase Agreement"), dated as of the date hereof, and executed among the
undersigned (the "Company"), the Open Society Institute ("OSI") and Chatterjee
Fund Management, L.P. ("CFM"). Capitalized terms used herein but not defined
herein shall have the meanings ascribed to such terms in the Note Purchase
Agreement.

         The parties hereto affirm and agree that they shall exercise their
best efforts to, promptly after the Closing, enter into a joint venture
agreement, the terms of which shall include the following:

         OSI, CFM and the Company will establish a joint venture (the "Joint
Venture") to review and provide financing for investment opportunities
throughout Asia, excluding the countries of the former Soviet Union (the
"Territory"). The Company will act as the operating partner of the Joint
Venture and will make available to the Joint Venture all existing and new
business opportunities of the Company and its subsidiaries applicable to the
Territory ("Ventures") for a time period of at least five years following the
establishment of the Joint Venture, with an option exercisable by either OSI or
CFM to extend such time period for an additional five years. If, during such
time period, both OSI and CFM jointly refuse to invest in the same five
Qualifying Proposals (as defined below), and the Company makes a Qualifying
Investment in each of such five Qualifying Proposals, the Company's obligation
to present Ventures to the Joint Venture shall cease. To constitute a
"Qualifying Proposal," each proposal must meet all of the following criteria:
(i) the proposal shall be submitted to each of OSI and CFM in writing; (ii)
both OSI and CFM shall be given an opportunity to propose reasonable changes to
the
<PAGE>   2
                                                                               2


proposal, which the Company will consider in good faith and (iii) both OSI and
CFM shall have 30 days to consider the proposal, which time period will be
extended by the time taken by the Company to review OSI's or CFM's proposed
changes. To constitute a Qualifying Investment, each investment made by the
Company must be (i) in an amount of not less than $5 million; (ii) consummated
within 90 days of OSI's and CFM's decision, communicated to the Company in
writing, not to invest and (iii) made by the Company on the same terms as were
offered to OSI and CFM. In the event the Company's investment is not made
within such 90 day period or if the Company's investment is to be made on terms
materially different from those offered to OSI and CFM, the Company shall
resubmit the proposal to both OSI and CFM for consideration.

         Except for China, both OSI and CFM will have the right to acquire in
aggregate up to a 50% interest in each Venture. With respect to China, (i)
neither OSI nor CFM will be entitled to participate in those Ventures that the
Company has consummated as of the date hereof, which Ventures are set forth on
Exhibit B-1; (ii) OSI and CFM will be entitled to acquire in the aggregate up
to a 25% interest in Ventures that the Company is currently actively
negotiating, which Ventures are set forth on Exhibit B-2 and (iii) both OSI and
CFM will be entitled to acquire in the aggregate up to a 50% interest in all
other Ventures. In all cases in which either OSI or CFM participates in a
Venture, its investment will be on the same basis (i.e., cost) as that made by
the Company. The Company will provide to both OSI and CFM all information the
Company receives, acquires and/or prepares with respect to each proposed
Venture. If, after review of all the factors involved and completion of its
diligence review of a proposed Venture, both OSI and CFM decline to invest in
such Venture, or if both OSI and CFM decline to commence such a review in a
timely fashion, the Company will be free to seek other outside capital
therefor. The fact that either OSI or CFM shall decline to invest in a Venture
(or shall decline to commence a diligence review of a Venture) shall not waive
either OSI's or CFM's right to invest in any subsequent Venture affiliated with
the one that had been declined. The Joint Venture will be organized with a
joint board on which the Company will have a majority of members and day-to-day
management control, provided that fundamental issues (including, without
limitation, mergers, acquisitions, sales of assets and restructurings) will
require the consent of all parties. The Company will exercise day-to-day
management control over the Ventures.
<PAGE>   3
                                                                               3


         Notwithstanding the foregoing, commencing on the date hereof until the
execution date of the joint venture agreement, the Company shall make available
to OSI and CFM all Ventures on the terms and conditions described above,
provided that such obligation of the Company shall extend for a time period of
five years from the date hereof, which time period may be extended for an
additional five years by either OSI or CFM. This agreement shall be binding on
the Parties hereto until the execution and delivery of a final joint venture
agreement.

         Without in any way limiting the rights of OSI and CFM to make
investment decisions independently, the Company may submit information and
written proposals with respect to Ventures and Qualifying Proposals to The
Chatterjee Group ("TCG") on behalf of OSI and CFM, and the Company may rely on
communications received by it in writing from The Chatterjee Group with respect
to the respective positions and decisions of each of OSI and CFM.
<PAGE>   4
         This letter agreement shall be governed by and construed in accordance
with the laws of the State of New York and may be executed in counterparts by
the parties hereto, each of which counterparts shall be an original and all of
which taken together shall constitute one and the same letter agreement.




                                     Very truly yours,
                   
                                     Global TeleSystems Group, Inc.
                   
                                     By: /s/ NS Molberger
                                        ----------------------------------
                                        Name:  NS Molberger
                                        Title: Vice President - General Counsel


Accepted and Agreed to by:

The Open Society Institute

By:  /s/ ARYEH NEIER
   -------------------------------
   Name:  Aryeh Neier

Chatterjee Fund Management, L.P.

By:  P. Chatterjee
   -------------------------------
    Name:  P. Chatterjee




<PAGE>   5
                                  EXHIBIT B-1

Existing Ventures in China:

V-Tech: Shanghai VSAT Business

Global Tongda opportunities:

         People's Daily: National Data Network

         Guangdong Paging: Paging opportunity in Guangdong Province
<PAGE>   6
                                  EXHIBIT B-2

Ventures Under Active Negotiations:

Global Tongda opportunities:

         Hubei CATV: CATV, data, voice opportunity in Hubei Province

         Intelligent Buildings: Value-added services opportunity in Guangdong
         Province

         800 Mhz-Guangdong: Mobile communications opportunity in Guangdong

China International Travel Services Group: VSAT-based network servicing the
travel industry

Zhanjiang Cellular: 80O Mhz cellular opportunity in partnership with the
People's Liberation Army and Shanghai Intelligence Engineering, Inc.

Wuxi Cellular: GSM cellular opportunity in Wuxi (near Shanghai)

<PAGE>   1

                                                                Exhibit 10.6

                      Registration Rights Letter Agreement

                                                                    June 6, 1996

The Open Society Institute
888 Seventh Avenue
Suite 3100
New York, NY 10106

Winston Partners II LDC
888 Seventh Avenue
Suite 3100
New York, NY 10106

Winston Partners II LLC
888 Seventh Avenue
Suite 3100
New York, NY 10106

Ladies/Gentlemen:


         We refer to the Senior Note Purchase Agreement, as it may be amended,
supplemented or otherwise modified from time to time (as amended, supplemented
or otherwise modified, the "Note Purchase Agreement"), the Warrant Agreement
(as defined in the Note Purchase Agreement) and the Additional Notes (as
defined in the Note Purchase Agreement), each dated, or dated as of, the date
hereof, and executed among the undersigned (the "Company"), the Open Society
Institute ("OSI"), Winston Partners II LDC ("WPLDC") and Winston Partners II LLC
("WPLLC," and together with OSI and WPLDC, the "Rights Holders" and,
individually, a "Rights Holder"). Capitalized terms used but not defined herein
shall have the meanings ascribed to such terms in the Note Purchase Agreement,
or, as indicated herein, the Stock Purchase Agreement.

         In connection with the purchase of the Additional Notes, the issuance
of the Warrants and the transactions contemplated by the Note Purchase
Agreement and the Warrant Agreement, and in consideration for and as an
inducement to the purchase by each of the Rights Holders of its Additional
Note, we hereby grant to each Rights Holder, with respect to all shares of the
Company's Common Stock that such Rights Holder may acquire (whether by exercise
of the Warrants or otherwise), on a most-favored-nation basis, all of the
registration rights and (with respect to all such shares of the Company's
Common Stock and, in addition, with respect to and upon the issuance of the
Warrants) all rights of first offer granted to any stockholder pursuant to the
Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of June 15,
1995 (a form of
<PAGE>   2



                                                                               2


which is attached as Exhibit A), executed by the Company and certain
stockholders, which rights are no less favorable than the rights provided to
any of the Company's stockholders pursuant to any other stock purchase
agreement, any other agreement, or otherwise. Such rights include, without
limitation, (A) unlimited rights to demand registration after the Company
qualifies as an S-3 Registrant (limited to one such registration in any 12
month period), as set forth in Section 6.2 of the Stock Purchase Agreement; (B)
unlimited piggyback registration rights, as set forth in Section 6.3 thereof;
(C) the Company's payment of all expenses (with certain exceptions) incurred
with respect to such registrations, as set forth in Section 6.4 thereof; and (D)
the right of first offer to purchase a pro rata share of any issue of "New
Securities" as defined in the Stock Purchase Agreement, which right shall not
expire prior to an initial public offering of the Company, as set forth in
Section 8.11 of the Stock Purchase Agreement.

         In the event that the Company effects or causes to be effected any
amendments to the Stock Purchase Agreement that would diminish or restrict in
any way the registration rights or the rights of first offer granted to
stockholders under the Stock Purchase Agreement, such amendment shall in no way
diminish, restrict or otherwise apply to or affect the registration rights,
rights of first offer to purchase New Securities or any other rights granted to
each Rights Holder hereunder and under the Stock Purchase Agreement as now in
effect. In the event the Company amends the Stock Purchase Agreement to
increase or enhance the registration rights or rights of first offer of any
stockholder, or if the Company otherwise agrees to enhance or increase such
rights, or if such rights are increased or enhanced for any other reason or in
any other manner, each Rights Holder will automatically and immediately benefit
from and receive such increased or enhanced rights with no further action
required by any Rights Holder, and this agreement shall be deemed to be amended
to incorporate such increased or enhanced rights. The Company shall notify each
Rights Holder immediately in writing of any such amendments or other agreements
or occurrences.

         In addition to any other transfer rights granted to each Rights Holder
pursuant to the terms of the Stock Purchase Agreement, any Rights Holder may
assign or transfer its rights under this agreement to any transferee to which
such Rights Holder transfers its Warrants, its Additional Note, or the shares
of Common Stock issued to such Rights Holder upon exercise of its Warrants in
accordance with the Note Purchase Agreement or the Warrant Agreement, as the
case may be.

         Notwithstanding any provision of the Stock Purchase Agreement or any
other document or agreement to the contrary, each Rights Holder and its
transferees shall, immediately upon the issuance of the Warrants, be entitled
to the full benefit of and shall be entitled to exercise all rights of first
offer granted hereby or otherwise with respect to any issue of New Securities,
whether or not any of the Warrants have been exercised by any Rights Holder.
<PAGE>   3


                                                                               3


                    
         This letter agreement shall be governed by and construed in accordance
with the laws of the State of New York, and may be executed in counterparts by
the parties hereto, each of which counterparts shall be an original and all of
which taken together shall constitute one and the same letter agreement.
Delivery of an executed counterpart of a signature page of this agreement by
telecopier shall be effective as delivery of a manually executed counterpart of
this agreement.



                                                Very truly yours,

                                                Global TeleSystems Group, Inc.

                                                By: /s/ N.S. Molberger
                                                   -----------------------------
                                                   Name: N.S. Molberger


Accepted and Agreed to by:

The Open Society Institute

By: [ILLEGIBLE]
   ------------------------------------------
   Name:

Winston Partners II LDC

By: [ILLEGIBLE]                 
   ------------------------------------------
   Name: Curacao Corporation Company, N.V.
         Sole Director



Winston Partners II LLC



By:  Chatterjee Advisors LLC.
     Its Sole Manager

By: /s/ PETER HURWITZ
   ------------------------------------------
   Name: Peter Hurwitz


Winston Partners, L.P.

By:  Chatterjee Fund Management, L.P.
     Its General Partner
     
By:
   ------------------------------------------
   Name:






<PAGE>   1
 
                                                                    EXHIBIT 10.7
 
                               WARRANT AGREEMENT
                              FOR 740,740 WARRANTS
 
     WARRANT AGREEMENT, dated as of June 6, 1996 (the "Agreement"), among Global
TeleSystems Group, Inc., a Delaware corporation (the "Company"), The Open
Society Institute ("OSI"), Winston Partners II LDC ("WPLDC") and Winston
Partners II LLC ("WPLLC," and together with OSI, WPLDC and any of their
permitted assignees, the "Holders" and individually, a "Holder").
 
     WHEREAS the Company proposes to issue and deliver its warrant certificates
("Warrant Certificates") evidencing an aggregate of 740,740 warrants (the
"Warrants"), each to purchase one share of common stock, par value $0.0001 per
share, of the Company ("Common Stock") in connection with the Senior Promissory
Notes dated as of the date hereof, as such notes may be amended, supplemented or
otherwise modified from time to time (as so amended, supplemented or otherwise
modified, the "Notes") in the aggregate principal amount of ten million
($10,000,000) dollars, issued by the Company to the Holders, pursuant to, and
subject to the terms and conditions of, that certain Senior Note Purchase
Agreement, dated as of the date hereof, among the Company and the Holders, as it
may be amended, supplemented or otherwise modified from time to time (as so
amended, supplemented or otherwise modified, the "Note Purchase Agreement").
 
     NOW THEREFORE, in consideration of the foregoing and for the purpose of
defining the terms and provisions of the Warrants and the respective rights and
obligations thereunder of the Company and each Holder, the Company and each
Holder agree as follows:
 
     1. Certain Definitions.  The following terms, as used in this Agreement,
have the following meanings:
 
          (a) "Affiliate" has the meaning set forth in the Note Purchase
     Agreement.
 
          (b) "Business Day" means any day other than a Saturday, Sunday or day
     on which banks in New York City are closed for general business.
 
          (c) "Common Stock" has the meaning set forth in the preamble.
 
          (d) "Exercise Period" means the period beginning on the date of
     issuance of the Warrants and ending at 5 p.m. New York City time on the
     sixth anniversary of such date.
<PAGE>   2
 
          (e) "Exercise Price" means $15.40 per share subject to a reduction to
     $14.00 per share if all amounts payable under the Notes have not been
     repaid in full on or before December 31, 1996 and subject to further
     adjustment as provided in Section 4.
 
          (f) "Expiration Date" for the Warrants means the last day of the
     Exercise Period.
 
          (g) "Holder" has the meaning set forth in the preamble.
 
          (h) "Notes" has the meaning set forth in the Recital.
 
          (i) "Note Purchase Agreement" has the meaning set forth in the
     Recital.
 
          (j) "Person" means any individual, corporation, limited liability
     company, partnership, limited liability company, joint venture,
     association, joint-stock company, trust, unincorporated organization or
     government or any agency or political subdivision thereof.
 
          (k) "Register" has the meaning set forth in Section 7(b) of this
     Agreement.
 
          (l) "Transfer Restriction Termination Date" has the meaning set forth
     in Section 7(a) of this Agreement.
 
          (m) "Underlying Common Stock" means the shares of Common Stock
     purchasable by the Holder upon the exercise of the Warrants.
 
          (n) "Warrants" has the meaning set forth in the preamble.
 
          (o) "Warrant Certificates" means the certificates evidencing the
     Warrants.
 
     2. Issue of Warrants.  The Warrant Certificates shall be in registered form
only and substantially in the form attached hereto as Exhibit A (including
legends and endorsements as set forth in Exhibit A and as are not inconsistent
with the provisions of this Agreement, the Notes and the Note Purchase
Agreement) and shall be dated the date on which signed by an authorized
signatory of the Company. Warrant Certificates evidencing the Warrants may be
executed by any authorized officer of the Company. Warrant Certificates
evidencing the Warrants may be executed by any authorized officer of the
Company. Warrant Certificates evidencing (a) 370,370 Warrants shall be delivered
in the name of OSI, (b) 246,914 Warrants shall be delivered in the name of WPLDC
and (c) 123,456 Warrants shall be delivered in the name of WPLLC upon execution
of this Agreement.
 
                                        2
<PAGE>   3
 
     3. Exercise Price, Exercise of Warrants
 
          (a) Exercise Price.  Each Warrant shall entitle the respective Holder
     of such Warrant, subject to the provisions of this Agreement, to purchase
     one share of Common Stock at a purchase price per share equal to the
     Exercise Price.
 
          (b) Exercise of Warrants Generally.
 
             (1) Exercise During Exercise Period.  All Warrants not exercised
        during the Exercise Period shall expire at 5 p.m. New York City time on
        the Expiration Date.
 
             (2) Liquidation Event.  If, at any time prior to the Expiration
        Date, the Company is to be liquidated, the Company shall give written
        notice thereof to the Holder at the earliest practicable time; provided,
        however, that, if the Company is to be liquidated in accordance with the
        provisions of its Certificate of Incorporation, such notice shall be
        given no less than 30 days prior to the date on which such liquidation
        is expected to become effective.
 
             (3) Method of Exercise; Payment of Exercise Price.  In order to
        exercise any or all of the Warrants represented by a Warrant
        Certificate, the Holder thereof must surrender the Warrant Certificate
        to the Company for exercise, with the reverse side of the Warrant
        Certificate duly executed, together with any required payment of the
        Exercise Price for each share of Underlying Common Stock to which such
        Holder is entitled, each such payment of the Exercise Price to be made
        by check or wire transfer in immediately available funds to an account
        designated by the Company; provided that such Holder, in its sole
        discretion, may deduct or offset from such payment any amounts
        outstanding under such Holder's Note (to the extent such amounts are
        then due and payable (after giving effect to applicable grace periods)
        to such Holder). If a Holder elects to deduct or offset from such
        payments all or a portion of the principal amount outstanding under the
        Note held by such Holder, such Holder shall surrender its Note to the
        Company and if, following such deduction or offset, any principal amount
        remains outstanding to such Holder, the Company shall simultaneously
        issue to such Holder a note payable to the order of such Holder in a
        principal amount equal to such remaining outstanding amount with terms
        and provisions otherwise identical to the terms and provisions of such
        Holder's original Note. If a Holder elects to exercise only a portion of
        the Warrants represented by the Warrant Certificate or Certificates
        registered in the Register in its name, then the remaining portion of
        such Warrants shall be registered in the Register in such name or names
        (subject to the limitation set forth in Section 7) as may be directed in
        writing by such Holder and shall be returned to such Holder in the form
        of a new Warrant Certificate for the number of Warrants that were not
        surrendered and with terms and provisions otherwise identical to the
        terms and provisions of such Holder's original Warrant Certificate. Upon
        surrender of a Warrant Certificate and the payment of the Exercise Price
        in conformity with the foregoing provisions, the Company shall promptly,
        but in no event later than five Business Days after the payment
 
                                        3
<PAGE>   4
 
of the Exercise Price of the Warrants by such Holder, issue to the Holder of
such Warrant Certificate share certificates representing the Underlying Common
Stock to which such Holder is entitled, registered in the name of such Holder or
the name or names of such Affiliates of such Holder as may be directed in
writing by the latter, and shall deliver such share certificates to the Person
or Persons entitled to receive the same. Such shares shall be deemed issued and
outstanding on the date the Warrant is exercised and the Exercise Price is paid
to the Company, and the share certificates shall be dated as of such date and
the Holder shall be entitled to exercise all of the rights of a shareholder as
of such date.
 
          (c) Exercise by Surrender of Warrant; Cashless Exercise.  In addition
     to the method of exercise set forth in Section 3(b)(3) above and in lieu of
     any cash payment required thereunder, each Holder, at its sole discretion,
     shall have the right at any time and from time to time to exercise the
     Warrants in full or in part (provided that any exercise in part shall be in
     a minimum amount of 50,000 Warrants or such lesser number of Warrants as
     may then be held by such Holder) by surrendering its Warrant Certificate in
     the manner specified in Section 3(b)(3) in exchange for the number of
     shares of Common Stock equal to the product of (x) the number of shares as
     to which the Warrants are being exercised multiplied by (y) a fraction, the
     numerator of which is the difference between the fair market value of a
     share at exercise (as defined hereafter) of the Common Stock less the
     Exercise Price and the denominator of which is such fair market value. As
     used herein, "fair market value" shall mean (A)(x) the average of the
     closing prices of the Common Stock sales on all domestic exchanges on which
     the Common Stock may at the time be listed, or, (y) if, there shall have
     been no sales on any such exchange on any day, the average of the highest
     bid and lowest asked prices on all such exchanges at the end of such day,
     or, (B) if on any day the Common Stock shall not be so listed, (x) the
     average of the representative bid and asked prices quoted in the NASDAQ
     System as of 3:30 p.m. New York City time, or (y) if on any day the Common
     Stock shall not be quoted in the NASDAQ System, the average of the high and
     low bid and asked prices on such day in the domestic over-the-counter
     market as reported by the National Quotation Bureau, Incorporation or any
     similar successor organization, in each case under (A) and (B) above
     averaged over the period of 15 consecutive Business Days immediately prior
     to the date of exercise; provided that if the Common Stock is listed on any
     domestic exchange the term "Business Days" as used in this sentence shall
     mean business days on which such exchange is open for trading. If at any
     time the Common Stock is not listed on any domestic exchange or quoted in
     the NASDAQ System or the domestic over-the-counter market, the fair market
     value shall be the fair market value as of the date of exercise, determined
     by a reputable investment banking firm selected by the Holder exercising
     its Warrants pursuant to this Section 3(c) and acceptable to the Company.
 
     4. Adjustments.  The Exercise Price and the number of shares of Common
Stock issuable upon exercise of each Warrant shall be subject to adjustment from
time to time as follows:
 
                                        4
<PAGE>   5
 
          (a) In the event, at any time and from time to time, the Company shall
     issue additional shares of Common Stock (or securities convertible into or
     exchangeable for Common Stock) in a stock dividend, stock distribution or
     subdivision paid with respect to Common Stock, or declare any dividend or
     other distribution payable with additional shares of Common Stock (or
     securities convertible into or exchangeable for Common Stock) with respect
     to Common Stock or effect a split or subdivision of the outstanding shares
     of Common Stock, the Exercise Price shall, concurrently with the
     effectiveness of such stock dividend, stock distribution or subdivision, or
     the earlier declaration thereof, be proportionately decreased, and the
     number of Underlying Common Stock shall be proportionately adjusted so
     that, to avoid dilution of each Holder's position, each Holder shall
     thereafter be entitled to receive at such adjusted price an additional
     number of shares of the Company's Common Stock which such Holder would have
     owned or would have been entitled to receive upon or by reason of any of
     the events described above, had the Warrants been exercised immediately
     prior to the happening of such event. If a dividend is declared and such
     dividend is not paid, the Exercise Price shall again be adjusted to be the
     Exercise Price in effect immediately prior to such record date.
 
          (b) If, at any time, the Company issues any additional shares of
     Common Stock (or other securities convertible into or exchangeable for
     Common Stock) for a price lower than $15.40 per share, the Exercise Price
     with respect to the Warrants shall be automatically and immediately reduced
     to such lower price, without any action or request on the part of either
     Holder. The Company shall notify each Holder of such reduced Exercise Price
     in writing prior to any such issuance of additional shares of Common Stock
     (or other securities convertible into or exchangeable for Common Stock);
     provided that, if the Company should enter into any agreement in connection
     with such issuance of additional shares of Common Stock (or other
     securities convertible into or exchangeable for Common Stock), the Company
     shall immediately notify each Holder in writing thereof and, upon such
     issuance of shares of Common Stock (or other securities convertible into or
     exchangeable for Common Stock), the Exercise Price shall be automatically
     reduced to such reduced Exercise Price, effective retroactively to the
     effective date of such agreement, whether or not the Warrants have been
     exercised during the time period between the effective date of such
     agreement and the date of such issuance (and if the Warrants have been
     exercised during such period, the Company shall promptly pay to such Holder
     the difference between the payment made by such Holder on such exercise and
     the payment that would have been required if the Warrants were exercised at
     such reduced Exercise Price). Notwithstanding the foregoing, the Exercise
     Price shall not be reduced as contemplated by this Section 4(b) in
     connection with the issuance by the Company of compensatory stock options
     to the extent that (i) the exercise price of such compensatory stock
     options is not more than ten percent (10%) lower than $15.40 and (ii) such
     compensatory stock options, in the aggregate, shall represent a right to
     purchase not more than two percent (2%) of the Common Stock in any year
     (provided that in fiscal year 1995/1996 such compensatory stock options
     issued to the Company's employees shall represent a right to purchase in
     total not more than 850,000 shares of the Common Stock.
 
                                        5
<PAGE>   6
 
          (c) In the event the outstanding shares of Common Stock shall be
     combined or consolidated, by reclassification or otherwise, into a lesser
     number of shares of Common Stock, the Exercise Price shall, concurrently
     with the effectiveness of such combination or consolidation, be
     proportionately increased and the number of Underlying Common Stock shall
     be proportionately adjusted so that each Holder of any Warrant exercised
     after such date shall be entitled to receive, upon payment of the same
     aggregate amount as would have been payable before such date, the aggregate
     number of shares of Common Stock which each Holder would have owned upon
     such exercise and been entitled to receive, if such Warrant had been
     exercised immediately prior to the happening of such combination or
     consolidation.
 
          (d) In the event of any consolidation or merger of the Company with or
     into another corporation or the conveyance of all or substantially all of
     the assets of the Company to another corporation or entity (other than any
     merger or sale which does not result in any reclassification or change in
     the relative right or preference of the outstanding shares), the Warrants
     shall thereafter be exercisable for the number of shares of capital stock
     or other securities or property that was delivered at the time of such
     consolidation, merger or conveyance to a holder of shares of Common Stock
     equal in number to the shares of Underlying Common Stock that would have
     been deliverable to such Holder if such Holder had exercised the Warrants
     immediately prior to such consolidation, merger or conveyance; and, in any
     such case, appropriate adjustment shall be made in the application of the
     provisions herein set forth with respect to the rights and interests of
     each Holder thereafter, to the end that the provisions set forth herein
     (including provisions with respect to adjustments in the Exercise Price)
     shall thereafter be applicable, as nearly as may be practicable, in
     relation to any shares of stock or other property thereafter deliverable
     upon the exercise of Warrants. At the request of either Holder, the
     resulting or surviving entity in any such consolidation or merger, if other
     than the Company, shall acknowledge in writing such Holder's rights
     hereunder.
 
     5. Loss or Mutilation.  Upon receipt by the Company of a notice of the
ownership of and the loss, theft, destruction or mutilation of any Warrant
Certificate and of indemnity satisfactory to the Company, and (in the case of
mutilation) upon surrender and cancellation thereof, then, in the absence of
notice to the Company that the Warrants represented thereby have been acquired
by a bona fide purchaser, the Company shall deliver to the Holder of such
Warrant Certificate, in exchange for or in lieu of the lost, stolen, destroyed
or mutilated Warrant Certificate, a new Warrant Certificate of the same tenor
and for a like aggregate number of Warrants.
 
     6. Reservation and Authorization of Common Stock.  The Company shall, at
all times until the Warrants have been exercised or have expired, reserve and
keep available for issue upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as is sufficient for the purpose
of permitting the exercise in full of all outstanding Warrants.
 
     7. Limitations on Transfer; Warrant Transfer Books.
 
                                        6
<PAGE>   7
 
          (a) Subject to the following provisions of this Section 7, the
     Warrants may be sold, transferred, pledged, assigned, hypothecated or
     otherwise disposed of (collectively, "transferred") to Affiliates of any
     Holder or to The Chatterjee Group ("TCG") or its Affiliates at any time;
     provided that if at any time prior to the Transfer Restriction Termination
     Date, any such transferee ceases to be an Affiliate of such Holder or TCG,
     it shall promptly transfer the Warrants to such Holder or TCG or to an
     Affiliate of such Holder or TCG. In addition to such transfers, but subject
     to the following provisions of this Section 7, the Warrants may be
     transferred by any Holder thereof to any Person, whether or not such Person
     is an Affiliate of any Holder or TCG after the earlier of (A) January 19,
     1999, or (B) the date on which the Underlying Common Stock has been
     registered under an effective registration statement with the Securities
     and Exchange Commission ("SEC") (such earlier date being the "Transfer
     Restriction Termination Date"). Transfers of the Warrants under this
     Section 7 shall be in a minimum amount of 50,000 Warrants or such lesser
     number of Warrants as may then be held by the Holder thereof.
 
          (b) The Company shall cause to be kept at the principal executive
     office of the Company a register (the "Register") in which the Company
     shall provide for the registration of Warrant Certificates and transfers or
     exchanges of Warrants as herein provided.
 
          (c) In order to effect any transfer of any Warrants under this Section
     7, the Warrant Certificate evidencing such Warrants shall be surrendered at
     the principal executive office of the Company for registration of transfer
     in the Register. Every Warrant Certificate surrendered for registration of
     transfer shall be duly endorsed and the Form of Assignment contained
     therein completed and duly executed by the Holder thereof. In addition,
     upon the surrender of a Warrant Certificate for registration of transfer
     prior to the Transfer Restriction Termination Date, there shall be
     delivered to the Company a certificate of an officer of the surrendering
     Holder certifying (i) that the transferee is a Holder or TCG or an
     Affiliate of a Holder or TCG, (ii) that the transfer is not in violation of
     this Agreement and (iii) that the transfer is pursuant to an exemption from
     registration under the Securities Act of 1933. Prior to the registration of
     the Underlying Common Stock pursuant to an effective registration statement
     filed with the SEC, the Company may also require, upon the surrender of a
     Warrant Certificate for registration of transfer to any Person other than a
     Holder or TCG or an Affiliate of a Holder or TCG, delivery of an opinion of
     counsel, reasonably satisfactory to the Company, stating that an exemption
     from registration under the Securities Act of 1933, as amended, is
     available in connection with such transfer and that the proposed transferee
     is not an (i) an "investment company," or a company "controlled" by an
     "investment company," within the meaning of the Investment Company Act of
     1940, as amended, (ii) a "holding company" or a "subsidiary" of a "holding
     company," or an "affiliate" of a "holding company," as such terms are
     defined in the Public Utility Holding Company Act of 1935, as amended, or
     (iii) a "public utility," as such term is defined in the Federal Power Act,
     as amended.
 
                                        7
<PAGE>   8
 
          (d) Upon the Company's receipt of a duly endorsed Warrant Certificate
     (with the Form of Assignment contained therein duly executed), together
     with any certificate or opinion required to be delivered therewith to the
     Company pursuant to Section 7(c), the Company shall (i) accept such Warrant
     Certificate and (ii) record the information contained therein in the
     Register. Within five Business Days after such receipt, the Company, at its
     own expense, shall execute and deliver to the transferee thereof, in
     exchange for the surrendered Warrant Certificate, a new Warrant Certificate
     registered in the name of such transferee and evidencing the number of
     Warrants transferred to such transferee, and if the transferring Holder has
     retained any Warrants, a new Warrant Certificate registered in the name of
     such transferring Holder and evidencing the number of Warrants retained by
     it hereunder. Such new Warrant Certificate shall be signed by an authorized
     officer of the Company, shall be dated and effective as of the effective
     date specified in the Form of Assignment for such transfer and shall
     otherwise be in substantially the form of Exhibit A hereto. Upon surrender
     for registration of transfer of any Warrant Certificate in accordance with
     Section 7(c) and acceptance and recording thereof by the Company in the
     Register in accordance with this Section 7(d), (x) the transferee
     thereunder shall be a party hereto, and shall have all the rights and
     obligations of a Holder hereunder and shall be entitled to the benefits of
     a Holder under this Agreement and (y) the Holder transferor thereunder
     shall, to the extent that rights and obligations hereunder have been
     assigned by it, relinquish the rights and be released from the obligations
     under this Agreement (and, in the case of a transfer of all or the
     remaining portion of a transferring Holder's rights and obligations under
     this Agreement, such Holder shall cease to be a party hereto).
 
          (e) At the option of any Holder, Warrant Certificates may be exchanged
     by surrendering such Warrant Certificate, duly endorsed by the Holder
     thereof, at the principal executive office of the Company. Whenever any
     Warrant Certificate is so surrendered for exchange by a Holder, the
     Company, at its own expense, shall execute and deliver to such Holder a new
     Warrant Certificate registered in the name of such Holder and evidencing
     the same number of Warrants as the surrendered Warrant Certificate. Each
     new Warrant Certificate issued under this Section 7(e) upon surrender of a
     Warrant Certificate for exchange shall be the valid obligation of the
     Company, evidencing the same obligations, and entitled to the same benefits
     under this Agreement, as the Warrant Certificate surrendered for exchange.
 
          (f) No service charge shall be made for any registration of transfer
     of, or exchange of, any Warrant Certificate; provided, however, that the
     Company may require payment of a sum sufficient to cover any tax or other
     governmental charge that may be imposed in connection such registration of
     transfer or exchange.
 
     8. No Voting or Dividend Rights.  Prior to the exercise of the Warrants,
the Holder shall not be entitled to any rights of a shareholder of the Company,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive right, but the Holder shall receive
all notices sent to share-
 
                                        8
<PAGE>   9
 
holders of the Company, including any notice of meetings of shareholders, and
shall have the right to attend or observe such meetings and the Holder shall be
entitled to the full benefit of and to exercise all rights of first offer as set
forth in the Registration Rights Agreement (as defined in the Note Purchase
Agreement).
 
     9. Notices.  Any notice, demand or delivery authorized by this Agreement
shall be in writing and shall be sufficiently given or made upon receipt
thereof, if made by personal delivery or facsimile transmission (with confirmed
receipt thereof) followed by a hard copy, or four Business Days after mailed, if
sent by first-class mail, postage prepaid, or on the next Business Day, if sent
by overnight courier, addressed to the Holder or the Company, as the case may
be, at their respective addresses below, or such other address as shall have
been furnished in accordance with this Section 9 to the party giving or making
such notice, demand or delivery:
 
         (a)  If to the Company, at:
 
              Global TeleSystems Group, Inc.
              1751 Pinnacle Drive
              North Tower 12th Floor
              McLean, Virginia 22102
 
              Attention: General Counsel
 
         (b)  If to OSI, at:
 
              The Open Society Institute
              888 Seventh Avenue, Suite 3100
              New York, New York 10106
 
              Attention: Kenneth Anderson, Esq.
 
         (c)  If to WPLDC or WPLLC, at:
 
              Winston Partners, L.P.
              888 Seventh Avenue, Suite 3100
              New York, New York 10106
 
              Attention: Peter Hurwitz, Esq.
 
                                        9
<PAGE>   10
 
                                          Provided that notices to OSI, WPLDC or
                                          WPLLC shall be deemed to be delivered
                                          to any such party if sent to TCG in
                                          accordance with the provisions of this
                                          Section 9 at:
 
                                          888 Seventh Avenue, Suite 3000
                                          New York, New York 10106
 
                                          Attention: Peter Hurwitz, Esq.
 
                                          In each case of delivery or deemed
                                          delivery to OSI, WPLDC or WPLLC, with
                                          a copy to:
 
                                          Soros Fund Management
                                          888 Seventh Avenue, Suite 3300
                                          New York, New York 10106
 
                                          Attention: Michael Neus, Esq.
                                                     and Peter Hurwitz, Esq.
 
     10. Applicable Law.  This Agreement and each Warrant Certificate issued
hereunder shall be governed by the laws of the State of New York. The Company
and the Holders hereby submit to the nonexclusive jurisdiction of the United
States District Court for the Southern District of New York and of any New York
State court sitting in New York City for purposes of all legal proceedings
arising out of or relating to this Agreement and the transactions contemplated
hereby. The Company irrevocably waives, to the fullest extent permitted by law,
any objection which it may now or hereafter have to the laying of the venue of
any such proceeding brought in such a court and any claim that any such
proceeding brought in such a court has been brought in an inconvenient forum.
 
     11. Successors and Assigns.  The provisions of this Agreement shall inure
to the benefit of and be binding upon the respective successors and permitted
assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
 
     12. Counterparts.  This Agreement may be executed by one or more of the
parties to this Agreement in any number of separate counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
 
                                       10
<PAGE>   11
 
     13. Captions and Headings.  The captions and headings used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
 
     14. Amendments and Waivers.  Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and each Holder. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon the Holders,
each future holder of the Warrants and the Company.
 
     15. Severability.  If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provisions shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
 
                                       11
<PAGE>   12
 
     IN WITNESS WHEREOF, the paries hereto have caused this Agreement to be duly
executed as of the day and year first above written.
 
                                          GLOBAL TELESYSTEMS GROUP, INC.
 
                                          By /s/ N.S. Molberger
                                          -------------------------------------
                                             Name:
 
                                          THE OPEN SOCIETY INSTITUTE
 
                                          By /s/ George Suros 
                                          --------------------------------------
                                             Name:
 
                                          WINSTON PARTNERS II LDC
 
                                          By /s/ [illegible] 
                                          --------------------------------------
                                             Name:
 
                                          WINSTON PARTNERS II LLC
 
                                          By: Chatterjee Advisors L.L.C.
                                            Its Sole Manager
 
                                            By /s/ Peter Hurwitz 
                                            ------------------------------------
                                               Name: Peter Hurwitz
 
                                          WINSTON PARTNERS, L.P.
 
                                          By: Chatterjee Fund Management, L.P.
                                            Its General Partner
 
                                            By
 
                                            ------------------------------------
                                               Name:
 
                                       12
<PAGE>   13
 
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
 
                                          GLOBAL TELESYSTEMS GROUP, INC.
 
                                          By:      /s/ N.S. MELBERGER
 
                                            ------------------------------------
                                            Name:
 
                                          THE OPEN SOCIETY INSTITUTE
 
                                          By        /s/ GEORGE SOROS
 
                                            ------------------------------------
                                            Name:
 
                                          WINSTON PARTNERS II LDC
 
                                          By         /s/ [ILLEGIBLE]
 
                                            ------------------------------------
                                            Name: Curacao Corporation Company
                                             N.V.
                                                   Sole Director
 
                                          WINSTON PARTNERS II LLC
 
                                          By: Chatterjee Advisors L.L.C.
                                            Its Sole Manager
 
                                              By    /s/ PETER HUROVITZ
 
                                              ----------------------------------
                                              Name: Peter Hurovitz
 
                                          WINSTON PARTNERS, L.P.
 
                                          By: Chatterjee Fund Management, L.P.
                                            Its General Partner
 
                                            By
 
                                              ----------------------------------
                                              Name:
 
                                       13
<PAGE>   14
 
                                                                       EXHIBIT A
 
                      FORM OF FACE OF WARRANT CERTIFICATE
 
     THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE
EXTENT APPLICABLE PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER
THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE ACT.
 
     THIS WARRANT CERTIFICATE AND THE WARRANTS REPRESENTED HEREBY ARE
TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS SET FORTH IN THE WARRANT
AGREEMENT REFERRED TO BELOW (INCLUDING, WITHOUT LIMITATION, REGISTRATION OF THE
TRANSFER TO THE TRANSFEREE IN THE COMPANY'S REGISTER)
 
     WARRANTS TO PURCHASE COMMON STOCK OF GLOBAL TELESYSTEMS GROUP, INC.
 
No. ______                                                 ____________ Warrants
 
     This certifies that                     is the owner of the number of
Warrants set forth above, each of which represents the right to purchase from
GLOBAL TELESYSTEMS, INC., a Delaware corporation (the "Company"), one share of
common stock, par value $0.0001 per share, of the Company ("Common Stock"),
subject to adjustment as set forth in the Warrant Agreement referred to below,
at the exercise price (the "Exercise Price") of $15.40, subject to a reduction
to $14.00 if all amounts payable under the Notes have not been repaid in full on
or before December 31, 1996 and subject to further adjustment as set forth in
the Warrant Agreement. As provided in the Warrant Agreement and subject
 
                                       A-1
<PAGE>   15
 
to the terms and conditions set forth therein, the Warrants are exercisable by
surrender of this Warrant Certificate at the office of the Company at Global
TeleSystems Group, Inc., 1751 Pinnacle Drive, North Tower, 12th Floor, McLean,
Virginia 22102, with the Exercise Subscription Form on the reverse hereof duly
executed and with payment in fully (by check or wire transfer in immediately
available funds to an account designated by the Company) of the Exercise Price
for the number of shares of Common Stock as to which the Warrant(s) represented
by this Warrant Certificate are exercised, or by surrender of this Warrant
Certificate at the same address in lieu of cash payment. The Warrants will
expire at 5 p.m. New York City time, and this Warrant Certificate shall be void
and all rights represented hereby shall cease, on the Expiration Date.
 
     This Warrant Certificate is issued under and in accordance with the Warrant
Agreement, dated as of June __, 1996, as it may be amended, supplemented or
otherwise modified from time to time (as so amended, supplemented or modified,
the "Warrant Agreement"), among the Company, The Open Society Institute, Winston
Partners II LDC and Winston Partners II LLC and subject to the terms and
provisions contained therein, to all of which terms and provisions the holder of
this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is
hereby incorporated herein by reference and made a part hereof. Reference is
hereby made to the Warrant Agreement for a full description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Company and the Holders of the Warrants. Capitalized defined terms used herein
have the same meanings as in the Warrant Agreement. Copies of the Warrant
Agreement are on file at the office of the
 
                                       A-2
<PAGE>   16
 
Company and may be obtained by writing to the Company at the following address:
Global TeleSystems Group, Inc., 1751 Pinnacle Drive, North Tower, 12th Floor,
McLean, Virginia 22102, attention of the General Counsel.
 
     The number of shares of the Common Stock of the Company purchasable upon
the exercise of each Warrant and the Exercise Price are subject to adjustment as
set forth in the Warrant Agreement.
 
     All shares of Common Stock issuable by the Company upon the exercise of
Warrants and the payment of the Exercise Price therefor shall be validly issued,
fully paid and nonassessable.
 
     Subject to the terms of the Warrant Agreement, this Warrant Certificate and
all rights hereunder are transferable by the Holder hereof, in whole or in part,
upon surrender of this Warrant Certificate duly endorsed and with the Form of
Assignment contained herein completed and duly executed by such Holder, together
with certificates and opinions as are required by the Warrant Agreement, and
upon payment of any necessary transfer tax or other governmental charge imposed
upon such transfer. As set forth in the Warrant Agreement, upon any partial
transfer, the Company shall issue and deliver to such Holder a new Warrant
Certificate or Certificates with respect to any portion not so transferred.
 
Dated:  June   , 1996
             --
 
                                          GLOBAL TELESYSTEMS GROUP, INC.
 
                                          By
                                            -----------------------------------
                                              Name:
                                              Title:
 
                                       A-3
<PAGE>   17
 
                     FORM OF REVERSE OF WARRANT CERTIFICATE
                           EXERCISE SUBSCRIPTION FORM
 
                 (To be executed only upon exercise of Warrant)
 
To:  Global TeleSystems Group, Inc.
 
     The undersigned irrevocably exercises ___________ of the Warrants evidenced
by this Warrant Certificate for the purchase of shares of Common Stock, par
value $0.0001 per share, of GLOBAL TELESYSTEMS GROUP, INC. and herewith:
 
_____   (a) makes payment of $ __________ (such payment being made by bank check
            or wire transfer in immediately available funds to the account
            designated by Global TeleSystems Group, Inc. and constituting the
            Exercise Price (as defined in the Warrant Agreement) for the shares
            as to which the Warrants evidenced by this Warrant Certificate are
            exercised); or
 
_____   (b) surrenders this Warrant Certificate in lieu of cash payment in
            accordance with the terms of Section 3(c) of the Warrant Agreement,
            all on the terms and conditions specified in this Warrant
            Certificate and the Warrant Agreement herein referred to.
 
     The undersigned hereby irrevocably surrenders this Warrant Certificate and
all right, title and interest therein to Global TeleSystems Group, Inc. and
directs that the shares of Common Stock deliverable upon the exercise of said
Warrants be
 
                                       A-4
<PAGE>   18
 
registered or placed in the name and at the address specified below and
delivered thereto.
 
Date:                ,      .
 
                                                                             (1)
 
                                          --------------------------------------
                                          Signature of Owner
 
                                          --------------------------------------
                                          (Street Address)
 
                                          --------------------------------------
                                          (City) (State) (Zip Code)
 
Securities and/or check to be issued to:
 
Please insert identifying number:
 
Name:
 
Street Address:
 
City, State and Zip Code:
 
Any unexercised Warrants evidenced by
the within Warrant Certificate to be issued to:
 
Please insert identifying number:
 
Name:
 
Street Address:
 
City, State and Zip Code:
 
- ---------------
(1) The signature must correspond with the name as written upon the face of this
    Warrant Certificate in every particular, without alteration or enlargement
    or any change whatsoever.
 
                                       A-5
<PAGE>   19
 
                               FORM OF ASSIGNMENT
 
     FOR VALUE RECEIVED, the undersigned registered holder of this Warrant
Certificate hereby sells, assigns and transfers, effective as of _________ ,
unto the Assignee(s) named below (including the undersigned with respect to any
Warrants constituting a part of the Warrants evidenced by this Warrant
Certificate not being assigned hereby) all of the right of the undersigned under
this Warrant Certificate, with respect to the number of Warrants set forth
below:
 
<TABLE>
<CAPTION>
Names of                                   Identifying         Number of
Assignees         Address             Number of Assignee(s)    Warrants
- ---------         -------             ---------------------    ---------
<C>               <C>                 <C>                      <C>
 






</TABLE>
 
and does hereby irrevocably constitute and appoint ___________ the undersigned's
attorney to make such transfer on the books of Global TeleSystems Group, Inc.
maintained for that purpose, with full power of substitution. The assignment is
subject in all respects to the terms of the Warrant Agreement referred to in the
Warrant Certificate of which this Form of Assignment is a part.
 
     The Assignee represents and warrants that it is not (a) an "investment
company", or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended, (b) a "holding
company" or a "subsidiary" of a "holding company", or an "affiliate" of a
"holding
 
                                       A-6
<PAGE>   20
 
company", as such terms are defined in the Public Utility Hodling Company Act of
1935, as amended or (c) a "public utility", as such term is defined in the
Federal Power Act, as amended.
 
Dated:
      -------------, -------
 
                                        --------------------------------------1)
                                        [Assignor]
 
- -------------------------------------
[Assignee]



 
- ---------------
 
1) The signature must correspond with the name as written upon the face of this
   Warrant Certificate in every particular, without alteration or enlargement or
   any change whatsoever.
 
                                       A-7

<PAGE>   1
                                                                Exhibit 10.9


                      Registration Rights Letter Agreement




                                                                February 2, 1996


Emerging Markets Growth Fund, Inc.
333 South Hope Street
Los Angeles, CA  90071

Gentlemen:

                 We refer to the Senior Note Purchase Agreement (the "Note
Purchase Agreement"), the Warrant Agreement (as defined in the Note Purchase
Agreement) and the Initial Note (as defined in the Note Purchase Agreement),
each dated, or dated as of, the date hereof, and executed between the
undersigned (the "Company") and Emerging Markets Growth Fund, Inc. (the
"Initial Rights Holder" and, together with its permitted transferees hereunder,
the "Rights Holders" and, individually, a "Rights Holder").  Capitalized terms
used but not defined herein shall have the meanings ascribed to such terms in
the Note Purchase Agreement, or, as indicated herein, the Stock Purchase
Agreement.

                 In connection with the purchase of the Initial Note, the
issuance of the Warrants and the transactions contemplated by the Note Purchase
Agreement and the Warrant Agreement, and in consideration for and as an
inducement to the purchase of the Initial Note by the Initial Rights Holders,
we hereby grant to each Rights Holder, with respect to all shares of the
Company's Common Stock that such Rights Holder may acquire (whether by exercise
of the Warrants or otherwise), on a most-favored-nation basis, all of the
registration rights and (with respect to all such shares of the Company's
Common Stock and, in addition, with respect to and upon the issuance of the
Warrants) all rights of first offer granted to any stockholder pursuant to the
Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of June 15,
1995 (a form of which is attached as Exhibit A), executed by the Company and
certain stockholders, which rights are no less favorable than the rights
provided to any of the Company's stockholders pursuant to any other stock
purchase agreement, any other agreement, or otherwise.  Such rights include,
without limitation, (A) unlimited rights to demand registration after the
Company qualifies as an S-3 Registrant (limited to one such registration in any
12 month period), as set forth in Section 6.2 of the Stock Purchase Agreement;
(B) unlimited piggyback registration rights, as set forth in Section 6.3
thereof; (C) the Company's payment of all expenses (with certain exceptions)
incurred with respect to such registrations, as set forth in Section 6.4
thereof; and (D) the






<PAGE>   2
                                       2

right of first offer to purchase a pro rata share of any issue of "New
Securities" as defined in the Stock Purchase Agreement, which right shall not
expire prior to an initial public offering of the Company, as set forth in
Section 8.11 of the Stock Purchase Agreement.

                 In the event that the Company effects or causes to be effected
any amendments to the Stock Purchase Agreement that would diminish or restrict
in any way the registration rights or the rights of first offer granted to
stockholders under the Stock Purchase Agreement, such amendment shall in no way
diminish, restrict or otherwise apply to or affect the registration rights,
rights of first offer to purchase New Securities or any other rights granted to
each Rights Holder hereunder and under the Stock Purchase Agreement as now in
effect.  In the event the Company amends the Stock Purchase Agreement to
increase or enhance the registration rights or rights of first offer of any
stockholder, or if the Company otherwise agrees to enhance or increase such
rights, or if such rights are increased or enhanced for any other reason or in
any other manner, each Rights Holder will automatically and immediately benefit
from and receive such increased or enhanced rights with no further action
required by such Rights Holder, and this agreement shall be deemed to be
amended to incorporate such increased or enhanced rights.  The Company shall
notify each Rights Holder immediately in writing of any such amendments or
other agreements or occurrences.

                 In addition to any other transfer rights granted to each
Rights Holder pursuant to the terms of the Stock Purchase Agreement, each
Rights Holder may assign or transfer its rights under this agreement to any
transferees to which the Warrants, the Notes or shares of Common Stock have
been transferred in accordance with the Note Purchase Agreement or the Warrant
Agreement.

                 Notwithstanding any provision of the Stock Purchase Agreement
or any other document or agreement to the contrary, each Rights Holder shall,
immediately upon the issuance of the Warrants, be entitled to the full benefit
of and shall be entitled to exercise all rights of first offer granted hereby
or otherwise with respect to any issue of New Securities, whether or not any of
the Warrants have been exercised by any Rights Holder.






<PAGE>   3
                                       3

                 This letter agreement shall be governed by and construed in
accordance with the laws of the State of New York, and may be executed in
counterparts by the parties hereto, each of which counterparts shall be an
original and all of which taken together shall constitute one and the same
letter agreement.


                                      Very truly yours,

                                      Global Telesystems Group, Inc.


                                      By:  /s/  N.S. Molberger
                                         -----------------------------
                                         Name: N.S. Molberger



Accepted and Agreed to by:

Emerging Markets Growth Fund, Inc.

By: Pierre-Marie Bouvet de Maisonneuve
   ----------------------------------------
   Name: Pierre-Marie Bouvet de Maisonneuve
         Authorized Representative







<PAGE>   1
                                                                Exhibit 10.10


                               WARRANT AGREEMENT


              WARRANT AGREEMENT, dated as of February 2, 1996 (the
"Agreement"), between Global TeleSystems Group, Inc., a Delaware corporation
(the "Company"), and Emerging Markets Growth Fund, Inc., a Maryland corporation
(the "Initial Holder" and together with its permitted assignees, the "Holders"
and individually, a "Holder").

              WHEREAS the Company proposes to issue and deliver its warrant
certificates ("Warrant Certificates") evidencing an aggregate of 1,944,444
warrants (the "Warrants"), each to purchase one share of common stock, par
value $0.0001 per share, of the Company ("Common Stock") in connection with the
Senior Promissory Note dated the date hereof (the "Initial Note") in the
aggregate principal amount of $26,250,000 dollars, issued by the Company to the
Initial Holder, pursuant to, and subject to the terms and conditions of, that
certain Senior Note Purchase Agreement, dated as of the date hereof (as it may
be amended, supplemented or otherwise modified from time to time, the "Note
Purchase Agreement"), between the Company and the Initial Holder.

              NOW THEREFORE, in consideration of the foregoing and for the
purpose of defining the terms and provisions of the Warrants and the respective
rights and obligations thereunder of the Company and each Holder, the Company
and the Initial Holder agree as follows:

              1.     Certain Definitions.  The following terms, as used in this
Agreement, have the following meanings:

                     (a)    "Affiliate" has the meaning set forth in the Note
Purchase Agreement.

                     (b)    "Business Day" means any day other than a Saturday,
Sunday or day on which banks in New York City are closed for general business.

                     (c)    "Common Stock" has the meaning set forth in the
preamble.

                     (d)    "Exercise Period"  means the period beginning on
the date of issuance of the Warrants and ending at 5 p.m. New York City time on
the sixth anniversary of such date.

                     (e)    "Exercise Price" means $15.40 per share subject to
a reduction to $14.00 per share if all amounts payable under the Notes have not
been repaid in full on or before December 31, 1996 and subject to further
adjustment as provided in Section 4.




<PAGE>   2
                                      2



                     (f)    "Expiration Date" for the Warrants means the last
day of the Exercise Period.

                     (g)    "Holder" has the meaning set forth in the preamble.

                     (h)    "Notes" has the meaning set forth in the Note
Purchase Agreement.

                     (i)    "Note Purchase Agreement" has the meaning set forth
in the Recital.

                     (j)    "Person" means any individual, corporation, limited
liability company, partnership, limited liability company, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

                     (k)    "Register" has the meaning set forth in Section
7(b) of this Agreement.

                     (l)    "Transfer Restriction Termination Date" has the
meaning set forth in Section 7(a) of this Agreement.

                     (m)    "Underlying Common Stock" means the shares of
Common Stock purchasable by a Holder upon the exercise of its Warrants.

                     (n)    "Warrants" has the meaning set forth in the
preamble.

                     (o)    "Warrant Certificates" means the certificates
evidencing the Warrants.

              2.     Issue of Warrants.  The Warrant Certificates shall be in
registered form only and substantially in the form attached hereto as Exhibit A
(including legends and endorsements as set forth in Exhibit A and as are not
inconsistent with the provisions of this Agreement, the Notes and the Note
Purchase Agreement) and shall be dated the date on which signed by an
authorized signatory of the Company.  Warrant Certificates evidencing the
Warrants may be executed by any authorized officer of the Company.  Warrant
Certificates evidencing 1,944,444 Warrants shall be delivered and registered in
the name of the Initial Holder upon execution of this Agreement.





<PAGE>   3
                                       3

              3.     Exercise Price, Exercise of Warrants.

                     (a)    Exercise Price.  Each Warrant shall entitle the
respective Holder of such Warrant, subject to the provisions of this Agreement,
to purchase one share of Common Stock at a purchase price per share equal to
the Exercise Price.

                     (b)    Exercise of Warrants Generally.

                            (1)    Exercise During Exercise Period.  All
Warrants not exercised during the Exercise Period shall expire at 5 p.m. New
York City time on the Expiration Date.

                            (2)    Liquidation Event.  If, at any time prior to
the Expiration Date, the Company is to be liquidated, the Company shall give
written notice thereof to each Holder at the earliest practicable time;
provided, however, that, if the Company is to be liquidated in accordance with
the provisions of its Certificate of Incorporation, such notice shall be given
no less than 30 days prior to the date on which such liquidation is expected to
become effective.

                            (3)    Method of Exercise; Payment of Exercise
Price.  In order to exercise any or all of the Warrants represented by a
Warrant Certificate, the Holder thereof must surrender the Warrant Certificate
to the Company for exercise, with the reverse side of the Warrant Certificate
duly executed, together with any required payment of the Exercise Price for
each share of Underlying Common Stock to which such Holder is entitled, each
such payment of the Exercise Price to be made by check or wire transfer in
immediately available funds to an account designated by the Company; provided
that such Holder, in its sole discretion, may deduct or offset from such
payment any amounts outstanding under the Notes (to the extent such amounts are
then due and payable (after giving effect to applicable grace periods) to such
Holder).  If a Holder elects to deduct or offset from such payments all or a
portion of the principal amount outstanding under the Note held by such Holder,
such Holder shall surrender its Note to the Company and if, following such
deduction or offset, any principal amount remains outstanding to such Holder,
the Company shall simultaneously issue to such Holder a note payable to the
order of such Holder in a principal amount equal to such remaining outstanding
amount with terms and provisions otherwise identical to the terms and
provisions of such Holder's original Note.  If a Holder elects to exercise only
a portion of the Warrants represented by the Warrant Certificate or
Certificates registered in the Register in its name, then the remaining portion
of such Warrants shall be registered in the Register in such name or names
(subject to the limitation set forth in Section 7) as may be directed in
writing by such Holder and shall be returned to such Holder in the form of a
new Warrant Certificate for the number of Warrants that were not surrendered
and with terms and provisions otherwise identical to the terms and provisions
of such Holder's original Warrant Certificate.  Upon surrender of a Warrant
Certificate and





<PAGE>   4
                                       4

the payment of the Exercise Price in conformity with the foregoing provisions,
the Company shall promptly, but in no event later than five Business Days after
the payment of the Exercise Price of the Warrants by such Holder, issue to the
Holder of such Warrant Certificate share certificates representing the
Underlying Common Stock to which such Holder is entitled, registered in the
name of such Holder or the name or names of such Affiliates of such Holder as
may be directed in writing by the latter, and shall deliver such share
certificates to the Person or Persons entitled to receive the same.  Such
shares shall be deemed issued and outstanding on the date the Warrant is
exercised and the Exercise Price is paid to the Company, and the share
certificates shall be dated as of such date and the Holder shall be entitled to
exercise all of the rights of a shareholder as of such date.

                     (c)    Exercise by Surrender of Warrant; Cashless
Exercise.  In addition to the method of exercise set forth in Section 3(b)(3)
above and in lieu of any cash payment required thereunder, each Holder, at its
sole discretion, shall have the right at any time and from time to time to
exercise the Warrants in full or in part (provided that any exercise in part
shall be in a minimum amount of 50,000 Warrants or such lesser number of
Warrants as may then be held by such Holder) by surrendering its Warrant
Certificate in the manner specified in Section 3(b)(3) in exchange for the
number of shares of Common Stock equal to the product of (x) the number of
shares as to which the Warrants are being exercised multiplied by (y) a
fraction, the numerator of which is the difference between the fair market
value of a share at exercise (as defined hereafter) of the Common Stock less
the Exercise Price and the denominator of which is such fair market value.  As
used herein, "fair market value" shall mean (A) (x) the average of the closing
prices of the Common Stock sales on all domestic exchanges on which the Common
Stock may at the time be listed, or, (y) if, there shall have been no sales on
any such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, (B) if on any day the
Common Stock shall not be so listed, (x) the average of the representative bid
and asked prices quoted in the NASDAQ System as of 3:30 p.m. New York City
time, or (y) if on any day the Common Stock shall not be quoted in the NASDAQ
System, the average of the high and low bid and asked prices on such day in the
domestic over-the-counter market as reported by the National Quotation Bureau,
Incorporation or any similar successor organization, in each case under (A) and
(B) above averaged over the period of 15 consecutive Business Days immediately
prior to the date of exercise; provided that if the Common Stock is listed on
any domestic exchange the term "Business Days" as used in this sentence shall
mean business days on which such exchange is open for trading.  If at any time
the Common Stock is not listed on any domestic exchange or quoted in the NASDAQ
System or the domestic over-the-counter market, the fair market value shall be
the fair market value as of the date of exercise, determined by a reputable
investment banking firm selected by the Holder exercising its Warrants pursuant
to this Section 3(c) and acceptable to the Company.





<PAGE>   5
                                       5

              4.     Adjustments.  The Exercise Price and the number of shares
of Common Stock issuable upon exercise of each Warrant shall be subject to
adjustment from time to time as follows:

                     (a)    In the event, at any time and from time to time,
the Company shall issue additional shares of Common Stock (or securities
convertible into or exchangeable for Common Stock) in a stock dividend, stock
distribution or subdivision paid with respect to Common Stock, or declare any
dividend or other distribution payable with additional shares of Common Stock
(or securities convertible into or exchangeable for Common Stock) with respect
to Common Stock or effect a split or subdivision of the outstanding shares of
Common Stock, the Exercise Price shall, concurrently with the effectiveness of
such stock dividend, stock distribution or subdivision, or the earlier
declaration thereof, be proportionately decreased, and the number of Underlying
Common Stock shall be proportionately adjusted so that, to avoid dilution of
each Holder's position, each Holder shall thereafter be entitled to receive at
such adjusted price an additional number of shares of the Company's Common
Stock which such Holder would have owned or would have been entitled to receive
upon or by reason of any of the events described above, had the Warrants been
exercised immediately prior to the happening of such event.  If a dividend is
declared and such dividend is not paid, the Exercise Price shall again be
adjusted to be the Exercise Price in effect immediately prior to such record
date.

                     (b)    If, at any time, the Company issues any additional
shares of Common Stock (or other securities convertible into or exchangeable
for Common Stock) for a price lower than $15.40 per share, the Exercise Price
with respect to the Warrants shall be automatically and immediately reduced to
such lower price, without any action or request on the part of either Holder.
The Company shall notify each Holder of such reduced Exercise Price in writing
prior to any such issuance of additional shares of Common Stock (or other
securities convertible into or exchangeable for Common Stock); provided that,
if the Company should enter into any agreement in connection with such issuance
of additional shares of Common Stock (or other securities convertible into or
exchangeable for Common Stock), the Company shall immediately notify each
Holder in writing thereof and, upon such issuance of shares of Common Stock (or
other securities convertible into or exchangeable for Common Stock), the
Exercise Price shall be automatically reduced to such reduced Exercise Price,
effective retroactively to the effective date of such agreement, whether or not
the Warrants have been exercised during the time period between the effective
date of such agreement and the date of such issuance (and if the Warrants have
been exercised during such period, the Company shall promptly pay to such
Holder the difference between the payment made by such Holder on such exercise
and the payment that would have been required if the Warrants were exercised at
such reduced Exercise Price).  Notwithstanding the foregoing, the Exercise
Price shall not be reduced as contemplated by this Section 4(b) in connection
with the issuance by the Company of compensatory stock options to the extent
that (i) the exercise price of such compensatory stock options is not more than
ten percent






<PAGE>   6
                                       6

(10%) lower than $15.40 and (ii) such compensatory stock options, in the
aggregate, shall represent a right to purchase not more than two percent (2%)
of the Common Stock in any year (provided that in fiscal year 1995/1996 such
compensatory stock options issued to the Company's employees shall represent a
right to purchase in total not more than 850,000 shares of the Common Stock.

                     (c)    In the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, the Exercise Price shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased and the number of Underlying Common Stock shall be proportionately
adjusted so that each Holder of any Warrant exercised after such date shall be
entitled to receive, upon payment of the same aggregate amount as would have
been payable before such date, the aggregate number of shares of Common Stock
which each Holder would have owned upon such exercise and been entitled to
receive, if such Warrant had been exercised immediately prior to the happening
of such combination or consolidation.

                     (d)    In the event of any consolidation or merger of the
Company with or into another corporation or the conveyance of all or
substantially all of the assets of the Company to another corporation or entity
(other than any merger or sale which does not result in any reclassification or
change in the relative right or preference of the outstanding shares), the
Warrants shall thereafter be exercisable for the number of shares of capital
stock or other securities or property that was delivered at the time of such
consolidation, merger or conveyance to a holder of shares of Common Stock equal
in number to the shares of Underlying Common Stock that would have been
deliverable to such Holder if such Holder had exercised the Warrants
immediately prior to such consolidation, merger or conveyance; and, in any such
case, appropriate adjustment shall be made in the application of the provisions
herein set forth with respect to the rights and interests of each Holder
thereafter, to the end that the provisions set forth herein (including
provisions with respect to adjustments in the Exercise Price) shall thereafter
be applicable, as nearly as may be practicable, in relation to any shares of
stock or other property thereafter deliverable upon the exercise of Warrants.
At the request of either Holder, the resulting or surviving entity in any such
consolidation or merger, if other than the Company, shall acknowledge in
writing such Holder's rights hereunder.

              5.     Loss or Mutilation.  Upon receipt by the Company of a
notice of the ownership of and the loss, theft, destruction or mutilation of
any Warrant Certificate and of indemnity satisfactory to the Company, and (in
the case of mutilation) upon surrender and cancellation thereof, then, in the
absence of notice to the Company that the Warrants represented thereby have
been acquired by a bona fide purchaser, the Company shall deliver to the Holder
of such Warrant Certificate, in exchange for or in lieu of the lost, stolen,
destroyed





<PAGE>   7
                                       7

or mutilated Warrant Certificate, a new Warrant Certificate of the same tenor
and for a like aggregate number of Warrants.

              6.     Reservation and Authorization of Common Stock.  The
Company shall, at all times until the Warrants have been exercised or have
expired, reserve and keep available for issue upon the exercise of Warrants
such number of its authorized but unissued shares of Common Stock as is
sufficient for the purpose of permitting the exercise in full of all
outstanding Warrants.

              7.     Limitations on Transfer; Warrant Transfer Books.

                     (a)    Subject to the following provisions of this Section
7, the Warrants may be sold, transferred, pledged, assigned, hypothecated or
otherwise disposed of (collectively, "transferred") to Affiliates of the Holder
of the Warrants at any time; provided that if at any time prior to the Transfer
Restriction Termination Date, any such transferee ceases to be an Affiliate of
such Holder, it shall promptly transfer the Warrants to such Holder or an
Affiliate of such Holder.  In addition to such transfers, but subject to the
following provisions of this Section 7, the Warrants may be transferred by any
Holder thereof to any Person, whether or not such Person is an Affiliate of
such Holder after the earlier of (A) February 2, 1999, or (B) the date on which
the Underlying Common Stock has been registered under an effective registration
statement with the Securities and Exchange Commission ("SEC") (such earlier
date being the "Transfer Restriction Termination Date").  Transfers of the
Warrants under this Section 7 shall be in a minimum amount of 50,000 Warrants
or such lesser number of Warrants as may then be held by the Holder thereof.

                     (b)    The Company shall cause to be kept at the principal
executive office of the Company a register (the "Register") in which the
Company shall provide for the registration of Warrant Certificates and
transfers or exchanges of Warrants as herein provided.

                     (c)    In order to effect any transfer of any Warrants
under this Section 7, the Warrant Certificate evidencing such Warrants shall be
surrendered at the principal executive office of the Company for registration
of transfer in the Register.  Every Warrant Certificate surrendered for
registration of transfer shall be duly endorsed and the Form of Assignment
contained therein completed and duly executed by the Holder thereof.  In
addition, upon the surrender of a Warrant Certificate for registration of
transfer prior to the Transfer Restriction Termination Date, there shall be
delivered to the Company a certificate of an officer of the surrendering Holder
certifying (i) that the transferee is an Affiliate of such Holder, (ii) that
the transfer is not in violation of this Agreement and (iii) that the transfer
is pursuant to an exemption from registration under the Securities Act of 1933.
Prior to the registration of the Underlying Common Stock pursuant to an
effective registration statement filed with the SEC, the Company may also
require, upon the surrender





<PAGE>   8
                                       8

of a Warrant Certificate for registration of transfer to any Person other than
an Affiliate of the Holder thereof, delivery of an opinion of counsel,
reasonably satisfactory to the Company, stating that an exemption from
registration under the Securities Act of 1933, as amended, is available in
connection with such transfer and that the proposed transferee is not an (i) an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended, (ii) a
"holding company" or a "subsidiary" of a "holding company," or an "affiliate"
of a "holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended, or (iii) a "public utility," as such term is
defined in the Federal Power Act, as amended.

                     (d)    Upon the Company's receipt of a duly endorsed
Warrant Certificate (with the Form of Assignment contained therein duly
executed), together with any certificate or opinion required to be delivered
therewith to the Company pursuant to Section 7(c), the Company shall (i) accept
such Warrant Certificate and (ii) record the information contained therein in
the Register.  Within five Business Days after such receipt, the Company, at
its own expense, shall execute and deliver to the transferee thereof, in
exchange for the surrendered Warrant Certificate, a new Warrant Certificate
registered in the name of such transferee and evidencing the number of Warrants
transferred to such transferee, and if the transferring Holder has retained any
Warrants, a new Warrant Certificate registered in the name of such transferring
Holder and evidencing the number of Warrants retained by it hereunder.  Such
new Warrant Certificate shall be signed by an authorized officer of the
Company, shall be dated and effective as of the effective date specified in the
Form of Assignment for such transfer and shall otherwise be in substantially
the form of Exhibit A hereto.  Upon surrender for registration of transfer of
any Warrant Certificate in accordance with Section 7(c) and acceptance and
recording thereof by the Company in the Register in accordance with this
Section 7(d), (x) the transferee thereunder shall be a party hereto, and shall
have all the rights and obligations of a Holder hereunder and shall be entitled
to the benefits of a Holder under this Agreement and (y) the Holder transferor
thereunder shall, to the extent that rights and obligations hereunder have been
assigned by it, relinquish the rights and be released from the obligations
under this Agreement (and, in the case of a transfer of all or the remaining
portion of a transferring Holder's rights and obligations under this Agreement,
such Holder shall cease to be a party hereto).

                     (e)    At the option of any Holder, Warrant Certificates
may be exchanged by surrendering such Warrant Certificate, duly endorsed by the
Holder thereof, at the principal executive office of the Company.  Whenever any
Warrant Certificate is so surrendered for exchange by a Holder, the Company, at
its own expense, shall execute and deliver to such Holder a new Warrant
Certificate registered in the name of such Holder and evidencing the same
number of Warrants as the surrendered Warrant Certificate.  Each new Warrant
Certificate issued under this Section 7(e) upon surrender of a Warrant
Certificate for exchange shall be the valid obligation of the Company,
evidencing the same obligations, and





<PAGE>   9
                                       9

entitled to the same benefits under this Agreement, as the Warrant Certificate
surrendered for exchange.

                     (f)    No service charge shall be made for any
registration of transfer of, or exchange of, any Warrant Certificate; provided,
however, that the Company may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection such
registration of transfer or exchange.

              8.     No Voting or Dividend Rights.  Prior to the exercise of
the Warrants, the Holder shall not be entitled to any rights of a shareholder
of the Company, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive right, but the
Holder shall receive all notices sent to shareholders of the Company, including
any notice of meetings of shareholders, and shall have the right to attend or
observe such meetings and the Holder shall be entitled to the full benefit of
and to exercise all rights of first offer as set forth in the Registration
Rights Agreement (as defined in the Note Purchase Agreement).

              9.     Notices.  Any notice, demand or delivery authorized by
this Agreement shall be in writing and shall be sufficiently given or made upon
receipt thereof, if made by personal delivery or facsimile transmission (with
confirmed receipt thereof) followed by a hard copy, or four Business Days after
mailed, if sent by first-class mail, postage prepaid, or on the next Business
Day, if sent by overnight courier, addressed to the Holder or the Company, as
the case may be, at their respective addresses below, or such other address as
shall have been furnished in accordance with this Section 9  to the party
giving or making such notice, demand or delivery:

                     (a)    If to the Company, to it at:

                            Global TeleSystems Group, Inc.
                            1751 Pinnacle Drive
                            North Tower 12th Floor
                            McLean, Virginia 22102

                            Attention: General Counsel


                     (b)    If to the Initial Holder, at:

                            Emerging Markets Growth Fund, Inc.
                            333 South Hope Street
                            Los Angeles, CA  90071; and





<PAGE>   10
                                       10


                     (c)    If to any other Holder, at the address
                            specified in the Form of Assignment
                            contained in the Warrant Certificate
                            surrendered for registration of transfer in
                            connection with the transfer of Warrants
                            pursuant to which it became a Holder
                            hereunder;

                     provided, that all such notices and communications to the
                     Initial Holder and any other Holder shall be deemed to
                     have been delivered to such Holder if sent to Capital
                     Group Companies, Inc. in accordance with the provisions of
                     this Section 9, at:

                            Capital Group Companies, Inc.
                            333 South Hope Street
                            Los Angeles, CA  90071

              10.    Applicable Law.  This Agreement and each Warrant
Certificate issued hereunder shall be governed by, the laws of the State of New
York excluding (to the greatest extent a New York court would permit) any rule
of law that would cause application of the laws of any jurisdiction other than
the State of New York.  The Company and the Holders hereby submit to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement and the transactions contemplated hereby. The Company irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.

              11.    Successors and Assigns.  The provisions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties.  Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.

              12.    Counterparts.  This Agreement may be executed by one or
more of the parties to this Agreement in any number of separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.





<PAGE>   11
                                       11

              13.    Captions and Headings.  The captions and headings used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

              14.    Amendments and Waivers.  Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and each Holder.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon the Holders, each future holder of the Warrants and the Company.

              15.    Severability.  If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provisions shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.





<PAGE>   12
                                       12


              IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.




                                   GLOBAL TELESYSTEMS GROUP, INC.


                                   By  /s/ N.S. Molberger
                                     ------------------------------------
                                     Name: N.S. Molberger


                                   EMERGING MARKETS GROWTH FUND, INC.


                                   By  /s/ Pierre-Marie Bouret de Maisonneuve
                                     ----------------------------------------
                                     Name: Pierre-Marie Bouret de Maisonneuve





<PAGE>   13

                                                                       EXHIBIT A

                      FORM OF FACE OF WARRANT CERTIFICATE


 THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
   UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
    1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i)
   PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE
 EXTENT APPLICABLE PURSUANT TO RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER
  THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) PURSUANT TO AN
                   EXEMPTION FROM REGISTRATION UNDER THE ACT.

                   THIS WARRANT CERTIFICATE AND THE WARRANTS
                    REPRESENTED HEREBY ARE TRANSFERABLE ONLY
                 IN ACCORDANCE WITH THE PROVISIONS SET FORTH IN
                    THE WARRANT AGREEMENT REFERRED TO BELOW
                        (INCLUDING, WITHOUT LIMITATION,
                      REGISTRATION OF THE TRANSFER TO THE
                     TRANSFEREE IN THE COMPANY'S REGISTER)

                       WARRANTS TO PURCHASE COMMON STOCK
                       OF GLOBAL TELESYSTEMS GROUP, INC.



No. __                                                      ___________ Warrants


              This certifies that _________________________ is the owner of the
number of Warrants set forth above, each of which represents the right to
purchase from GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the
"Company"), one share of common stock, par value $0.0001 per share, of the
Company ("Common Stock"), subject to adjustment as set forth in the Warrant
Agreement referred to below, at the exercise price (the "Exercise Price") of
$15.40, subject to a reduction to $14.00 if all amounts payable under the Notes
have not been repaid in full on or before December 31, 1996 and subject to
further





<PAGE>   14
                                                                             A-2





adjustment as set forth in the Warrant Agreement.  As provided in the Warrant
Agreement and subject to the terms and conditions set forth therein, the
Warrants are exercisable by surrender of this Warrant Certificate at the office
of the Company at Global TeleSystems Group, Inc., 1751 Pinnacle Drive, North
Tower, 12th Floor, McLean, Virginia 22102, with the Exercise Subscription Form
on the reverse hereof duly executed and with payment in full (by check or wire
transfer in immediately available funds to an account designated by the
Company) of the Exercise Price for the number of shares of Common Stock as to
which the Warrant(s) represented by this Warrant Certificate are exercised, or
by surrender of this Warrant Certificate at the same address in lieu of cash
payment.  The Warrants will expire at 5 p.m. New York City time, and this
Warrant Certificate shall be void and all rights represented hereby shall
cease, on the Expiration Date.

              This Warrant Certificate is issued under and in accordance with
the Warrant Agreement, dated as of February 2, 1996, as it may be amended,
supplemented or otherwise modified from time to time (as so amended,
supplemented or modified, the "Warrant Agreement"), between the Company and
Emerging Markets Growth Fund, Inc. and subject to the terms and provisions
contained therein, to all of which terms and provisions the holder of this
Warrant Certificate consents by acceptance hereof.  The Warrant Agreement is
hereby incorporated herein by reference and made a part hereof.  Reference is
hereby made to the Warrant Agreement for a full description of the rights,
limitations of rights, obligations,





<PAGE>   15
                                                                             A-3





duties and immunities thereunder of the Company and the Holders of the
Warrants.  Capitalized defined terms used herein have the same meanings as in
the Warrant Agreement.  Copies of the Warrant Agreement are on file at the
office of the Company and may be obtained by writing to the Company at the
following address: Global TeleSystems Group, Inc., 1751 Pinnacle Drive, North
Tower, 12th Floor, McLean, Virginia 22102, attention of the General Counsel.

              The number of shares of Common Stock of the Company purchasable
upon the exercise of each Warrant and the Exercise Price are subject to
adjustment as set forth in the Warrant Agreement.

              All shares of Common Stock issuable by the Company upon the
exercise of Warrants and the payment of the Exercise Price therefor shall be
validly issued, fully paid and nonassessable.

              Subject to the terms of the Warrant Agreement, this Warrant
Certificate and all rights hereunder are transferable by the Holder hereof, in
whole or in part, upon surrender of this Warrant Certificate duly endorsed and
with the Form of Assignment contained herein completed and duly executed by
such Holder, together with certificates and opinions as are required by the
Warrant Agreement, and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer.  As set forth in the Warrant





<PAGE>   16
                                                                             A-4





Agreement, upon any partial transfer, the Company shall issue and deliver to
such Holder a new Warrant Certificate or Certificates with respect to any
portion not so transferred.  Dated:  February 2, 1996


                                   GLOBAL TELESYSTEMS GROUP, INC.


                                   By
                                     ------------------------------------
                                     Name:
                                     Title:



<PAGE>   17
                                                                             A-5





                     FORM OF REVERSE OF WARRANT CERTIFICATE
                           EXERCISE SUBSCRIPTION FORM

                 (To be executed only upon exercise of Warrant)

To:    Global TeleSystems Group, Inc.

              The undersigned irrevocably exercises ____________ of the
Warrants evidenced by this Warrant Certificate for the purchase of shares of
Common Stock, par value $0.0001 per share, of GLOBAL TELESYSTEMS GROUP, INC.
and herewith: 

____          (a)    makes payment of $___________ (such payment being made by
       bank check or wire transfer in immediately available funds to the
       account designated by Global TeleSystems Group, Inc. and constituting
       the Exercise Price (as defined in the Warrant Agreement) for the shares
       as to which the Warrants evidenced by this Warrant Certificate are
       exercised); or

____          (b)    surrenders this Warrant Certificate in lieu of cash
       payment in accordance with the terms of Section 3(c) of the Warrant
       Agreement, all on the terms and conditions specified in this Warrant
       Certificate and the Warrant Agreement herein referred to.

              The undersigned hereby irrevocably surrenders this Warrant
Certificate and all right, title and interest therein to Global TeleSystems
Group, Inc. and directs that the shares





<PAGE>   18
                                                                             A-6





of Common Stock deliverable upon the exercise of said Warrants be registered or
placed in the name and at the address specified below and delivered thereto.


Date:           ,     .
     -----------  ----                                                        1
                                           -----------------------------------  
                                           Signature of Owner

                                                                               
                                           ------------------------------------
                                           (Street Address)

                                                                               
                                           ------------------------------------
                                           (City) (State)       (Zip Code)



Securities and/or check to be issued to:

Please insert identifying number:

Name:

Street Address:

City, State and Zip Code:

Any unexercised Warrants evidenced by
the within Warrant Certificate to be issued to:

Please insert identifying number:

Name:






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

(1)   The signature must correspond with the name as written upon the face of 
      this Warrant Certificate in every particular, without alteration or 
      enlargement or any change whatsoever.

Emerging Markets Warrant Agreement
<PAGE>   19
                                                                             A-7






Street Address:

City, State and Zip Code:

<PAGE>   20
                                                                             A-8





                               FORM OF ASSIGNMENT

              FOR VALUE RECEIVED, the undersigned registered holder of this
Warrant Certificate hereby sells, assigns and transfers, effective as of
___________, unto the Assignee(s) named below (including the undersigned with
respect to any Warrants constituting a part of the Warrants evidenced by this
Warrant Certificate not being assigned hereby) all of the right of the
undersigned under this Warrant Certificate, with respect to the number of
Warrants set forth below:

<TABLE>
<CAPTION>
Names of                        Identifying              Number of
Assignees     Address       Number of Assignee(s)        Warrants
- ---------     -------       ---------------------        --------
<S>           <C>           <C>                          <C>
</TABLE>



and does hereby irrevocably constitute and appoint _______________ the
undersigned's attorney to make such transfer on the books of Global TeleSystems
Group, Inc. maintained for that purpose, with full power of substitution.  The
assignment is subject in all respects to the terms of the Warrant Agreement
referred to in the Warrant Certificate of which this Form of Assignment is a
part.

              The Assignee represents and warrants that it is not (a) an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended, (b) a
"holding company" or a "subsidiary" of a "holding company", or an "affiliate"
of a "holding company", as such






<PAGE>   21
                                                                             A-9





terms are defined in the Public Utility Holding Company Act of 1935, as amended
or (c) a "public utility", as such term is defined in the Federal Power Act, as
amended.


Dated:             ,      
        -----------  ----                                                    (1)
                                           -----------------------------------
                                           [Assignor]

- --------------------------
[Assignee]





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

(1)    The signature must correspond with the name as written upon the face of 
       this Warrant Certificate in every particular, without alteration or 
       enlargement or any change whatsoever.



<PAGE>   1
                                                                Exhibit 10.12


                    Registration Rights Letter Agreement




                                                                February 2, 1996


Capital International Emerging
 Markets Fund
5 Boulevard de la Foire
Luxembourg  L-2013

Gentlemen:

                We refer to the Senior Note Purchase Agreement (the "Note
Purchase Agreement"), the Warrant Agreement (as defined in the Note Purchase
Agreement) and the Initial Note (as defined in the Note Purchase Agreement),
each dated, or dated as of, the date hereof, and executed between the
undersigned (the "Company") and Capital International Emerging Markets Fund
(the "Initial Rights Holder" and, together with its permitted transferees
hereunder, the "Rights Holders" and, individually, a "Rights Holder"). 
Capitalized terms used but not defined herein shall have the meanings ascribed
to such terms in the Note Purchase Agreement, or, as indicated herein, the
Stock Purchase Agreement. 

                In connection with the purchase of the Initial Note, the
issuance of the Warrants and the transactions contemplated by the Note Purchase
Agreement and the Warrant Agreement, and in consideration for and as an
inducement to the purchase of the Initial Note by the Initial Rights Holders,
we hereby grant to each Rights Holder, with respect to all shares of the
Company's Common Stock that such Rights Holder may acquire (whether by exercise
of the Warrants or otherwise), on a most-favored-nation basis, all of the
registration rights and (with respect to all such shares of the Company's
Common Stock and, in addition, with respect to and upon the issuance of the
Warrants) all rights of first offer granted to any stockholder pursuant to the
Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of June 15,
1995 (a form of which is attached as Exhibit A), executed by the Company and
certain stockholders, which rights are no less favorable than the rights
provided to any of the Company's stockholders pursuant to any other stock
purchase agreement, any other agreement, or otherwise.  Such rights include,
without limitation, (A) unlimited rights to demand registration after the
Company qualifies as an S-3 Registrant (limited to one such registration in any
12 month period), as set forth in Section 6.2 of the Stock Purchase Agreement;
(B) unlimited piggyback registration rights, as set forth in Section 6.3
thereof; (C) the Company's payment of all expenses (with certain exceptions)



<PAGE>   2

incurred with respect to such registrations, as set forth in Section 6.4
thereof; and (D) the right of first offer to purchase a pro rata share of any
issue of "New Securities" as defined in the Stock Purchase Agreement, which
right shall not expire prior to an initial public offering of the Company, as
set forth in Section 8.11 of the Stock Purchase Agreement.

                In the event that the Company effects or causes to be effected
any amendments to the Stock Purchase Agreement that would diminish or restrict
in any way the registration rights or the rights of first offer granted to
stockholders under the Stock Purchase Agreement, such amendment shall in no way
diminish, restrict or otherwise apply to or affect the registration rights,
rights of first offer to purchase New Securities or any other rights granted to
each Rights Holder hereunder and under the Stock Purchase Agreement as now in
effect.  In the event the Company amends the Stock Purchase Agreement to
increase or enhance the registration rights or rights of first offer of any
stockholder, or if the Company otherwise agrees to enhance or increase such
rights, or if such rights are increased or enhanced for any other reason or in
any other manner, each Rights Holder will automatically and immediately benefit
from and receive such increased or enhanced rights with no further action
required by such Rights Holder, and this agreement shall be deemed to be
amended to incorporate such increased or enhanced rights.  The Company shall
notify each Rights Holder immediately in writing of any such amendments or
other agreements or occurrences.

                In addition to any other transfer rights granted to each Rights
Holder pursuant to the terms of the Stock Purchase Agreement, each Rights
Holder may assign or transfer its rights under this agreement to any
transferees to which the Warrants, the Notes or shares of Common Stock have
been transferred in accordance with the Note Purchase Agreement or the Warrant
Agreement.

                Notwithstanding any provision of the Stock Purchase Agreement
or any other document or agreement to the contrary, each Rights Holder shall,
immediately upon the issuance of the Warrants, be entitled to the full benefit
of and shall be entitled to exercise all rights of first offer granted hereby
or otherwise with respect to any issue of New Securities, whether or not any of
the Warrants have been exercised by any Rights Holder.

<PAGE>   3
                                      3
 

                This letter agreement shall be governed by and construed in
accordance with the laws of the State of New York, and may be executed in
counterparts by the parties hereto, each of which counterparts shall be an
original and all of which taken together shall constitute one and the same
letter agreement.


                                          Very truly yours,
                                          
                                          Global Telesystems Group, Inc.
                                          
                                          
                                          By: /s/ N. S. Molberger
                                             ------------------------------
                                             Name: N. S. Molberger
                                             


Accepted and Agreed to by:

Capital International Emerging
 Markets Fund

By: /s/ David Wallace
   ---------------------------
   Name: David Wallace
         Director

and /s/ David Beevers
    --------------------------
    David Beevers
    Director



      
      
      
      
      
      
      
      

<PAGE>   1
                                                                Exhibit 10.13




                               WARRANT AGREEMENT


           WARRANT AGREEMENT, dated as of February 2, 1996 (the "Agreement"),
between Global TeleSystems Group, Inc., a Delaware corporation (the "Company"),
and Capital International Emerging Markets Fund, a Luxembourg SICAV (the
"Initial Holder" and together with its permitted assignees, the "Holders" and
individually, a "Holder").

           WHEREAS the Company proposes to issue and deliver its warrant
certificates ("Warrant Certificates") evidencing an aggregate of 277,778
warrants (the "Warrants"), each to purchase one share of common stock, par
value $0.0001 per share, of the Company ("Common Stock") in connection with the
Senior Promissory Note dated the date hereof (the "Initial Note") in the
aggregate principal amount of $3,750,000 dollars, issued by the Company to the
Initial Holder, pursuant to, and subject to the terms and conditions of, that
certain Senior Note Purchase Agreement, dated as of the date hereof (as it may
be amended, supplemented or otherwise modified from time to time, the "Note
Purchase Agreement"), between the Company and the Initial Holder.

           NOW THEREFORE, in consideration of the foregoing and for the purpose
of defining the terms and provisions of the Warrants and the respective rights
and obligations thereunder of the Company and each Holder, the Company and the
Initial Holder agree as follows:

           1.    Certain Definitions.  The following terms, as used in this
Agreement, have the following meanings:

                 (a)   "Affiliate" has the meaning set forth in the Note
Purchase Agreement.

                 (b)   "Business Day" means any day other than a Saturday,
Sunday or day on which banks in New York City are closed for general business.

                 (c)   "Common Stock" has the meaning set forth in the
preamble.

                 (d)   "Exercise Period"  means the period beginning on the
date of issuance of the Warrants and ending at 5 p.m. New York City time on the
sixth anniversary of such date.

                 (e)   "Exercise Price" means $15.40 per share subject to a
reduction to $14.00 per share if all amounts payable under the Notes have not
been repaid in full on or before December 31, 1996 and subject to further
adjustment as provided in Section 4.




<PAGE>   2
                 (f)   "Expiration Date" for the Warrants means the last day of
the Exercise Period.

                 (g)   "Holder" has the meaning set forth in the preamble.

                 (h)   "Notes" has the meaning set forth in the Note Purchase
Agreement.

                 (i)   "Note Purchase Agreement" has the meaning set forth in
the Recital.

                 (j)   "Person" means any individual, corporation, limited
liability company, partnership, limited liability company, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.

                 (k)   "Register" has the meaning set forth in Section 7(b) of
this Agreement.

                 (l)   "Transfer Restriction Termination Date" has the meaning
set forth in Section 7(a) of this Agreement.

                 (m)   "Underlying Common Stock" means the shares of Common
Stock purchasable by a Holder upon the exercise of its Warrants.

                 (n)   "Warrants" has the meaning set forth in the preamble.

                 (o)   "Warrant Certificates" means the certificates evidencing
the Warrants.

           2.    Issue of Warrants.  The Warrant Certificates shall be in
registered form only and substantially in the form attached hereto as Exhibit A
(including legends and endorsements as set forth in Exhibit A and as are not
inconsistent with the provisions of this Agreement, the Notes and the Note
Purchase Agreement) and shall be dated the date on which signed by an
authorized signatory of the Company.  Warrant Certificates evidencing the
Warrants may be executed by any authorized officer of the Company.  Warrant
Certificates evidencing 277,778 Warrants shall be delivered and registered in
the name of the Initial Holder upon execution of this Agreement.





<PAGE>   3
                                       3

           3.    Exercise Price, Exercise of Warrants.

                 (a)   Exercise Price.  Each Warrant shall entitle the
respective Holder of such Warrant, subject to the provisions of this Agreement,
to purchase one share of Common Stock at a purchase price per share equal to
the Exercise Price.

                 (b)   Exercise of Warrants Generally.

                       (1)  Exercise During Exercise Period.  All Warrants not
exercised during the Exercise Period shall expire at 5 p.m. New York City time
on the Expiration Date.

                       (2)  Liquidation Event.  If, at any time prior to the
Expiration Date, the Company is to be liquidated, the Company shall give
written notice thereof to each Holder at the earliest practicable time;
provided, however, that, if the Company is to be liquidated in accordance with
the provisions of its Certificate of Incorporation, such notice shall be given
no less than 30 days prior to the date on which such liquidation is expected to
become effective.

                       (3)  Method of Exercise; Payment of Exercise Price.  In
order to exercise any or all of the Warrants represented by a Warrant
Certificate, the Holder thereof must surrender the Warrant Certificate to the
Company for exercise, with the reverse side of the Warrant Certificate duly
executed, together with any required payment of the Exercise Price for each
share of Underlying Common Stock to which such Holder is entitled, each such
payment of the Exercise Price to be made by check or wire transfer in
immediately available funds to an account designated by the Company; provided
that such Holder, in its sole discretion, may deduct or offset from such
payment any amounts outstanding under the Notes (to the extent such amounts are
then due and payable (after giving effect to applicable grace periods) to such
Holder).  If a Holder elects to deduct or offset from such payments all or a
portion of the principal amount outstanding under the Note held by such Holder,
such Holder shall surrender its Note to the Company and if, following such
deduction or offset, any principal amount remains outstanding to such Holder,
the Company shall simultaneously issue to such Holder a note payable to the
order of such Holder in a principal amount equal to such remaining outstanding
amount with terms and provisions otherwise identical to the terms and
provisions of such Holder's original Note.  If a Holder elects to exercise only
a portion of the Warrants represented by the Warrant Certificate or
Certificates registered in the Register in its name, then the remaining portion
of such Warrants shall be registered in the Register in such name or names
(subject to the limitation set forth in Section 7) as may be directed in
writing by such Holder and shall be returned to such Holder in the form of a
new Warrant Certificate for the number of Warrants that were not surrendered
and with terms and provisions otherwise identical to the terms and provisions
of such Holder's original Warrant Certificate.  Upon surrender of a Warrant
Certificate and





<PAGE>   4
                                       4

the payment of the Exercise Price in conformity with the foregoing provisions,
the Company shall promptly, but in no event later than five Business Days after
the payment of the Exercise Price of the Warrants by such Holder, issue to the
Holder of such Warrant Certificate share certificates representing the
Underlying Common Stock to which such Holder is entitled, registered in the
name of such Holder or the name or names of such Affiliates of such Holder as
may be directed in writing by the latter, and shall deliver such share
certificates to the Person or Persons entitled to receive the same.  Such
shares shall be deemed issued and outstanding on the date the Warrant is
exercised and the Exercise Price is paid to the Company, and the share
certificates shall be dated as of such date and the Holder shall be entitled to
exercise all of the rights of a shareholder as of such date.

                 (c)   Exercise by Surrender of Warrant; Cashless Exercise.  In
addition to the method of exercise set forth in Section 3(b)(3) above and in
lieu of any cash payment required thereunder, each Holder, at its sole
discretion, shall have the right at any time and from time to time to exercise
the Warrants in full or in part (provided that any exercise in part shall be in
a minimum amount of 50,000 Warrants or such lesser number of Warrants as may
then be held by such Holder) by surrendering its Warrant Certificate in the
manner specified in Section 3(b)(3) in exchange for the number of shares of
Common Stock equal to the product of (x) the number of shares as to which the
Warrants are being exercised multiplied by (y) a fraction, the numerator of
which is the difference between the fair market value of a share at exercise
(as defined hereafter) of the Common Stock less the Exercise Price and the
denominator of which is such fair market value.  As used herein, "fair market
value" shall mean (A) (x) the average of the closing prices of the Common Stock
sales on all domestic exchanges on which the Common Stock may at the time be
listed, or, (y) if, there shall have been no sales on any such exchange on any
day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, (B) if on any day the Common Stock shall
not be so listed, (x) the average of the representative bid and asked prices
quoted in the NASDAQ System as of 3:30 p.m. New York City  time, or (y) if on
any day the Common Stock shall not be quoted in the NASDAQ System, the average
of the high and low bid and asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporation or any similar successor organization, in each case under (A) and
(B) above averaged over the period of 15 consecutive Business Days immediately
prior to the date of exercise; provided that if the Common Stock is listed on
any domestic exchange the term "Business Days" as used in this sentence shall
mean business days on which such exchange is open for trading.  If at any time
the Common Stock is not listed on any domestic exchange or quoted in the NASDAQ
System or the domestic over-the-counter market, the fair market value shall be
the fair market value as of the date of exercise, determined by a reputable
investment banking firm selected by the Holder exercising its Warrants pursuant
to this Section 3(c) and acceptable to the Company.





<PAGE>   5
                                       5

           4.    Adjustments.  The Exercise Price and the number of shares of
Common Stock issuable upon exercise of each Warrant shall be subject to
adjustment from time to time as follows:

                 (a)   In the event, at any time and from time to time, the
Company shall issue additional shares of Common Stock (or securities
convertible into or exchangeable for Common Stock) in a stock dividend, stock
distribution or subdivision paid with respect to Common Stock, or declare any
dividend or other distribution payable with additional shares of Common Stock
(or securities convertible into or exchangeable for Common Stock) with respect
to Common Stock or effect a split or subdivision of the outstanding shares of
Common Stock, the Exercise Price shall, concurrently with the effectiveness of
such stock dividend, stock distribution or subdivision, or the earlier
declaration thereof, be proportionately decreased, and the number of Underlying
Common Stock shall be proportionately adjusted so that, to avoid dilution of
each Holder's position, each Holder shall thereafter be entitled to receive at
such adjusted price an additional number of shares of the Company's Common
Stock which such Holder would have owned or would have been entitled to receive
upon or by reason of any of the events described above, had the Warrants been
exercised immediately prior to the happening of such event.  If a dividend is
declared and such dividend is not paid, the Exercise Price shall again be
adjusted to be the Exercise Price in effect immediately prior to such record
date.

                 (b)   If, at any time, the Company issues any additional
shares of Common Stock (or other securities convertible into or exchangeable
for Common Stock) for a price lower than $15.40 per share, the Exercise Price
with respect to the Warrants shall be automatically and immediately reduced to
such lower price, without any action or request on the part of either Holder.
The Company shall notify each Holder of such reduced Exercise Price in writing
prior to any such issuance of additional shares of Common Stock (or other
securities convertible into or exchangeable for Common Stock); provided that,
if the Company should enter into any agreement in connection with such issuance
of additional shares of Common Stock (or other securities convertible into or
exchangeable for Common Stock), the Company shall immediately notify each
Holder in writing thereof and, upon such issuance of shares of Common Stock (or
other securities convertible into or exchangeable for Common Stock), the
Exercise Price shall be automatically reduced to such reduced Exercise Price,
effective retroactively to the effective date of such agreement, whether or not
the Warrants have been exercised during the time period between the effective
date of such agreement and the date of such issuance (and if the Warrants have
been exercised during such period, the Company shall promptly pay to such
Holder the difference between the payment made by such Holder on such exercise
and the payment that would have been required if the Warrants were exercised at
such reduced Exercise Price).  Notwithstanding the foregoing, the Exercise
Price shall not be reduced as contemplated by this Section 4(b) in connection
with the issuance by the Company of compensatory stock options to the extent
that (i) the exercise price of such compensatory stock options is not more than
ten percent





<PAGE>   6
                                       6

(10%) lower than $15.40 and (ii) such compensatory stock options, in the
aggregate, shall represent a right to purchase not more than two percent (2%)
of the Common Stock in any year (provided that in fiscal year 1995/1996 such
compensatory stock options issued to the Company's employees shall represent a
right to purchase in total not more than 850,000 shares of the Common Stock.

                 (c)   In the event the outstanding shares of Common Stock
shall be combined or consolidated, by reclassification or otherwise, into a
lesser number of shares of Common Stock, the Exercise Price shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased and the number of Underlying Common Stock shall be proportionately
adjusted so that each Holder of any Warrant exercised after such date shall be
entitled to receive, upon payment of the same aggregate amount as would have
been payable before such date, the aggregate number of shares of Common Stock
which each Holder would have owned upon such exercise and been entitled to
receive, if such Warrant had been exercised immediately prior to the happening
of such combination or consolidation.

                 (d)   In the event of any consolidation or merger of the
Company with or into another corporation or the conveyance of all or
substantially all of the assets of the Company to another corporation or entity
(other than any merger or sale which does not result in any reclassification or
change in the relative right or preference of the outstanding shares), the
Warrants shall thereafter be exercisable for the number of shares of capital
stock or other securities or property that was delivered at the time of such
consolidation, merger or conveyance to a holder of shares of Common Stock equal
in number to the shares of Underlying Common Stock that would have been
deliverable to such Holder if such Holder had exercised the Warrants
immediately prior to such consolidation, merger or conveyance; and, in any such
case, appropriate adjustment shall be made in the application of the provisions
herein set forth with respect to the rights and interests of each Holder
thereafter, to the end that the provisions set forth herein (including
provisions with respect to adjustments in the Exercise Price) shall thereafter
be applicable, as nearly as may be practicable, in relation to any shares of
stock or other property thereafter deliverable upon the exercise of Warrants.
At the request of either Holder, the resulting or surviving entity in any such
consolidation or merger, if other than the Company, shall acknowledge in
writing such Holder's rights hereunder.

           5.    Loss or Mutilation.  Upon receipt by the Company of a notice
of the ownership of and the loss, theft, destruction or mutilation of any
Warrant Certificate and of indemnity satisfactory to the Company, and (in the
case of mutilation) upon surrender and cancellation thereof, then, in the
absence of notice to the Company that the Warrants represented thereby have
been acquired by a bona fide purchaser, the Company shall deliver to the Holder
of such Warrant Certificate, in exchange for or in lieu of the lost, stolen,
destroyed





<PAGE>   7
                                       7

or mutilated Warrant Certificate, a new Warrant Certificate of the same tenor
and for a like aggregate number of Warrants.

           6.    Reservation and Authorization of Common Stock.  The Company
shall, at all times until the Warrants have been exercised or have expired,
reserve and keep available for issue upon the exercise of Warrants such number
of its authorized but unissued shares of Common Stock as is sufficient for the
purpose of permitting the exercise in full of all outstanding Warrants.

           7.    Limitations on Transfer; Warrant Transfer Books.

                 (a)   Subject to the following provisions of this Section 7,
the Warrants may be sold, transferred, pledged, assigned, hypothecated or
otherwise disposed of (collectively, "transferred") to Affiliates of the Holder
of the Warrants at any time; provided that if at any time prior to the Transfer
Restriction Termination Date, any such transferee ceases to be an Affiliate of
such Holder, it shall promptly transfer the Warrants to such Holder or an
Affiliate of such Holder.  In addition to such transfers, but subject to the
following provisions of this Section 7, the Warrants may be transferred by any
Holder thereof to any Person, whether or not such Person is an Affiliate of
such Holder after the earlier of (A) February 2, 1999, or (B) the date on which
the Underlying Common Stock has been registered under an effective registration
statement with the Securities and Exchange Commission ("SEC") (such earlier
date being the "Transfer Restriction Termination Date").  Transfers of the
Warrants under this Section 7 shall be in a minimum amount of 50,000 Warrants
or such lesser number of Warrants as may then be held by the Holder thereof.

                 (b)   The Company shall cause to be kept at the principal
executive office of the Company a register (the "Register") in which the
Company shall provide for the registration of Warrant Certificates and
transfers or exchanges of Warrants as herein provided.

                 (c)   In order to effect any transfer of any Warrants under
this Section 7, the Warrant Certificate evidencing such Warrants shall be
surrendered at the principal executive office of the Company for registration
of transfer in the Register.  Every Warrant Certificate surrendered for
registration of transfer shall be duly endorsed and the Form of Assignment
contained therein completed and duly executed by the Holder thereof.  In
addition, upon the surrender of a Warrant Certificate for registration of
transfer prior to the Transfer Restriction Termination Date, there shall be
delivered to the Company a certificate of an officer of the surrendering Holder
certifying (i) that the transferee is an Affiliate of such Holder, (ii) that
the transfer is not in violation of this Agreement and (iii) that the transfer
is pursuant to an exemption from registration under the Securities Act of 1933.
Prior to the registration of the Underlying Common Stock pursuant to an
effective registration statement filed with the SEC, the Company may also
require, upon the surrender

<PAGE>   8
                                       8

of a Warrant Certificate for registration of transfer to any Person other than
an Affiliate of the Holder thereof, delivery of an opinion of counsel,
reasonably satisfactory to the Company, stating that an exemption from
registration under the Securities Act of 1933, as amended, is available in
connection with such transfer and that the proposed transferee is not an (i) an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended, (ii) a
"holding company" or a "subsidiary" of a "holding company," or an "affiliate"
of a "holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended, or (iii) a "public utility," as such term is
defined in the Federal Power Act, as amended.

                 (d)   Upon the Company's receipt of a duly endorsed Warrant
Certificate (with the Form of Assignment contained therein duly executed),
together with any certificate or opinion required to be delivered therewith to
the Company pursuant to Section 7(c), the Company shall (i) accept such Warrant
Certificate and (ii) record the information contained therein in the Register.
Within five Business Days after such receipt, the Company, at its own expense,
shall execute and deliver to the transferee thereof, in exchange for the
surrendered Warrant Certificate, a new Warrant Certificate registered in the
name of such transferee and evidencing the number of Warrants transferred to
such transferee, and if the transferring Holder has retained any Warrants, a
new Warrant Certificate registered in the name of such transferring Holder and
evidencing the number of Warrants retained by it hereunder.  Such new Warrant
Certificate shall be signed by an authorized officer of the Company, shall be
dated and effective as of the effective date specified in the Form of
Assignment for such transfer and shall otherwise be in substantially the form
of Exhibit A hereto.  Upon surrender for registration of transfer of any
Warrant Certificate in accordance with Section 7(c) and acceptance and
recording thereof by the Company in the Register in accordance with this
Section 7(d), (x) the transferee thereunder shall be a party hereto, and shall
have all the rights and obligations of a Holder hereunder and shall be entitled
to the benefits of a Holder under this Agreement and (y) the Holder transferor
thereunder shall, to the extent that rights and obligations hereunder have been
assigned by it, relinquish the rights and be released from the obligations
under this Agreement (and, in the case of a transfer of all or the remaining
portion of a transferring Holder's rights and obligations under this Agreement,
such Holder shall cease to be a party hereto).

                 (e)   At the option of any Holder, Warrant Certificates may be
exchanged by surrendering such Warrant Certificate, duly endorsed by the Holder
thereof, at the principal executive office of the Company.  Whenever any
Warrant Certificate is so surrendered for exchange by a Holder, the Company, at
its own expense, shall execute and deliver to such Holder a new Warrant
Certificate registered in the name of such Holder and evidencing the same
number of Warrants as the surrendered Warrant Certificate.  Each new Warrant
Certificate issued under this Section 7(e) upon surrender of a Warrant
Certificate for exchange shall be the valid obligation of the Company,
evidencing the same obligations, and


<PAGE>   9
                                       9

entitled to the same benefits under this Agreement, as the Warrant Certificate
surrendered for exchange.

                 (f)   No service charge shall be made for any registration of
transfer of, or exchange of, any Warrant Certificate; provided, however, that
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection such registration of
transfer or exchange.

           8.    No Voting or Dividend Rights.  Prior to the exercise of the
Warrants, the Holder shall not be entitled to any rights of a shareholder of
the Company, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive right, but the
Holder shall receive all notices sent to shareholders of the Company, including
any notice of meetings of shareholders, and shall have the right to attend or
observe such meetings and the Holder shall be entitled to the full benefit of
and to exercise all rights of first offer as set forth in the Registration
Rights Agreement (as defined in the Note Purchase Agreement).

           9.    Notices.  Any notice, demand or delivery authorized by this
Agreement shall be in writing and shall be sufficiently given or made upon
receipt thereof, if made by personal delivery or facsimile transmission (with
confirmed receipt thereof) followed by a hard copy, or four Business Days after
mailed, if sent by first-class mail, postage prepaid, or on the next Business
Day, if sent by overnight courier, addressed to the Holder or the Company, as
the case may be, at their respective addresses below, or such other address as
shall have been furnished in accordance with this Section 9 to the party giving
or making such notice, demand or delivery:

                 (a)   If to the Company, to it at:

                       Global TeleSystems Group, Inc.
                       1751 Pinnacle Drive
                       North Tower 12th Floor
                       McLean, Virginia 22102
                       Attention: General Counsel


                 (b)   If to the Initial Holder, at:

                       Capital International Emerging
                         Markets Fund
                       5 Boulevard de la Foire
                       Luxembourg  L-2013; and



<PAGE>   10
                                       10


                 (c)   If to any other Holder, at the address
                       specified in the Form of Assignment
                       contained in the Warrant Certificate
                       surrendered for registration of transfer in
                       connection with the transfer of Warrants
                       pursuant to which it became a Holder
                       hereunder;

                 provided, that all such notices and communications to the
                 Initial Holder and any other Holder shall be deemed to have
                 been delivered to such  Holder if sent to Capital Group
                 Companies, Inc. in accordance with the provisions of this
                 Section 9, at:

                       Capital Group Companies, Inc.
                       333 South Hope Street
                       Los Angeles, CA  90071

           10.   Applicable Law.  This Agreement and each Warrant Certificate
issued hereunder shall be governed by, the laws of the State of New York
excluding (to the greatest extent a New York court would permit) any rule of
law that would cause application of the laws of any jurisdiction other than the
State of New York.  The Company and the Holders hereby submit to the
nonexclusive jurisdiction of the United States District Court for the Southern
District of New York and of any New York State court sitting in New York City
for purposes of all legal proceedings arising out of or relating to this
Agreement and the transactions contemplated hereby. The Company irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.

           11.   Successors and Assigns.  The provisions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties.  Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.

           12.   Counterparts.  This Agreement may be executed by one or more
of the parties to this Agreement in any number of separate counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.


<PAGE>   11
                                       11

           13.   Captions and Headings.  The captions and headings used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

           14.   Amendments and Waivers.  Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and each Holder.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon the Holders, each future holder of the Warrants and the Company.

           15.   Severability.  If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provisions shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.


<PAGE>   12
                                       12


           IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.



                            GLOBAL TELESYSTEMS GROUP, INC.


                            By /s/ N. S. Molberger
                               ----------------------------
                               Name: N. S. Molberger


                            CAPITAL INTERNATIONAL EMERGING
                              MARKETS FUND



                            By /s/ David Wallace
                               ----------------------------
                               Name: David Wallace
                                     Director


                            and /s/ David Beevers
                                ---------------------------
                                    David Beevers
                                    Director



<PAGE>   13
                                                                       EXHIBIT A

                      FORM OF FACE OF WARRANT CERTIFICATE


 THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
                      UPON EXERCISE THEREOF HAVE NOT BEEN
 REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
                  NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT
   TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT
                 APPLICABLE PURSUANT TO RULE 144 UNDER THE ACT
 (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES),
                    OR (iii) PURSUANT TO AN EXEMPTION FROM
                          REGISTRATION UNDER THE ACT.

                   THIS WARRANT CERTIFICATE AND THE WARRANTS
                    REPRESENTED HEREBY ARE TRANSFERABLE ONLY
                 IN ACCORDANCE WITH THE PROVISIONS SET FORTH IN
                    THE WARRANT AGREEMENT REFERRED TO BELOW
                        (INCLUDING, WITHOUT LIMITATION,
                      REGISTRATION OF THE TRANSFER TO THE
                     TRANSFEREE IN THE COMPANY'S REGISTER)

                       WARRANTS TO PURCHASE COMMON STOCK
                       OF GLOBAL TELESYSTEMS GROUP, INC.



No. __                                                      ___________ Warrants

           This certifies that _________________________ is the owner of the
number of Warrants set forth above, each of which represents the right to
purchase from GLOBAL TELESYSTEMS GROUP, INC., a Delaware corporation (the
"Company"), one share of common stock, par value $0.0001 per share, of the
Company ("Common Stock"), subject to adjustment as set forth in the Warrant
Agreement referred to below, at the exercise price (the "Exercise Price") of
$15.40, subject to a reduction to $14.00 if all amounts payable under the Notes
have not been repaid in full on or before December 31, 1996 and subject to
further


<PAGE>   14
                                                                             A-2





adjustment as set forth in the Warrant Agreement.  As provided in the Warrant
Agreement and subject to the terms and conditions set forth therein, the
Warrants are exercisable by surrender of this Warrant Certificate at the office
of the Company at Global TeleSystems Group, Inc., 1751 Pinnacle Drive, North
Tower, 12th Floor, McLean, Virginia 22102, with the Exercise Subscription Form
on the reverse hereof duly executed and with payment in full (by check or wire
transfer in immediately available funds to an account designated by the
Company) of the Exercise Price for the number of shares of Common Stock as to
which the Warrant(s) represented by this Warrant Certificate are exercised, or
by surrender of this Warrant Certificate at the same address in lieu of cash
payment.  The Warrants will expire at 5 p.m. New York City time, and this
Warrant Certificate shall be void and all rights represented hereby shall
cease, on the Expiration Date.

           This Warrant Certificate is issued under and in accordance with the
Warrant Agreement, dated as of February 2, 1996, as it may be amended,
supplemented or otherwise modified from time to time (as so amended,
supplemented or modified, the "Warrant Agreement"), between the Company and
Capital International Emerging Markets Fund and subject to the terms and
provisions contained therein, to all of which terms and provisions the holder
of this Warrant Certificate consents by acceptance hereof.  The Warrant
Agreement is hereby incorporated herein by reference and made a part hereof.
Reference is hereby made to the Warrant Agreement for a full description of the
rights, limitations of rights, obligations,





<PAGE>   15
                                                                            A-3





duties and immunities thereunder of the Company and the Holders of the
Warrants.  Capitalized defined terms used herein have the same meanings as in
the Warrant Agreement.  Copies of the Warrant Agreement are on file at the
office of the Company and may be obtained by writing to the Company at the
following address: Global TeleSystems Group, Inc., 1751 Pinnacle Drive, North
Tower, 12th Floor, McLean, Virginia 22102, attention of the General Counsel.

           The number of shares of Common Stock of the Company purchasable upon
the exercise of each Warrant and the Exercise Price are subject to adjustment
as set forth in the Warrant Agreement.

           All shares of Common Stock issuable by the Company upon the exercise
of Warrants and the payment of the Exercise Price therefor shall be validly
issued, fully paid and nonassessable.

           Subject to the terms of the Warrant Agreement, this Warrant
Certificate and all rights hereunder are transferable by the Holder hereof, in
whole or in part, upon surrender of this Warrant Certificate duly endorsed and
with the Form of Assignment contained herein completed and duly executed by
such Holder, together with certificates and opinions as are required by the
Warrant Agreement, and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer.  As set forth in the Warrant





<PAGE>   16
                                                                             A-4





Agreement, upon any partial transfer, the Company shall issue and deliver to
such Holder a new Warrant Certificate or Certificates with respect to any
portion not so transferred.  Dated:  February 2, 1996

                            GLOBAL TELESYSTEMS GROUP, INC.



                            By___________________________
                              Name:
                              Title:





<PAGE>   17
                                                                             A-5





                     FORM OF REVERSE OF WARRANT CERTIFICATE
                           EXERCISE SUBSCRIPTION FORM

                 (To be executed only upon exercise of Warrant)

To:   Global TeleSystems Group, Inc.

           The undersigned irrevocably exercises ____________ of the Warrants
evidenced by this Warrant Certificate for the purchase of shares of Common
Stock, par value $0.0001 per share, of GLOBAL TELESYSTEMS GROUP, INC. and
herewith:

____       (a)   makes payment of $___________ (such payment being made by bank
      check or wire transfer in immediately available funds to the account
      designated by Global TeleSystems Group, Inc. and constituting the
      Exercise Price (as defined in the Warrant Agreement) for the shares as to
      which the Warrants evidenced by this Warrant Certificate are exercised);
      or

____       (b)   surrenders this Warrant Certificate in lieu of cash payment in
      accordance with the terms of Section 3(c) of the Warrant Agreement, all
      on the terms and conditions specified in this Warrant Certificate and the
      Warrant Agreement herein referred to.

           The undersigned hereby irrevocably surrenders this Warrant
Certificate and all right, title and interest therein to Global TeleSystems
Group, Inc. and directs that the shares






<PAGE>   18
                                                                             A-6





of Common Stock deliverable upon the exercise of said Warrants be registered or
placed in the name and at the address specified below and delivered thereto.
Date:___________, ____.

                                                                               1
                                          -------------------------------------
                                          Signature of Owner

                                          -------------------------------------
                                          (Street Address)

                                          -------------------------------------
                                          (City) (State)   (Zip Code)


Securities and/or check to be issued to:

Please insert identifying number:

Name:

Street Address:

City, State and Zip Code:

Any unexercised Warrants evidenced by
the within Warrant Certificate to be issued to:

Please insert identifying number:

Name:

Street Address:

City, State and Zip Code:


____________________

     1  The signature must correspond with the name as written upon the
        face of this Warrant Certificate in every particular, without
        alteration or enlargement or any change whatsoever.








<PAGE>   19
                                                                             A-7
        




                               FORM OF ASSIGNMENT

           FOR VALUE RECEIVED, the undersigned registered holder of this
Warrant Certificate hereby sells, assigns and transfers, effective as of
___________, unto the Assignee(s) named below (including the undersigned with
respect to any Warrants constituting a part of the Warrants evidenced by this
Warrant Certificate not being assigned hereby) all of the right of the
undersigned under this Warrant Certificate, with respect to the number of
Warrants set forth below:

<TABLE>
<CAPTION>
Names of                                 Identifying               Number of
Assignees          Address          Number of Assignee(s)          Warrants
- ---------          -------          ---------------------          --------
<S>                <C>              <C>                            <C>
                                                            
</TABLE>


and does hereby irrevocably constitute and appoint _______________ the
undersigned's attorney to make such transfer on the books of Global TeleSystems
Group, Inc. maintained for that purpose, with full power of substitution.  The
assignment is subject in all respects to the terms of the Warrant Agreement
referred to in the Warrant Certificate of which this Form of Assignment is a
part.

           The Assignee represents and warrants that it is not (a) an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended, (b) a
"holding company" or a "subsidiary" of a "holding company", or an "affiliate"
of a "holding company", as such





<PAGE>   20
                                                                            
                                                                             A-8





terms are defined in the Public Utility Holding Company Act of 1935, as amended
or (c) a "public utility", as such term is defined in the Federal Power Act, as
amended.

Dated:  ___________, ____
                                                                              
                                                                               1
                                              ---------------------------------
                                              [Assignor]

- ----------------------------------
[Assignee]





____________________

    1    The signature must correspond with the name as written upon the
         face of this Warrant Certificate in every particular, without
         alteration or enlargement or any change whatsoever.






<PAGE>   1
                                                                   Exhibit 10.14


                  GLOBAL TELESYSTEMS GROUP, INC. NON-EMPLOYEE
                         DIRECTORS' STOCK OPTION PLAN


1.       PURPOSE OF THE PLAN.

         The purpose of this Plan is to permit Eligible Directors of the
Company to share in the growth of the value of the Company through the grant
and exercise of Options.

2.       DEFINITIONS.

         For purposes of the Plan, the following terms shall be defined as set
forth below:

         "Board" means the Board of Directors of the Company.

         "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.

         "Common Stock" means the Common Stock of the Company, par value $.0001
per share.

         "Company" means Global Telesystems Group, Inc., a Delaware
corporation, including any wholly owned subsidiary or affiliate, or any
successor organization.

         "Disability" means permanent and total disability within the meaning of
Section 22(e)(3) of the Code.

         "Eligible Director" means a person who is a non-employee member of the
Board.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Fair Market Value" means the fair market value of the Common Stock as
determined objectively by the Board, in good faith, using such criteria as it
deems relevant; provided, however, that where there is a public market for the
Common Stock, the fair market value per Share shall be the average of the last
reported bid and asked prices of the Common Stock on the date of grant, as
reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
("NASDAQ") System) or, in the event the Common Stock is listed on a national
securities exchange, within the meaning of Section 6 of the Exchange Act, the
fair market




<PAGE>   2
                                       2



value per Share shall be the closing price on such exchange on the date of
grant of the Option, as reported in The Wall Street Journal.

         "Incentive Stock Option" means any Option intended to be designated as
an "incentive stock option" within the meaning of Section 422 of the Code.

         "Nonqualified Stock Option" means any Option that is not an Incentive
Stock Option.

         "Option" means any option to purchase shares of the Common Stock of
the Company granted pursuant to this Plan.

         "Option Agreement" means a written agreement between the Company and
the Optionee regarding the grant and exercise of Options to purchase shares of
Common Stock and the terms and conditions thereof.

         "Optionee" means an Eligible Director who receives an Option under the
Plan.

         "Plan" means the SFMT, Inc. Non-Employee Directors' Stock Option Plan,
as hereinafter amended from time to time.

         "Rules" means the regulations promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.

         Except where otherwise indicated by the context, any masculine
terminology used herein shall also include the feminine and vice versa, and the
definition of any term herein in the singular shall also include the plural and
vice versa.

3.       STOCK SUBJECT TO THE PLAN.

         (a) Aggregate Number of Shares. The aggregate number of shares of
Common Stock that may be issued or transferred under the Plan is 250,000,
subject to adjustment pursuant to Section 3(b) below. Such shares may include
authorized but unissued shares of Common Stock or reacquired shares of Common
Stock. In the event the number of shares of Common Stock issued under the Plan
and the number of shares of Common Stock subject to outstanding awards (taking
into account the share counting requirements established under the Rules)
equals the maximum number of shares of Common Stock authorized under the Plan,
no further awards shall be made unless the Plan is amended (in accordance with
the Rules, if necessary) or additional shares of Common Stock become available
for further awards under the Plan. If and to the extent that Options granted
under the Plan terminate, expire or are canceled without having been exercised,
such shares shall again be available for subsequent awards under the Plan.




<PAGE>   3
                                       3



         (b) Adjustments Upon Changes in Capitalization. If any change is made
to the Common Stock (whether by reason of merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, combination of
shares or exchange of shares or any other change in capital structure made
without receipt of consideration), then unless such event or change results in
the termination of all outstanding awards under the Plan, the Board shall
preserve the value of the outstanding awards by adjusting the maximum number
and class of shares available under the Plan to reflect the effect on such
event or change in the Company's capital structure, and by making appropriate
adjustments to the number and class of shares subject to an outstanding award
or the Option price of each outstanding Option, except that any fractional
shares resulting from such adjustments shall be eliminated by rounding any
portion of a share equal to .500 or greater up, and any portion of a share
equal to less than .500 down, in each case to the nearest whole number.

4.       ADMINISTRATION OF THE PLAN.

         The Plan shall be administered by the Board. Subject to the provisions
of the Plan, the Board shall be authorized to:

         (a) adopt, revise and repeal such administrative rules, guidelines and
practices governing this Plan as it shall from time to time deem advisable;

         (b) interpret the terms and provisions of the Plan and any Option
issued under the Plan (and any agreements relating thereto), and otherwise
settle all claims and disputes arising under the Plan;

         (c) delegate responsibility and authority for the operation and
administration of the Plan, appoint employees and officers of the Company to
act on its behalf, and employ persons to assist in the fulfilling of its
responsibilities under the Plan; and

         (d) otherwise supervise the administration of the Plan; provided,
however, that the Board shall have no discretion with respect to the selection
of Eligible Directors to receive Options hereunder, the number of shares of
Common Stock covered by such Option or the price or timing of any Options
granted hereunder; provided, further, that any action by the Board relating to
the Plan will be taken only if approved by the affirmative vote of a majority
of the directors who are not then eligible to participate under the Plan.

5.       OPTION GRANTS.

         (a) Number of Options Granted. The following number of Options are
hereby granted to each Eligible Director under the Plan:

          (i) As of the effective date of the Plan, an Option to purchase
     12,000 shares of Common Stock is granted to each person who on that date
     is an incumbent Eligible Director.




<PAGE>   4
                                       4



          (ii) With respect to each person who first becomes an Eligible
     Director after the effective date of the Plan, an Option to purchase
     12,000 shares of Common Stock is granted as of the date such person first
     becomes an Eligible Director.

          (iii) As of the date of the third annual meeting of the Company's
     shareholders following the grant of an Option to an Eligible Director
     pursuant to section (i) or (ii) above, and provided that such Eligible
     Director remains an incumbent on such date, an Option to purchase 9,000
     shares of Common Stock is granted to such Eligible Director.

         (b) Nonqualified Options. All Options granted hereunder shall be
Nonqualified Stock Options. No Option granted pursuant to this Plan may be
designated as an Incentive Stock Option.

         (c) Amendments to this Section 5. Notwithstanding any other provision
of the Plan, this Section 5 may not be amended more then once every six months,
except for amendments necessary to conform the Plan to changes in the
provisions of, or the regulations relating to, the Code.

6.        TERMS AND CONDITIONS OF OPTIONS.

         (a) Option Agreement. Each Option granted hereunder shall be evidenced
by an Option agreement.

         (b) Option Price. The Option price per share of Common Stock covered
by an Option granted hereunder shall be the Fair Market Value of the Common
Stock as of the date of grant.

         (c) Option Term. The term of each Option shall be ten years. No Option
shall be exercised by any person after expiration of the term of the Option.

         (d) Exercisability. An Option shall be exercisable during its term,
subject to the following provisions of this Section 6(d):

          (i) Initial Grants. With respect to any Option granted to an Eligible
     Director pursuant to Section 5(a)(i) or 5(a)(ii), such Option shall become
     exercisable with respect to 6,000 shares of Common Stock on the date six
     months following the relevant date of grant, with respect to an additional
     3,000 shares on the date six months following the first annual meeting of
     the Company's shareholders to occur after such date of grant, and with
     respect to the final 3,000 shares on the date six months following the
     second annual meeting of the Company shareholders to occur after such date
     of grant.




<PAGE>   5
                                       5



          (ii) Subsequent Grants. With respect to any Option granted to an
     Eligible Director pursuant to Section 5(a)(iii), such Option shall become
     exercisable with respect to 3,000 shares of Common Stock on the date six
     months following the relevant date of grant, with respect to an additional
     3,000 shares on the date six months following the first annual meeting of
     the Company's shareholders to occur after such date of grant, and with
     respect to the final 3,000 shares on the date six months following the
     second annual meeting of the Company's shareholders to occur after such
     date of grant.

         (e) Method of Exercise. Options may be exercised, in whole or in part,
at any time and from time to time during the Option exercise period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either in cash or by certified or bank check, or such other instrument
as the Board may accept. Payment in full or in part may also be made in the
form of unrestricted Common Stock already owned by the Optionee (and based upon
the Fair Market Value of the Common Stock so tendered as of the date the Option
is exercised, as determined by the Board). No shares of Common Stock shall be
issued until full payment therefor has been made. Eligible Directors shall
generally have the rights to dividends or other rights of a stockholder with
respect to shares subject to the Option when the Eligible Director has given
notice as to exercise, has paid in full for such shares and, if requested, has
given any representations required by the Board.

         (f) Non-transferability. No Option shall be transferable by the
Optionee otherwise than by will, by the laws of descent and distribution,
pursuant to a qualified domestic relations order or as permitted under the
Rules, and all Options shall be exercisable, during the Optionee's lifetime,
only by the Optionee.

         (g) Termination by Reason of Death. If an Optionee ceases to be an
Eligible Director by reason of death, any Option held by such Optionee may
thereafter be exercised to the extent then exercisable, by the legal
representative of the estate or by the legatee of the Optionee under the will
of the Optionee, for a period of one year from the date of such death or until
the expiration of the stated term of such Option, whichever period is shorter.

         (h) Termination by Reason of Disability. If an Optionee ceases to be
an Eligible Director by reason of Disability, any Option held by such Optionee
may thereafter be exercised by the Optionee, to the extent it was exercisable
at the time of termination, for a period of one year from the date of such
termination or until the expiration of the stated term of such Option,
whichever period is shorter; provided, however, that if the Optionee dies 
within such one-year period, any unexercised Option held by such Optionee shall
thereafter be exercisable to the extent it was exercisable at the time of death
for a period of one year from the date of such death or until the expiration of
the stated term of such Option, whichever period is shorter.





<PAGE>   6
                                       6



         (i) Other Termination. If an Optionee ceases to be an Eligible
Director for any reason other than death or Disability (except as a result of
becoming an employee of the Company), any Option held by such Optionee may
thereafter be exercised by the Optionee, to the extent it was exercisable at
the time of such termination, for a period of three months from the date of
such termination or the expiration of the stated term of such Option, whichever
period is shorter; provided, however, that if the Optionee dies within such
three-month period, any unexercised Option held by such Optionee shall
thereafter be exercisable, to the extent to which it was exercisable at the
time of death, for a period of one year from the date of such death or until
the expiration of the stated term of the Option, whichever period is shorter.
If an Optionee ceases to be an Eligible Director by reason of his becoming an
employee of the Company and his employment with the Company is subsequently
terminated, any Option held by such Optionee may thereafter be exercised by the
Optionee, to the extent that it was exercisable at the time of such
termination, for a period of three months from the date of such termination or
the expiration of the stated term of the Option, whichever period is shorter;
provided, however, that if the Optionee dies within such three-month period,
any unexercised Option held by such Optionee shall thereafter be exercisable, to
the extent to which it was exercisable at the time of death, for a period of
one year from the date of such death or until the expiration of the stated term
of the Option, whichever period is shorter.

7.       AMENDMENT AND TERMINATION.

         The Board may amend, alter or discontinue the Plan at any time and
from time to time (either by resolution or unanimous consent), but no
amendment, alteration, or discontinuation shall be made which would impair the
rights of an Optionee under an Option theretofore granted, without the Option's
consent, or which, without the approval of the Company's stockholders, would
require stockholder approval under the Rules or under the requirements of any
applicable federal or state law or regulation; provided, however, that in no
event may the provisions of the Plan respecting eligibility to participate be
amended more frequently than once every six months, other than to comport with
changes in the Code, or the Employee Retirement Income Security Act of 1974, as
amended, and any rules or regulations thereunder; provided, further, that any
amendment which, under the requirements of applicable federal or state law or
regulation or the rules of any stock exchange or automated quotation system on
which the Common Stock may then be listed or quoted must be approved by the
stockholders of the Company, shall not be effective unless and until such
stockholder approval has been obtained in compliance with such law; and
provided, further, that any amendment that must be approved by the
stockholders of the Company in order to maintain the continued qualification of
the Plan under Rule 16b-3(c)(2)(ii) under the Exchange Act, or any successor
provision, shall not be effective unless and until such stockholder approval
has been obtained in compliance with such Rule. The Committee may amend the
terms of any Option theretofore granted, prospectively or retroactively, but no
such amendment shall impair the rights of any Optionee without the Optionee's
consent. Notwithstanding any provision herein to the contrary, the Board shall
have broad authority to




<PAGE>   7
                                      7



amend the Plan or any Option to take into account changes in applicable tax
laws, securities laws, accounting rules and other applicable state and federal
laws.

8.       UNFUNDED STATUS OF THE PLAN.

         The Plan is intended to constitute an unfunded plan for incentive
compensation. With respect to any payments not yet made to an Optionee by the
Company, nothing contained herein shall give any such Optionee any rights that
are greater than those of a general creditor of the Company. In its sole
discretion, the Board may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver Common
Stock or payments in lieu thereof or with respect to awards hereunder.

9.       GENERAL PROVISIONS.

         (a) Representations by Optionees. The Board may require each Optionee
to represent to and agree with the Company in writing that the Optionee is
acquiring the shares of Common Stock without a view to distribution thereof.
The certificates for such shares may include any legend that the Company deems
appropriate to reflect any restrictions on transfer.

         (b) No Restrictions on Adoption of Other Compensation Arrangements.
Nothing contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements (subject to stockholder approval, if such
approval is required) and such arrangements may be either generally applicable
or applicable only in specific cases.

         (c) No Right to Continuing Employment or Re-election. The adoption of
the Plan shall not confer upon any Optionee any right to continued employment
with the Company nor shall it interfere in any way with the right of the
Company to terminate its relationship with any of its employees, directors, or
independent contractors at any time.

         (d) Tax Withholding. No later than the date as of which an amount
first becomes includable in the gross income of the Optionee for applicable
income tax purposes with respect to any award under the Plan, the Optionee
shall pay to the Company or make arrangements satisfactory to the Board
regarding the payment of any federal, state or local taxes of any kind required
by law to be withheld with respect to such amount. Unless otherwise determined
by the Board, the minimum required withholding obligations may be settled with
Common Stock, including Common Stock that is part of the award that gives rise
to the withholding requirement. The obligation of the Company under the Plan
shall be conditional upon such payment or arrangements and the Company shall to
the extent permitted by law have the right to deduct any such taxes from any
payment of any kind otherwise due to the Optionee.




<PAGE>   8
                                       8



         (e) Right of First Refusal. At the time of grant, the Board may
provide in connection with any grant made under this Plan that the shares of
Common Stock received as a result of such grant shall be subject to a right of
first refusal pursuant to which the Optionee shall be required to offer to the
Company any shares that the Optionee wishes to sell with the price being the
then Fair Market Value of the Common Stock, subject to such other terms and
conditions as the Board may specify at the time of grant.

         (f) Designation of a Beneficiary. The Board shall establish such
procedures as it deems appropriate for an Optionee to designate a beneficiary
to whom any amounts payable in the event of the Optionee's death are to be
paid.

         (g) Applicable Law. The Plan shall be governed by and subject to the
laws of the State of Delaware and to all applicable laws and to the approvals
by any governmental or regulatory agency as may be required.

         (h) Severability. If any provision of this Plan shall be held illegal
or invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of this Plan, but this Plan shall be construed and
enforced as if such illegal or invalid provision had never been included
herein.

         (i) Compliance with Rule 16b-3. It is the intent of the Company that
this Plan comply in all respects with applicable provisions of Rule 16b-3 under
the Exchange Act in connection with any grant of Options. Accordingly, if any
provision of this Plan or any agreement hereunder does not comply with the
requirements of Rule 16b-3 as then applicable to any such Optionee, or would
cause any Optionee to no longer be deemed a "disinterested person" within the
meaning of Rule 16b-3, such provision shall be construed or deemed amended to
the extent necessary to conform to such requirements with respect to such
Optionee. In addition, the Board shall have no authority to make any amendment,
alteration, suspension, discontinuation, or termination of the Plan or any
agreement hereunder to take other action if and to the extent such authority
would cause an Optionee's transactions under the Plan not to be exempt, or
optionees no longer to be deemed "disinterested persons," under Rule 16b-3 of
the Exchange Act.

10.      EFFECTIVE DATE AND TERM OF THE PLAN.

         The Plan shall be effective as of November 14, 1994, subject to its
approval by the affirmative votes of a majority of shares of Common Stock
present or represented by proxy at the next special meeting of the Company's
stockholders, or by written consent of a majority of shares of Common Stock,
after March 15, 1995. No Options shall be granted pursuant to the Plan on or
after November 14, 2004, but Options granted prior to such date may extend
beyond that date.





<PAGE>   1
                                                                   Exhibit 10.15
                                GTS-HERMES, INC.
                             1994 STOCK OPTION PLAN

SECTION 1. Purpose: Definitions.

         The name of this plan is the GTS-Hermes, Inc. 1994 Stock Option Plan
(the "Plan"). The purpose of the Plan is to enable employees of GTS-Hermes,
Inc. ("GTS") and/or its Subsidiaries and Affiliates, to (i) own shares of stock
in the Company, (ii) participate in the shareholder value which has been 
created, (iii) have a mutuality of interest with other shareholders and (iv)
enable the Company to attract, retain and motivate key employees of particular
merit.

         For the purposes of the Plan, the following terms shall be defined as
set forth below:

         (a)     "Board" means the Board of Directors of the Company.

         (b)     "Cause" means a felony conviction of a Participant or the
failure of a Participant to contest prosecution for a felony, or a Participant's
willful misconduct or dishonesty, any of which is directly and materially 
harmful to the business or reputation of the Company.

         (c)     "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.

         (d)     "Committee" means the Committee referred to in Section 2 of the
Plan. If at any time, no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.

         (e)     "Company" means GTS-Hermes, Inc., a corporation organized under
the laws of the State of Delaware, or any successor organization.

         (f)     "Disability" means permanent and total disability as determined
under the Company's long-term disability program.

         (g)     "Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission under 
the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor 
definition adopted by the Securities and Exchange Commission.

         (h)     "Early Retirement" means retirement, with consent of the
Committee at the time of retirement, from active employment with the Company
pursuant to the early retirement provisions of the pension plan of the Company.

         (i)     "Fair Market Value" means, as of any given date, the fair
market value of the Stock as determined by the Committee in good faith based on
the best available facts and circumstances at the time.
<PAGE>   2
         (j)     "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the meaning of Section
422A of the Code.

         (k)     "Insider" means a Participant who is subject to the
requirements of the Rules (as defined below).

         (l)     "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option.

         (m)     "Normal Retirement" means retirement from active employment
with the Company and any Subsidiary or Affiliate pursuant to the normal
retirement provisions of the pension plan of the Company.

         (n)     "Participant" means an employee to whom an Award is granted
pursuant to the Plan.

         (o)     "Plan" means the GTS-Hermes 1994 Stock Option Plan, as
hereinafter amended from time to time.

         (p)     "Retirement" means Normal or Early Retirement.

         (q)     "Rules" means Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the regulations promulgated
thereunder.

         (r)     "Securities Broker" means the registered securities broker
acceptable to the Company who agrees to effect the cashless exercise of an
Option pursuant to Section 5(1) hereof.

         (s)     "Stock" means Common Stock $.01 par value per share, of the
Company.

         (t)     "Stock Appreciation Right" means the right, pursuant to an
award granted under Section 6 below, to surrender to the Company all (or a
portion) of a Stock Option in exchange for an amount equal to the difference
between (i) the Fair Market Value, as of the date such Stock Option (or such
portion thereof) is surrendered, of the shares of Stock covered by such Stock
Option (or such portion thereof), and (ii) the aggregate exercise price of such
Stock Option (or such portion thereof).

         (u)     "Stock Option" or "Option" means any option to purchase shares
of Stock granted pursuant to Section 5 below.

         In addition, the terms "Change-in-Control," "Potential
Change-in-Control" and "Change-in-Control Price" shall have meanings set forth,
respectively, in Sections 7(b), (c) and (d) below.

SECTION 2. Administration.

                                       2
<PAGE>   3
         The Plan shall be administered by a Committee of not less than two
Disinterested Persons, who shall be appointed by the Board of Directors of the
Company and who shall serve at the pleasure of the Board.

         The Committee shall have the authority to grant to eligible employees,
pursuant to the terms of the Plan: (i) Stock Options and/or (ii) Stock
Appreciation Rights.

         In particular, the Committee shall have the authority:

         (a)     to select the officers and other employees of the Company to
whom Stock Options and Stock Appreciation Rights may from time to time be
granted hereunder;

         (b)     to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, or any
combination thereof, are to be granted hereunder;

         (c)     to determine the number of shares to be covered by each such
award granted hereunder;

         (d)     to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder: including, but not
limited to the share price and any restriction or limitation, or any vesting
acceleration or forfeiture waiver regarding any Stock Option or other award
and/or the shares of Stock relating thereto, based on such factors as the
Committee shall determine, in its sole discretion;

         (e)     to determine whether and under what circumstances a Stock
Option may be settled in cash or stock under Section 5(l);

         (f)     to determine whether and under what circumstances a Stock
Option may be exercised without a payment of cash under Section 5(m); and

         (g)     to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award under
this Plan shall be deferred either automatically or at the election of the
participant.

         The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan.

         All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and Plan
Participants.

SECTION 3. Stock Subject to the Plan.

                                       3
<PAGE>   4
         (a)     Stock Subject to Plan. The stock to be subject or related to
awards under the Plan shall be shares of the Company's Stock, and may be either
authorized and unissued or held in the treasury of the Company. The maximum
number of shares of Stock authorized with respect to the grant of awards under
the Plan in each calendar year during any part of which the Plan is in effect,
subject to adjustment in accordance with paragraph 3(c) below, shall be up to
6.5% of the shares of Stock issued and outstanding, any or all of such shares
of Stock may be granted for awards pursuant to the plan and the aggregate
number of shares of stock subject to the Plan shall be 13% of the issued and
outstanding shares of stock.

         (b)     Unused, Forfeited and Reacquired Shares. Any unused portion of
the shares annually available for award shall be carried forward and shall be
made available for Plan awards in succeeding calendar years. The shares related
to the unexercised or undistributed portion of any terminated, expired or
forfeited award for which no material benefit was received by a participant
(i.e. dividends) also shall be made available for distribution in connection
with future awards under the Plan to the extent permitted to receive exemptive
relief pursuant to the Rules. Any shares made available for distribution in
connection with future awards under this Plan pursuant to this paragraph (b)
shall be in addition to the shares available pursuant to paragraph (a) of this
Section 3.

         (c)     Other Adjustment. In the event of any merger, reorganization,
consolidation, recapitalization, Stock dividend, or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan and in the number and price of shares subject to other Awards made
under the Plan, as may be determined to be appropriate by the Committee in its
sole discretion, provided that the number of shares subject to any award shall
always be a whole number. Such adjusted option price shall also be used to
determine the amount payable by the Company upon the exercise of anv Stock
Appreciation Right associated with any Stock Option.

SECTION 4. Eligibility.

         Officers and other employees of the Company and/or its Subsidiaries
and Affiliates (but excluding any person who serves only as a member of the
Committee) are eligible to be granted awards under the Plan. The Committee, in
its sole discretion, will determine participant eligibility in the plan in any
given year.

SECTION 5. Stock 0ptions.

         Stock Options may be granted alone, in addition to or in tandem with
other awards granted under the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.

         Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options.

                                       4
<PAGE>   5
The Committee shall have the authority to grant any optionee Incentive Stock
Options. Non-Qualified Stock Options, or both types of Stock Options (in each
case with or without Stock Appreciation Rights). To the extent that any Stock
Option does not qualify as an Incentive Stock Option, it shall constitute a
separate Non-Qualified Stock Option.

Anything in the Plan to the contrary notwithstanding, no term of this Plan
relating to Incentive Stock Options shall be interpreted, amended or altered,
nor shall any discretion or authority granted under the Plan be so exercised,
so as to disqualify the Plan under Section 422A of the Code, or, without the
consent of the optionee(s) affected, to disqualify any Incentive Stock Option
under such Section 422A.

Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem 
appropriate:

         (a)     Option Price. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the time of grant.
Any Incentive Stock Option shall not be granted at less than 100% of Fair
Market Value at the time of grant. Incentive Stock Options granted to any
optionee who, at the time the option is granted, owns more than 1O% of the
voting power of all classes of stock of the Company or of a Parent or
Subsidiary corporation, shall have an exercise price no less than 110% of Fair
Market Value per share on date of the grant.

         (b)     Option Term. The term of each Stock Option shall be fixed by
the Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the Option is granted and no Non-Qualified Stock Option
shall be exercisable more than ten years and one day after the date the Option
is granted. However, any option granted to any optionee who, at the time the
option is granted owns more than 10% of the voting power of all classes of
Stock of the Company or of a Parent or Subsidiary corporation may not have a
term of more than five years. No option may be exercised by any person after
expiration of the term of the option.

         (c)     Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined
by the Committee at or after grant. No option granted pursuant to the Plan
shall be exercisable in whole or in part, nor shall the Company be obligated to
sell any Shares subject to any such option, if such exercise, sale or settlement
would, in the opinion of counsel for the Company, violate the Securities Act of
1933 (or other Federal or State statutes having similar requirements), as it 
may be in effect at that time. Each option shall be subject to the further 
requirement that, if at any time the Board of Directors shall determine in its
discretion that the listing, registration or qualification of the Shares subject
to such option under any securities exchange requirements or under any 
applicable law, or the consent or approval of any governmental regulatory body, 
is necessary as a condition of, or in connection with, the granting of such 
option or the issuance of Shares thereunder, such option may not be exercised 
in whole in part unless such listing, registration, qualification, consent or

                                       5
<PAGE>   6
approval shall have been affected or obtained free of any conditions not
acceptable to the Board of Directors.

         (d)     Vesting. Vesting shall be determined by the Committee at the
time of grant.

         (e)     Method of Exercise. Subject to whatever installment exercise
provisions apply under Section 5(c), Stock Options may be exercised in whole or
in part at any time and from time to time during the option period, by giving
written notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by certified or bank check, or such other instrument as the
Committee may accept. As determined by the Committee, in its sole discretion,
at or after grant, payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee or, in the case of the
exercise of a Non-Qualified Stock Option or Restricted Stock subject to an
award hereunder (based, in each case, on the Fair Market Value of the Stock on
the date the option is exercised, as determined by the Committee), provided,
however, that, in the case of an Incentive Stock Option the right to make a
payment in the form of already owned shares may be authorized only at the time
the option is granted.

         The Committee, in its sole discretion, may at the time of grant or
such later time as it determines, permit payment of the option exercise price
of a Non-Qualified Stock Option to be made in whole or in part in the form of
Restricted Stock. If such payment is permitted, then such Restricted Stock (and
any replacement shares relating thereto) shall remain (or be) restricted in
accordance with the original terms of the Restricted Stock award in question,
and any additional Stock received upon the exercise, shall be subject to the
same forfeiture restrictions, unless otherwise determined by the Committee, in
its sole discretion, at or after grant.

         If payment of the Option exercise price of a Non-Qualified Option is
made in whole or in part in the form of unrestricted stock already owned by the
Participant, the Company may require that the stock be owned by the Participant
for a period of six months or longer so that such payment would not result in a
pyramid exercise.

         No shares of Stock shall be issued until full payment therefor has
been made. An optionee shall generally have the rights to dividends or other
rights of a shareholder with respect to shares subject to the Option when the
optionee has given written notice of exercise, has paid in full for such
shares, and, if requested, has given the representation described in Section
10(a).

         (f)     Non-transferability of Options. No unvested Stock Option shall
be transferable by the optionee otherwise than by will or by the laws of
descent and distribution, and all Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee.

         (g)     Termination by Reason of Death. Subject to Section 5(k), if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of death, any vested portion of the Stock Option held by such optionee
may thereafter be exercised, to the extent then exercisable or on such 
accelerated basis as the Committee may determine at or after

                                       6
<PAGE>   7
grant, by the legal representative of the estate or by the legatee of the 
optionee under the will of the optionee, for a period of one year (or such
shorter period as the Committee may specify at grant) from the date of such
death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.

         (h)     Termination by Reason of Disability. Subject to Section 5(k),
if an optionee's employment by the Company and any Subsidiary or Affiliate
terminates by reason of Disability, any vested portion of the Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination, or on such accelerated basis as the
Committee may determine at or after grant, for a period of three years (or such
shorter period as the Committee may specify at grant) from the date of such
termination of employment or until the expiration of the stated term of such
Stock Option, whichever period is the shorter: provided, however, that if the
optionee dies within such three-year period (or such shorter period as the
Committee shall specify at grant), any unexercised Stock Option held by such
optionee shall, at the sole discretion of the Committee, thereafter be
exercisable to the extent to which it was exercisable at the time of death for
a period of twelve months from the date of such death or until the expiration
of the stated term of such Stock Option, whichever period is the shorter. In
the event of termination of employment by reason of Disability, if an incentive
Stock Option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422A of the Code, such Stock Option will
thereafter be treated as a Non-Qualified Stock Option.

         (i)     Termination by Reason of Retirement. Subject to Section 5(k),
if an optionee's employment by the Company terminates by reason of Normal or
Early Retirement, any Stock Option held by such optionee may thereafter be
exercised by the optionee, to the extent it was exercisable at the time of such
Retirement or on such accelerated basis as the Committee may determine at or
after grant, for a period of three years (or such shorter period as Committee
may specify at grant) from the date of such termination of employment or the
expiration of the stated term of such Stock Option, whichever period is the
shorter; provided, however, that, if the optionee dies within such three-year
period, any unexercised Stock Option held by such optionee shall, at the sole
discretion of the Committee, thereafter be exercisable, to the extent to which
it was exercisable at the time of death for a period of twelve months from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter. In the event of termination of
employment by reason of Retirement, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422A of the Code, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.

         (j)     Other Termination. Unless otherwise determined by the Committee
at or after grant, if an optionee's employment by the Company terminates for 
any reason other than death, Disability or Normal or Early Retirement, the Stock
Option shall thereupon terminate, except that such Stock Option may be exercised
for the lesser of three months or the balance of such Stock Option's term if the
optionee is involuntarily terminated by the Company without Cause.

         (k)     Incentive Stock Option Limitations. To the extent required for
"incentive stock option" status under Section 422A of the Code, the aggregate
Fair Market Value (determined as

                                       7
<PAGE>   8
of the time of grant) of the stock with respect to which Incentive Stock Options
granted after 1986 are exercisable for the first time by the optionee during 
any calendar year under the Plan and/or any other stock option plan of the 
Company (within the meaning of Section 425 of the Code) after 1986 shall not 
exceed $100,000.

         To the extent (if any) permitted under Section 422A of the Code, if
(i) a participant's employment with the Company is terminated by reason of
death, Disability or Retirement and (ii) the portion of any Incentive Stock
Option that is otherwise exercisable during the post-termination period
specified under Section 5(g), (h) or (i), applied without regard to this
Section 5(k), is greater than the portion of such option that is exercisable as
an "incentive stock option" during such post-termination period under Section
422A, such post-termination period shall automatically be extended (but not
beyond the original option term) to the extent necessary to permit the optionee
to exercise such Incentive Stock Option. The Committee is also authorized to
provide at grant for a similar extension of the post-termination exercise period
in the event of a Change-in-Control.

         (l)     Cash-out of Option: Settlement of Spread Value in Restricted
Stock. On receipt of written notice to exercise, the Committee may, in it sole
discretion, elect to cash out all or part of the portion of the option(s) to be
exercised by paying the optionee an amount, in cash or Stock, equal to the
excess of the Fair Market Value of the Stock over the option price (the "Spread
Value") on the effective date of such cash-out.

         In addition, if the option agreement so provides at grant or is
amended after grant and prior to exercise to so provide (with the optionee's
consent), the Committee may require that all or part of the shares to be issued
with respect to the Spread Value of an exercised option take the form of
Restricted Stock, which shall be valued on the date of exercise on the basis of
the Fair Market Value of such Restricted Stock determined without regard to the
forfeiture restrictions involved.

         (m)     Cashless Exercise. To the "extent permitted under the
applicable laws and regulations under Section 16 of the Securities Exchange Act
of 1934, as amended, and the Rules promulgated thereunder, and with the consent
of the Committee, the Company agrees to cooperate in a "cashless exercise" of
an Option. The cashless exercise shall be effected by the Participant delivering
to the Securities Broker instructions to sell a sufficient number of shares of
Common Stock to cover the costs and expenses associated therewith.

SECTION 6. Stock Appreciation Rights.

         (a)     Grant and Exercise. Stock Appreciation Rights may be granted
in conjunction with all or part of any Stock Option granted under the Plan. In
the case of a Non-Qualified Stock Option, such rights may be granted either at
or after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of the grant of such
Stock Option.


                                       8
<PAGE>   9
         A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, except that,
unless otherwise determined by the Committee, in its sole discretion, at the
time of grant, a Stock Appreciation Right granted with respect to less than the
full number of shares covered by a related Stock Option shall not be reduced
until the number of shares covered by an exercise or termination of the related
Stock Option exceeds the number of shares not covered by the Stock Appreciation
Right.

         A Stock Appreciation Right may be exercised by an optionee, in
accordance with Section 6(b), by surrendering the applicable portion of the
related Stock Option. Upon such exercise and surrender, the optionee shall be
entitled to receive an amount determined in the manner prescribed in Section
6(b). Stock Options which have been so surrendered, in whole or in part, shall
no longer be exercisable to the extent the related Stock Appreciation Rights
have been exercised.

         (b)     Terms and Conditions. Stock Appreciation Rights shall be 
subject to such terms and conditions, not inconsistent with the provisions of
the Plan, as shall be determined from time to time by the Committee, including
the following:

                 (i)      Stock Appreciation Rights shall be exercisable only
         at such time or times and to the extent that the Stock Options to
         which they relate, if any, shall be exercisable in accordance with the
         provisions of Section 5 and this Section 6 of the Plan; provided
         however, that any Stock Appreciation Right granted subsequent to the
         grant of the related Stock Option shall not be exercisable during the
         first six months of its term, except that this special limitation
         shall not apply in the event of death or Disability of the optionee
         prior to the expiration of the six-month period.

                 (ii)     Upon the exercise of a Stock Appreciation Right, an
         optionee shall be entitled to receive up to, but not more than, an
         amount in cash and/or shares of Stock equal in value to the excess of
         the Fair Market Value of one share of Stock over the option price per
         share specified in the related Stock Option, multiplied by the number
         of shares in respect of which the Stock Appreciation Right shall have
         been exercised, with the Committee having the right to determine the
         form of payment.

                 (iii)    Upon the exercise of a Stock Appreciation Right, the
         Stock Option or part thereof to which such Stock Appreciation Right is
         related shall be deemed to have been exercised for the purpose of the
         limitation set forth in Section 3 of the Plan on the number of shares
         of Stock to be issued under the Plan, but only to the extent of the
         number of shares issued under the Stock Appreciation Right at the time
         of exercise based on the value of the Stock Appreciation Right at such
         time.

                 (iv)     A Stock Appreciation Right granted in connection with
         an Incentive Stock Option may be exercised only if and when the
         market price of the Stock subject to the Incentive Stock Option
         exceeds the exercise price of such Stock Option.


                                       9
<PAGE>   10
                 (v)      In its sole discretion, the Committee may provide, at
         the time of grant of a Stock Appreciation Right under this Section 6,
         that such Stock Appreciation Right can be exercised only in the event
         of a Change-in-Control and/or a Potential Change-in-Control, subject
         to such terms and conditions as the Committee may specify at grant.

                 (vi)     The Committee, in its sole discretion, may also
         provide that, in the event of a Change-in-Control and/or a Potential
         Change-in-Control, the amount to be paid upon the exercise of a Stock
         Appreciation Right shall be based on the Change-in-Control Price,
         subject to such terms and conditions as the Committee may specify at
         grant.

SECTION 7. Change in Control Provisions.

         (a)     Impact of Event. In the event of:

                 (i)      a "Change in Control" as defined in Section 7(b),
         unless otherwise determined by the Committee or the Board at or after
         grant, but prior to the occurrence of such Change in Control, or

                 (ii)     a "Potential Change in Control" as defined in Section
         7(c), but only if and to the extent so determined by the Committee or
         the Board at or after grant (subject to any right of approval
         expressly reserved by the Committee or the Board at the time of such
         determination), the following acceleration and valuation provisions
         shall apply:

                          (A)     Any Stock Appreciation Rights outstanding for
                 at least six months and any Stock Options awarded under the
                 Plan not previously exercisable and vested which have been
                 held for at least six months from the date of grant, shall
                 become fully vested and exercisable.

                          (B)     The value of all outstanding Stock Options
                 and Stock Appreciation Rights awards shall, unless otherwise
                 determined by the Committee at or after grant, be cashed out
                 on the basis of the "Change in Control Price" as defined in
                 Section 7(d) as of the date such Change in Control or such
                 Potential Change in Control is determined to have occurred or
                 such other date as the Committee may determine prior to the
                 Change in Control.

         (b)     Definition of "Change in Control". For purposes of Section
7(a), a "Change in Control" means the happening of any of the following:

                 (i)      When any "person," as such term is used in Sections
         13(d) and 14(d) of the Exchange Act, other than the Company or a
         Subsidiary, any Company employee benefit plan (including any trustee
         of such plan acting as trustee), or any shareholder that owns 50% or
         more of the outstanding shares of the Company is or becomes the
         "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
         directly or indirectly of more than 50% of Common Stock of the Company
         without the consent of a majority of the Board;


                                       10
<PAGE>   11
                 (ii)     The occurrence of any transactions or event relating
         to the Company required to be described pursuant to the requirements
         of Item 5(f) of Schedule 13A of the Exchange Act;

                 (iii)    When, during any period of two consecutive years
         during the existence of the Plan, the individuals who, at the
         beginning of such period, constitute the Board of Directors of the
         Company cease for any reason other than death to constitute at least a
         two-thirds majority thereof, provided however, that a director who was
         not a director at the beginning of such period shall be deemed to have
         satisfied the two-year requirement if such director was elected by, or
         on the recommendation of, at least two-thirds of the directors who
         were directors at the beginning of such period (either actually or by
         prior operation of this Section 7(b) (iii); or

                 (iv)     The occurrence of a transaction requiring stockholder
         approval for the acquisition of the Company by an entity other than
         the Company through purchase of assets, or by merger, or otherwise.

         (c)     Definition of Potential Change in Control. For purposes of
Section 7(a), a "Potential Change in Control" means the happening of any one
of the following:

                 (i)      The entering into an agreement by the Company, the
         consummation of which would result in a Change in Control of the
         Company as defined in Section 7(b); or

                 (ii)     The acquisition of beneficial ownership, directly or
         indirectly, by any entity, person or group other than the Company, any
         Company employee benefit plan (including any trustee of such plan
         acting as such trustee), or any shareholder that owns greater than 50%
         of the outstanding shares of securities of the Company representing
         five percent or more of the Common Stock of the Company and the
         adoption by the Board of Directors of a resolution to the effect that
         a Potential Change in Control of the Company has occurred for the
         purposes of this Plan.

         (d)     Change in Control Price. For purposes of this Section 7,
"Change in Control Price" means, as of any given date, the highest sales price
per share paid in any transaction reported by the New York Stock Exchange
(consolidated trading), other public market, U. S. or foreign, or paid or
offered in any bona fide transaction related to a potential or actual
change in control of the Company at any time during the preceding sixty day
period as determined by the Committee except that, in the case of Incentive
Stock Options and Stock Appreciation Rights relating to Incentive Stock
Options, such price shall be based only on transactions reported for the date
on which the Committee decides to cash out such options or SARs.

         (e)     Compliance with Section 280G. No payment shall be made under
this Section 7 which, when aggregated with other payments made to the employee,
would, as determined by such person(s) as the Committee shall irrevocably
designate at or prior to a Change in Control or


                                       11
<PAGE>   12
Potential Change in Control, result in an excess parachute payment for which
the Company, would not receive a Federal income tax deduction by reason of
Section 28OG of the Code.

SECTION 8. Amendments and Termination.

         The Board of Directors of the Company may amend, alter, or discontinue
the Plan at any time and from time to time, but no amendment, alteration, or
discontinuation shall be made which would impair the rights of an optionee or
participant with respect to a Stock Option or Stock Appreciation Right which
has been granted under the Plan, without the optionee's or participant's
consent, or which, without the approval of the Company's stockholders, would:

         (a)     except as expressly provided in this Plan, increase the total
number of shares reserved for the purpose of the Plan;

         (b)     decrease the option price of (i) any Stock Option to less than
100% of the Fair Market Value on the date of grant, or (ii) change the pricing
terms of Section 7(a); or

         (c)     change the employees or class of employees eligible to
participate in the Plan; or

         (d)     extend the maximum option period under Section 5(b) of the
Plan.

         The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively but, subject to Section 3 above, no such
amendment shall impair the rights of any holder without the holder's consent.
The Committee may also substitute new Stock Options for previously granted
Stock Options, including previously granted Stock Options having higher option
prices.

         Subject to the above provisions, the Board of Directors of the Company
shall have broad authority to amend the Plan to take into account changes in
applicable tax laws and accounting rules, as well as other developments.

SECTION 9. Unfunded Status of Plan.

         The Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a
general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards hereunder, provided, however, that, unless the Committee otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.

SECTION 10.  General Provisions.


                                       12
<PAGE>   13
         (a)     The Committee may require each person purchasing shares
pursuant to a Stock Option under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.

         All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Exchange Act, any stock exchange upon which the
Stock is then listed, and any applicable Federal or state securities law, and
the Committee may cause a legend or legends to be put on any such certificates
to make appropriate reference to such restrictions.

         (b)     Nothing contained in this Plan shall prevent the Board of
Directors from adopting other or additional compensation arrangements, subject
to stockholder approval if such approval is required; and such arrangements may
be either generally applicable or applicable only in specific cases.

         (c)     The adoption of the Plan shall not confer upon any employee of
the Company any right to continued employment with the Company, as the case may
be, nor shall it interfere in any way with the right of the Company to
terminate the employment of any of its employees at any time.

         (d)     No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Committee regarding the
payment of, any Federal, state, or local taxes of any kind required by law to
be withheld with respect to such amount. Unless otherwise determined by the
Committee, the minimum required withholding obligations may be settled with
Stock, including Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the participant.

         (e)     At the time of grant, the Committee may provide in connection
with any grant made under this Plan that the shares of Stock received as a
result of such grant shall be subject to a right of first refusal, pursuant to
which the participant shall be required to offer to the Company any shares that
the participant wishes to sell, with the price being the then Fair Market Value
of the Stock, subject to such other terms and conditions as the Committee
specify at the time of grant.

         (f)     The Committee shall establish such procedures as it deems
appropriate for a participant to designate a beneficiary to whom any amounts
payable in the event of the participant's death are to be paid.


                                       13
<PAGE>   14
         (g)     The Plan and all awards made and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware.

SECTION 11. Effective Date of Plan.

         The Plan shall be effective on the date it is approved by a vote of
the holders of a majority of the total outstanding Stock.

SECTION 12. Term of Plan.

         No Stock Option or Stock Appreciation Right shall be granted pursuant
to the Plan on or after the tenth anniversary of the date of stockholder
approval, but awards granted prior to such tenth anniversary may extend beyond
that date.

                                       14

<PAGE>   1
                                                                   Exhibit 10.16

                         GLOBAL TELESYSTEMS GROUP, INC
                            EQUITY COMPENSATION PLAN

                        RESTRICTED STOCK GRANT LETTER


Date of Grant: January 1, 1995

           Global TeleSystems Group, Inc. (the "Company") maintains the The
Global TeleSystems Group, Inc. Equity Compensation Plan (the "Plan"), the
purpose of which is to enable designated individuals to own common stock of the
Company, par value $.0001 (the "Common Stock"). This Restricted Stock Grant is
granted to Jan Loeber, the Senior Vice President-Hermes of the Company (the
"Grantee") in accordance with the Plan. Capitalized terms used and not
otherwise defined in this Grant Letter are used herein as defined in the Plan.

           1 .   Stock Grant. The Company hereby offers to the Grantee 20,000
shares of Common Stock (the "Granted Shares"). Subject to the Grantee's
signifying acceptance of this offer (in the manner described in Section 2
below), the Company shall prepare and issue certificates representing the
Granted Shares (the "Initial Share Certificates"), which shall be registered in
the name of the Grantee, and which shall bear the following restrictive legend,
in addition to such other legends  as the Company may deem necessary or
desirable under any

                               Restricted Shares

   The shares represented by this certificate are subject to the restrictions
   and other conditions contained in Global TeleSystems Group, Inc. Equity
   Compensation Plan (the "Plan") and the Grant Letter (the "Letter")
   delivered by the Company to the person named as the registered holder of
   this certificate, including certain rights of first refusal and
   restrictions on the sale, encumbrance or transfer of these shares. The
   Secretary of the Company will furnish to the holder hereof, without charge,
   a copy of the Plan and the Letter.

           2.    Acceptance by Grantee; Escrow Agent. The Grantee shall signify
acceptance of the Granted Shares by delivering to the Secretary of the Company,
as escrow agent for the Company (the "Escrow Agent"): (i) an executed copy of
the form of Acceptance of Grant attached as Annex A hereto; (ii) if the Grantee
is a married individual, an executed copy of the Joinder Agreement attached as
Annex C hereto and (iii) three forms of stock power, each signed in blank for
completion by the Escrow Agent at the time of any transfer of any of the Granted
Shares pursuant to this Grant Letter.  Each of the Grantee and the Company
waives any requirement that the signature of the Grantee on each such stock
power be guaranteed.  Upon receipt from the Grantee of the foregoing items, the
Escrow Agent shall notify the proper officers of the Company and such officers
promptly shall deposit the Initial Share Certificates with the Escrow Agent, to
be held in accordance with the terms of this Grant.

           3.    Restrictions

           (a)   Restriction Period. The restrictions on the sale, encumbrance
and transfer of the Granted Shares which are described in Section 3(c) below
shall lapse in accordance with Section 3(b) (relating to termination of
employment with the Company) or 3(d) (relating to discretionary acceleration of
lapse), or if earlier, on each of the second, third and fourth anniversaries of
the Date of Grant with respect to a number of the Granted Shares equal to
one-third of the Granted Shares on each such date. The period during which any
portion of the Granted Shares actually remains subject to the restrictions of
Section 3(c) hereof is referred to in this Grant and in the Plan as the
"Restriction Period" for such portion of the Granted Shares.
<PAGE>   2
            (b)  Requirement of Employment with Company. Upon (i) the voluntary
termination of the Grantee's employment with the Company by the Grantee or (ii)
the involuntary termination of the Grantee's employment with the Company for
"Cause" during the Restriction Period of any of the Granted Shares, the Grantee
shall forfeit all of the Granted Shares as to which the restrictions under
Section 3(c) hereof have not, on or before the effective date of such
termination, lapsed pursuant to this Section 3. Upon such termination, the
Escrow Agent is authorized to utilize the stock powers delivered by the Grantee
pursuant to Section 2 hereof and to transfer all such forfeited shares to the
Company. For purposes of this Grant, the effective date of termination of the
Grantee's employment with the Company shall be the first day on which the
Grantee no longer performs services for the Company. For purposes of this
Section 3(b), "Cause" shall have the same meaning as is set forth in the
employment agreement between the Grantee and the Company and shall also include
the failure of the Grantee to meet the performance expectations of the Board of
Directors or the Chief Executive Officer of the Company.

           (c)   Restrictions on Transfer; Shares Subject to Forfeiture. The
Grantee shall not sell, assign, transfer, pledge or otherwise dispose of any
portion of the Granted Shares at any time during the Restriction Period for
such Granted Shares.

           (d)   Lapse of Restrictions.

                 (1)   Except with respect to (i) any of the Granted Shares that
           are forfeited by the Grantee pursuant to Section 3(b) hereof, upon
           the expiration of the Restriction Period applicable under Section
           3(a) hereof to a portion of the Granted Shares (the "Newly Released
           Shares"), all restrictions imposed under Section 3(c) of this Grant
           shall lapse with respect to such Newly Released Shares.

                 (2)   In the event of the Grantee's death during the
           Restriction Period, the restrictions of Section 3(c) hereof shall
           lapse with respect to all of the Granted Shares which have not
           previously been forfeited by the Grantee and all such shares
           released from restriction shall be treated Newly Released Shares.

                 (3)   In the event of the Grantee's "Total Disability" during
           the Restriction Period, the restrictions of Section 3(c) hereof
           shall lapse with respect to all of the Granted Shares which have not
           previously been forfeited by the Grantee and all such shares
           released from restriction shall be treated Newly Released Shares.
           For purposes of this Section 3(d), "Total Disability" shall have the
           same meaning as is set forth in the employment agreement between the
           Grantee and the Company.

                 (4)   In the event of the involuntary termination of the
           Grantee's employment with the Company without Cause during the
           Restriction Period, the restrictions of Section 3(c) hereof shall
           lapse with respect to all of the Granted Shares which have not
           previously been forfeited by the Grantee and all such shares
           released from restriction shall be treated as Newly Released Shares.

                 (5)   In the event of a Change of Control of the Company (as
           defined below)  during the Restriction Period, the restrictions of
           Section 3(c) hereof shall lapse with respect to all of the Granted
           Shares which have not previously been forfeited by the Grantee and
           all such shares released from restriction shall be treated as Newly
           Released Shares; provided, however, that in the event of a Change of
           Control as defined in Section 3(d)(5)(i), the restrictions of
           Section 3(c) shall lapse with respect to all of the Granted Shares
           which have not previously been forfeited by the Grantee only at the
           discretion of the Compensation Committee of the Board of Directors
           of the Company. For purposes of this Section 3(d)(5), a Change of
           Control shall mean the happening of any of the following:

                                      -2-
<PAGE>   3
                       (i)  When any "person", as such term is used in Sections
                 13(d) and 14(d) of the Exchange Act, other than the Company or
                 an Affiliate of the Company (as defined in Rule 12b-2 under
                 the Exchange Act) or any Company employee benefit plan
                 (including any trustee of such plan acting as trustee) is or
                 becomes the "beneficial owner" (as defined in Rule 13d-3 under
                 the Exchange Act), directly or indirectly of securities of the
                 Company representing: (A) 50% or more of the combined voting
                 power of the Company's then outstanding securities;
                 provided, however, that for purposes of the Section
                 3(d)(5)(i), the initial public offering of the Company's
                 securities shall not constitute a Change of Control; and (B)
                 35% or more of the combined voting power of the Company's then
                 outstanding securities subsequent to an initial public
                 offering of equity securities of the Company; or

                       (ii) When, during any period of two consecutive years
                 during the existence of the Plan, the individuals who, at the
                 beginning of such period, constitute the Board cease for any
                 reason other than death to constitute at least a two-thirds
                 majority thereof; provided, however, that a director who was
                 not a director at the beginning of such period shall be deemed
                 to have satisfied the two-year requirement if such director
                 was elected by, or on the recommendation of, at least
                 two-thirds of the directors who were directors at the
                 beginning of such period (either actually or by prior
                 operation of this Section 3(d)(5)(ii)).

                 (6)   Notwithstanding any other provision hereof, the
           Committee may, as it deems equitable, in its sole discretion,
           accelerate the date on which the restrictions of Section 3(c) hereof
           shall lapse with respect to any of the Granted Shares which have not
           previously been forfeited by the Grantee, and any such shares shall
           thereupon be treated as Newly Released Shares.

           (e)   Delivery of Unrestricted Share Certificates. Promptly after
the date on which restrictions lapse with respect to Newly Released Shares, the
Escrow Agent shall (1) cancel the certificate representing such Newly Released
Shares then held by the Escrow Agent in the Grantee's name, (2) issue and
deliver to the Grantee a share certificate in the Grantee's name, which does
not bear the restrictive legend recited in Section 1 hereof, but which may bear
any other restrictive legend that the Company may then deem necessary or
desirable under any applicable law, for the number of Newly Released Shares and
(3) issue and hold or continue to hold in escrow a share certificate or
certificates in the Grantee's name, bearing the one or more restrictive legends
recited and referred to in Section 1 hereof, representing any Granted Shares
that then remain subject to restrictions hereunder. In the event of the
Grantee's death, any share certificates shall be delivered to the Grantee's
spouse, or if there shall be no spouse, to the legal representative of the
Grantee's estate.

           (f)   Non-assignability of Rights. No rights of the Grantee under
any of Sections 1-3 of this Grant Letter may be assigned or transferred by the
Grantee, except, in the event of the death of the Grantee, by will or by the
laws of descent or distribution. Any attempt to assign, transfer, pledge or
dispose of any Granted Shares which are then subject to the restrictions of
Section 3(c) hereof shall be contrary to the provisions hereof, and the levy of
any execution, attachment or similar process upon such restricted shares, shall
be null and void and without effect.

           4.    "Market Stand-off" Agreement.

           (a)   In connection with any underwritten public offering by the
Company of its Common Stock pursuant to an effective registration statement
filed under the Securities Act of 1933, including the Company's initial public
offering, the Grantee shall not sell, make any short sale of, loan,
hypothecate, pledge, grant any option for the purchase of, or otherwise dispose
or transfer for value or otherwise agree to engage in any of the foregoing
transactions

                                      -3-
<PAGE>   4
with respect to any shares of Common Stock without the prior written consent of
the Company or its underwriters, for such period of time prior to and from and
after the effective date of such registration statement as may be requested
by the underwriters and agreed to by all of the members of the Board of
Directors.

           (b)   If any change is made to the Common Stock (whether by reason
of merger, consolidation, reorganization, recapitalization, stock dividend,
stock split, combination of shares, or exchange of shares or any other change in
capital structure made without receipt of consideration), then, unless such
event or change results in the termination of a outstanding Grants under the
Plan, any new, substituted or additional securities distributed with respect to
the Granted Shares shall be immediately subject to the provisions of this
Section 4, to the same extent that the Granted Shares, immediately prior
thereto, shall have been covered by such provisions.

           (c)   In order to enforce the provisions of this Section 4, the
Company may impose stop/transfer instructions with respect to the Granted Shares
(or other securities described in Section 4(b) above that shall have been
distributed with respect thereto) until the end of the applicable stand-off
period.

           5.    Voting of Shares Dividends.  Prior to the effective date on
which the Restriction Period terminates with respect to any Granted Shares, the
Grantee (and in the event of the Grantee's death, the Successors) shall not be
entitled to vote any of the Granted Shares and or to receive any dividends
payable to stockholders of record prior to such date.

           6.    Withholding of Taxes. The Company shall have the right to
require the Grantee to pay to the Company the amount of any taxes which the
Company is required to withhold in respect of this Grant or to take whatever
action it deems necessary to protect the interests of the Company in respect of
such tax liabilities, including, without limitation, withholding a portion of
the Granted Shares. The Company's obligation to issue or transfer the Granted
Shares shall be conditioned upon the Grantee's compliance with the requirements
of this Section to the satisfaction of the Committee.

           7.    No Contract for Employment

           (a)   Nothing contained in this Grant Letter shall be deemed to
require the Company to continue the Grantee's employment by the Company.
Except as may be provided in a written employment contract executed by a duly
authorized officer of the Company and approved by the Board, the Grantee shall
at all times be an employee-at-will of the Company and the Company may
discharge the Grantee at any time for any reason, with or without cause, and
with or without severance compensation.

           (b)   From time to time, the Company may distribute employee manuals
or handbooks, and officers or other representatives of the Company may make
written or oral statements relating to the Company's policies and procedures.
Such manuals, handbooks and statements are intended only for the general
guidance of employees. No policies, procedures or statements of any nature by
or on behalf of the Company (whether written or oral, and whether or not
contained in any formal employee manual or handbook) shall be construed to
modify this Grant Letter (including without limitation Section 7(a) above) or
to create express or implied obligations to the Grantee of any nature.

           8.    Administration. This Grant is made pursuant to the terms,
conditions and other provisions of the Plan as in effect on the Date of Grant,
and as the Plan may be amended from time to time in accordance with Section 7
of the Plan. All questions of interpretation and application of the Plan and of
any grant under the Plan (including this Grant) shall be determined by the
Committee in its discretion, and such determination shall be final and binding
upon all persons. The validity, construction and effect of this Grant shall be
determined in

                                      -4-
<PAGE>   5
accordance with the laws of the State of Delaware, without giving effect to the
principles of conflicts of law thereof.

                                       GLOBAL TELESYSTEMS GROUP, INC.
                                       
Attest:                                
                                       
[/s/ [ILLEGIBLE]]                      By  /s/ Neil S. Molberger             
- --------------------------               --------------------------------

                                      -5-
<PAGE>   6
                                                                         ANNEX A

                              ACCEPTANCE OF GRANT

           The Grantee acknowledges and agrees with the terms and conditions of
the attached Grant Letter dated January 1, 1996 pursuant to which the Grantee
has been granted 20,000 shares of the Company's Common Stock, and as a
condition to the issuance of the Granted Shares, hereby represents and warrants
to the Company as follows:

           1.    Investment. The Grantee represents that Grantee is acquiring
the Granted Shares Grantee's own account for investment and not with a view to,
or for sale in connection with, any distribution of the Granted Shares or any
portion thereof and not with any present intention of selling, offering to sell
or otherwise disposing of or distributing the Granted Shares or any portion
thereof in any transaction other than a transaction exempt from registration
under the Securities Act of 1933, as amended (the "1933 Act"). The Grantee
represents that the entire legal and beneficial interest in the Granted Shares
is being acquired, and will be held, for the Grantee's account only, and
neither in whole or in part for any other person.

           2.    Information Concerning Company. The Grantee has heretofore
discussed with officers and directors of the Company the plans, operations and
financial condition of the Company and has heretofore received all such
information as the Grantee has deemed necessary and appropriate, and the
Grantee has received satisfactory and complete information concerning the
business and financial condition of the Company in response to all inquiries in
respect thereof.

           3.    Economic Risk. The Grantee understands that the Granted Shares
are a highly speculative investment involving a high degree of risk. The
Grantee is able, without impairing his financial condition, to hold the Granted
Shares for an indefinite period of time and to suffer a complete loss of such
investment.

           4.    Restricted Securities

           a.    The Grantee understands that the Granted Shares have not been
registered under the 1933 Act and are characterized as "restricted securities"
under the 1933 Act and applicable regulations inasmuch as they are being
acquired from the Company pursuant to the Plan and that the Granted Shares may
not be resold without registration under the 1933 Act except in certain limited
circumstances.

           b.    The Grantee is familiar with Rules 144 and 701 under the 1933
Act, which provide for the resale of restricted securities. In its present
form, Rule 144 generally provides that routine sales of restricted securities
may be made in reliance thereon if (1) such securities must have been
beneficially owned for a period of at least two years by the person for whose
account they are sold, (2) the amount sold does not exceed in any three-month
period the greater of one percent of the class outstanding or the average
weekly volume reported on all exchanges or quotation systems during the four
weeks preceding the filing of the required notice of sale, (3) adequate
information is available to the public in regard to the issuer of the
securities and (4) a notice of the sale on Form 144 is duly filed. The Company
has not yet determined whether it will make available to the public the
information necessary to enable the Grantee to make sales of securities under
Rule 144 and, hence, even if the other requirements of Rule 144 have been met,
the Grantee may not be able to resell the Granted Shares. In its present form,
Rule 701 eliminates some of the restrictions otherwise imposed under Rule 144
in respect of the resale of restricted securities that are acquired pursuant to
a written compensation agreement with the issuer, such as the Consulting
Agreement. The Grantee acknowledges and agrees that the Grantee should consult
counsel regarding any proposed resale of the Granted Shares.

           5.    Disposition of Shares. The Grantee hereby agrees not make any
disposition of all or any of the Granted Shares unless and until the Grantee
shall have:

                                      -6-
<PAGE>   7
           a.    notified the Company of the proposed disposition and provided
a written summary of the terms and conditions thereof;

           b.    complied with all requirements of this Agreement applicable to
the disposition of the Granted Shares; and

           c.    provided the Company an opinion of counsel in form and
substance satisfactory to the Company, that (1) the proposed disposition does
not require registration of the Granted Shares under the 1933 Act, (2) all
actions necessary or appropriate for compliance with the registration
requirements of the 1933 Act and any applicable "blue sky" laws have been taken
or (3) all actions necessary or appropriate for compliance with any exemption
from registration available under the 1933 Act (including Rule 144) and any
applicable "blue sky" laws have been taken.

           6.    Legends. The Grantee understands that the certificates
representing the Granted Shares may bear the following restrictive legends (in
addition to any legend set forth in the Grant Letter):

                 a.    THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
           REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). SUCH SHARES
           HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED,
           PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
           STATEMENT FOR SUCH SHARES UNDER THE ACT, UNLESS, IN THE OPINION
           (WHICH SHALL BE IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY)
           OF COUNSEL SATISFACTORY TO THE COMPANY, SUCH REGISTRATION UNDER THE
           ACT IS NOT REQUIRED.

                 b.    Any legends required by the securities or "blue sky" 
           laws of any state.

                                      -7-
<PAGE>   8
           7.    Section 83(b) Election. The Grantee understands that under
Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the
difference between the value of the the Granted Shares and their fair market
value on the date when the Restriction Period lapses will be reportable as
ordinary income at such time. The Grantee understands that, in lieu of the
foregoing, the Grantee may elect to be taxed at the time the Granted Shares are
acquired hereunder on the difference between the fair market value of the
Granted Shares and the purchase price paid therefor, by filing an election with
the Internal Revenue Service pursuant to Section 83(b) of the Code within 30
days after the date of grant hereunder. If the fair market value of the Granted
Shares on such date of grant equals the purchase price paid therefor (and thus
no tax is payable), the election must be made to avoid adverse tax consequences
in the future. The form for making this election is attached as Annex B hereto.
The Grantee understands that a failure to make this filing within the 30-day
period may result in the recognition of ordinary income by the Grantee (in the
event the fair market value of the Granted Shares increases after the Date of
Grant) as the Restriction Period lapses. THE GRANTEE ACKNOWLEDGES THAT IT IS
THE GRANTEE'S SOLE RESPONSIBILITY TO SEEK ADVICE REGARDING SECTION 83(B) AND TO
DETERMINE WHETHER TO MAKE SUCH ELECTION. THE GRANTEE IS RELYING SOLELY ON THE
GRANTEE'S ADVISORS WITH RESPECT TO ANY SECTION 83(B) ELECTION AND THE COMPANY
SHALL HAVE NO RESPONSIBILITY OR LIABILITY IN CONNECTION THEREWITH.

           The Grantee, intending to be legally bound hereby, has executed this
Acceptance of Grant on the date set forth below.

Dated: January 1, 1996                    /s/ Jan Loeber  
                                         ----------------------------
                                            Jan Loeber
                                       
Witness: /s/ ILLEGIBLE               
        --------------------

                                      -8-
<PAGE>   9
                                                                         ANNEX C

                               JOINDER AGREEMENT

The undersigned, being the spouse of Jan Loeber (the "Grantee"), a holder of
Common Stock of Global TeleSystems Group,  Inc. (the "Company"), has read and
understands the Global TeleSystems Group, Inc. Equity Compensation Plan (the
"Plan") and the attached Grant Letter (the "Grant Letter") and Acceptance of
Grant (the "Acceptance"), and, intending to be legally bound hereby,
irrevocably agrees that she and her equitable or community property interests,
if any, in the Granted Shares (as defined in the Grant Letter) shall be bound
in all respects by the Plan, the Grant Letter and the Acceptance, as each such
document may be amended from time to time in accordance with its terms.



Dated: January     ,   1996                      /s/ A. Kristin Loeber      
                                             -------------------------------
                                             print name: A. Kristin Loeber

Witness: /s/ [ILLEGIBLE]                   
        ------------------------
          C. Puissant
<PAGE>   10
                                                                         ANNEX B

                  ELECTION TO INCLUDE THE VALUE OF RESTRICTED
                PROPERTY IN GROSS INCOME IN THE YEAR OF TRANSFER

           This statement is being made under Section 83(b) of the Internal
Revenue Code, pursuant to Treas. Reg. Section 1.83-2.

           (1)   The person who performed the services is:

                       Name:
                       Address:

                       Taxpayer Ident. No.:
                       Taxable Year:

           (2)   The property with respect which the election is being made is
20,000 shares of the common stock of Global Tel TeleSystems Group, Inc..

           (3)   The property was issued January 1, 1996.

           (4)   The property is subject to a restriction period during which
the property will be forfeited upon the voluntary termination of the taxpayer's
employment with the issuer by the taxpayer or the involuntary termination of
the taxpayer's employment with the issuer for "cause."  The restriction period
lapses on January 1, 1999.

           (5)   The fair market value at the time of grant (determined without
regard to any restriction other than a restriction which by its terms will
never lapse) is $15.40 per share.

           (6)   The amount paid for such property is $ 0.00 per share.

           (7)   A copy of this statement was furnished to Global TeleSystems
Group, Inc. for whom the taxpayer rendered the service underlying the transfer
of property.

           (8)   This statement is executed as of _________________.


- ------------------------           ----------------------------- 
Spouse                             Grantee

<PAGE>   1
                                                                   Exhibit 10.17

                              EMPLOYMENT AGREEMENT



                 THIS EMPLOYMENT AGREEMENT, is made and entered into as of the
third day of January, 1995, by and between SFMT. Inc., a Delaware corporation
(the "Corporation"), and Jan Loeber (the "Executive").

                              W I T N E S S E T H:

                 WHEREAS, the Executive has substantial experience in the
telecommunications industry in both operations and finance; and

                 WHEREAS, the Corporation desires to employ the Executive, and
the Executive desires to be employed by the Corporation, in accordance with the
terms and provisions herein contained:

                 NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein set forth, the parties hereto, intending to be legally
bound, hereby agree as follows:

         1.      Employment.

         (a)     The Corporation hereby employs the Executive, and the
Executive, hereby accepts such employment, on the terms, and subject to the
conditions herein contained.

         (b)     The Executive shall be the Senior Vice President -- Hermes of
the Corporation, and by secondment agreement shall be assigned to work at SFMT-
Hermes ("SFMT-Hermes"), a subsidiary of the Corporation, or Hermes Europe
Railtel B.V, ("Hermes Europe"), a subsidiary of SFMT-Hermes, as the Managing
Director of Hermes Europe. In his capacity as Senior Vice President -- Hermes,
the Executive shall report to and shall perform such duties and exercise such
power and authority as may from time to time be delegated to him by, the Chief
Executive Officer of the Corporation. As the Managing Director of Hermes Europe
he shall also report to the Board of Supervisory Directors of Hermes Europe.

         (c)     The Executive shall devote all of his business time and
attention and his best efforts to the performance of his duties pursuant to
this Employment Agreement.

         (d)     Initially, the Executive shall be required to reside in
Brussels and work from the Corporation's offices in Brussels. The Corporation
reserves the right to require that the Executive will move to and reside in and
operate from the offices of the Corporation's or Hermes Europe in another major
city within the region in which Hermes Europe operates.

         2.      Term.    The initial term of the employment of the Executive
under this Employment Agreement shall be Two (2) years, commencing on January
3, 1995, and continuing, unless sooner terminated pursuant to Section 9 to and
including January 2, 1997. Thereafter this Agreement shall be automatically
renewed annually, unless either party hereto shall

<PAGE>   2
deliver written notice in accordance with Section 9 to the other party at least
Six (6) months prior to the date of termination of the initial term or any
extension or renewal thereof (the "Term") of its desire to terminate such
employment (a "Notice of Termination").

         3.      Compensation.

         (a)     During the initial Term, the Executive shall be paid a salary
at the rate of Two Hundred Thirty-Five Thousand Dollars ($235,000) per annum,
payable in accordance with the Corporation's customary payroll practices for
executive officers.

         (b)     Thereafter, at the end of each year the Compensation Committee
of the Board of Directors of the Corporation shall review the salary of the
Executive, and shall make such increases to such salary as the Board of
Directors shall, in its sole and absolute discretion, deem appropriate.

         (c)     For the purposes of this Agreement, "Salary" shall mean any
payment by the Corporation to the executive pursuant to this Section 3.

         4.      Bonus.

         (a)     After the Executive has been employed by the Corporation for a
period of eighteen (18) months, and as additional compensation to the Executive
hereunder, the Executive will be assessed for eligibility to receive a
discretionary bonus (the "Bonus") in respect of the initial employment period.
Subject to the provisions of Section 4(b), the initial target for such Bonus,
based on the achievement by Hermes Europe of the objectives shall be Fifty
percent (50%) of the Salary of the Executive earned during the initial
employment period. The first bonus shall be in respect of two years ("the
Initial Bonus"), payable in accordance with Section 4(c). One-half of the
maximum target for the Initial Bonus shall be guaranteed. The remainder of the
potential Initial Bonus shall be subject to the achievement of the performance
objectives set forth in the approved Hermes Europe Business Plan.

         (b)     The formula or other method for determining the Bonus for the
Executive in each subsequent fiscal year shall be determined by the Corporation
and shall be based upon the performance of Hermes Europe in such fiscal year as
compared with the Hermes Europe approved business plan for such fiscal years.
The amount of the Bonus paid to the Executive in respect of any fiscal year of
the Corporation shall be subject to the sole and absolute discretion of the
Board of Directors of the Corporation. The objectives for each fiscal year and
the amount of bonus for successful completion of objectives (as a percentage of
base salary or other formula declared for the period) shall be established
during the period between Twelve (12) and Fifteen (15) months prior to the
fiscal year for which such objectives apply (e.g., October 1 - December 31, 1994
for fiscal year 1996).

         (c)     All Bonuses in respect of any fiscal year of the Hermes Europe
shall be paid within Thirty (30) days after the issuance of the audited
financial statements of Hermes Europe for such fiscal year. The only exception
will be the guaranteed portion of the initial Bonus which shall be paid on or
before January 2, 1997.


                                      2
<PAGE>   3
         5.      Equity Participation

         (a)     The Corporation shall use its best efforts to cause SFMT-
Hermes to adopt a Stock Option Plan (the "Option Plan") for its senior
executives. Subject to the provision of the Plan, SFMT-Hermes shall grant to
the Executive options to purchase shares of Capital Stock of SFMT-Hermes
("Capital Stock"). The number of shares of Capital Stock which shall be subject
to the option shall be an amount equal to Three and One-Half percent (3.5%) of
the outstanding shares of SFMT-Hermes to be determined at the time of the
completion of the capitalization required to achieve the build-out of the first
phase of network installation in accordance with an approved business plan of
Hermes Europe; provided however, that the issuance of such options is
conditioned upon such capitalization being committed to in writing on or prior
to January 1, 1997 and completed within six months thereafter; provided,
further, that if Hermes Europe does not for any reason adopt a stock option
plan for its senior executives, the Corporation shall provide options to
purchase a number of shares of Common Stock of the Corporation of comparable
value as of the same date, which options shall be issued pursuant to the
Corporation's 1992 Stock Option Plan, as amended. Any options which may be
issued to the Executive shall vest as follows:

                 (i)      options to purchase 33.33% (one-third) of the shares
         of Capital Stock shall vest as at the close of business on January 2,
         1997;

                 (ii)     options to purchase 33.33% (one-third) of the shares
         of Capital Stock shall vest as at the close of business of January
         2,1998: and

                 (iii)    options to purchase 33.33% (one-third) of the shares
         of Capital Stock shall vest as at the close of business on January 2,
         1999.

Notwithstanding the foregoing, in the event the Hermes Europe business plan is
revised to provide for the capitalization of Hermes Europe on a date subsequent
to January 1, 1997, then the foregoing options shall be issued on each of the
date of commitments for such capitalization (subject to its completion within
six months thereafter), and one-third of such options shall vest on the close
of business on each of the date of such commitment, and the first and second
anniversaries of the commitment of such financing (in each case subject to
completion of such financing within six months of the commitment for such
financing).

         (b)     The Corporation has a Restricted Stock Plan (the "Restricted
Plan"). Subject to the provision of the Restricted Plan, the Corporation shall
grant to the Executive Twenty Thousand (20,000) shares of Restricted Stock of
the Corporation ("Restricted Stock") upon achievement of the first year Hermes
Europe Business Plan objectives. The shares shall vest as follows:

                 (i)      Six Thousand Six Hundred Sixty-Six (6,666) shares of
         Restricted Stock shall vest as at the close of business on January 2,
         1997;

                 (ii)      Six Thousand Six Hundred Sixty-Seven (6,667) shares
         of Restricted Stock shall vest as at the close of business on January
         2. 1998; and


                                      3
<PAGE>   4
                 (ii)      Six Thousand Six Hundred Sixty-Seven (6,667) shares
         of Restricted Stock shall vest as at the close of business on 
         January 1, 1999.

         6.      Benefits.

         (a)     During the Term. the Executive shall be entitled to receive
such benefits and to participate in such employee group benefit plans as are
generally provided by the Corporation, or made available by the Corporation, to
its executive officers, including without limitation, but subject to the
conditions imposed by the carriers, any medical, health, disability and life
insurance policies.

         (b)     During the Term, the Corporation or Hermes Europe shall
provide to the Executive, at the Corporation's expense, use of a late model
automobile appropriate in the geographic location of Executive's residence, and
acceptable to the Corporation.

         (c)     During the Term, the Corporation or Hermes Europe shall
provide business class transportation to and from the United States for one
trip per annum for Executive and Executive's immediate family living with
Executive in Brussels.

         (d)     During the initial first Two (2) years of the Term, the
Corporation or Hermes Europe shall provide to the Executive a furnished
residence in the city of residence of the Executive.

         (e)     The Corporation or Hermes Europe shall pay to the Executive
during the Term an amount perannum as shall compensate the Executive for tax
equalization in connection with the requirement that the Executive reside
outside the United States for so long as the Executive is required to live
outside the United States. Such tax equalization shall apply to Salary, Bonus
taxable components of equity awards and any other payment deemed taxable in a
foreign jurisdiction. SFMT will also be responsible for paying for the
preparation and filing of your domestic and international income taxes.

         (f)     The Executive shall be paid an amount equal to Seven percent
(7%) of the Executive's Salary as a cost of living adjustment in connection
with requirement that the Executive reside in Brussels for so long as the
Executive is required to live in Brussels.

         (g)     The Corporation or Hermes Europe shall provide relocation and
moving support as provided in the Schedule to this Agreement in connection with
the Executive's relocation to Brussels.

         7.      Expense Reimbursement.

         (a)     During the Term, the Corporation shall reimburse the Executive
for all reasonable expenditures actually and necessarily paid or incurred by
the Executive in the course of and pursuant to the business of the Corporation.
Such reimbursement shall be subject to the submission to the Corporation by the
Executive of appropriate documentation and/or vouchers,



                                      4
<PAGE>   5
and shall be made in accordance with customary procedures of the Corporation
for expense reimbursement, as may from time to time be established.

         (b)     Should the Corporation provide Executive with a credit card,
Executive acknowledges complete personal responsibility for all charges made on
such credit card. Any charges received by the Corporation for expenses not
documented on an approved expense report may be deducted by the Corporation from
the Executives payroll check. Upon termination of this Agreement, non-approved
charges shall be deducted from the last payroll check issued to the Executive.

         8.      Vacation. In each fiscal year of the Corporation during the
Term, the Executive shall be entitled to Four (4) weeks vacation time, which
shall not be cumulative from year to year without the prior written consent of
the Corporation or unless the Executive shall be unable to take such vacation
due to Executive's duties under this Agreement; provided, however, that to the
extent the Executive cannot take vacation time during the Term due to his
responsibilities under this Agreement, upon termination, Executive shall be
entitled to be compensated for accrued but unused vacation time.

         9.      Termination.

         (a)     Notwithstanding anything to the contrary contained in this
Agreement, the Corporation shall at all times have the right to terminate this
Agreement and the employment of the Executive hereunder for "Cause" by written
notice to the Executive in accordance with Section 15. For the purpose of this
Agreement, the term "Cause" shall mean any action of the Executive or any
failure to act by the Executive which constitutes:

                 (i)      fraud, embezzlement or any felony in connection with
         the Executive's duties as an executive officer of the Corporation or
         any subsidiary or affiliate of the Corporation, or willful misconduct
         or the commission of any other act which causes or may reasonably be
         expected to cause substantial economic or reputational injury to the
         Corporation or any such subsidiary or affiliate of the Corporation.
         including any violation of the Foreign Corrupt Practices Act, as
         described in Section 15 of this Agreement;

                 (ii)     continuing conflict of interest or continuing failure
         to follow reasonable directions or instructions of the Board of
         Directors or Chief Executive Officer of the Corporation. A conflict of
         interest or a failure to follow directions of the Board of Directors
         or the Chief Executive Officer of the Corporation shall be deemed to
         be continuing if the Executive shall have received written notice
         thereof and shall have not terminated the conflict of interest or
         failure to follow directions within Thirty (30) days after receipt of
         such notice; or

                 (iii)    an extended period of absence by the Executive from
         the performance of the obligations of the Executive provided
         hereunder, which absence shall be for a reason other than a
         disability, and which has not been approved in writing advance by the
         Board of Directors or the Chief Executive Officer of the Corporation.



                                      5
<PAGE>   6
         (b)     Notwithstanding anything to the contrary contained in this
Agreement, the Corporation, by written notice to the Executive, shall at all
times have the right to terminate this Agreement and the employment of the
Executive hereunder if the Executive shall experience a "Total Disability." For
the purpose of this Agreement the term "Total Disability" shall mean any mental
or physical illness, condition, disability or incapacity as shall:

                 (i)      prevent the Executive from reasonably discharging his
         services and employment duties hereunder;

                 (ii)     be attested to in writing by a physician acceptable
         to the Corporation; and

                 (iii)    continue during any period of Three (3) consecutive
         months or for periods aggregating three months in any twelve-month
         period.

         A Total Disability shall be deemed to have occurred on the last day of
such applicable three-month period.

         (c)     This Agreement shall terminate automatically upon the date of
the death of the Executive.

         10.     Payments upon Termination.

         (a)     If the Corporation shall terminate the employment of the
Executive under this Agreement pursuant to Section 9(a) hereof, or if the
employment of the Executive hereunder shall be terminated by the Executive
other than in accordance with Section 2 hereof, then, in any such event, the
Corporation shall have no obligation to pay to the Executive his Salary or any
other compensation or benefits provided under this Agreement for any period
after the date of such termination, or to pay any Bonus for the year in which
such termination occurs; provided, however, that the Corporation shall pay all
Salary earned by the Executive prior to the date of such termination and the
reimbursement of all expenses incurred by the Executive prior to the date of
such termination in accordance with Section 7 hereof. Upon a termination
pursuant to Section 9(a) or by the Executive, all options and restricted shares
granted to Executive pursuant to Section 5 shall immediately be canceled and no
further options shall vest.

         (b)     If the employment of the Executive hereunder shall terminate
pursuant to Sections 9 (b) or (c) hereof, if the employment of the Executive
shall be terminated by the Corporation in accordance with Section 2 hereof, or
if the Executive shall be terminated by the Corporation other than in
accordance with the provisions of this Agreement, the Corporation shall pay to
the Executive or his Estate, as the case may be, the Salary and Bonus for the
fiscal year in which such termination occurs, prorated for the number of weeks
during which the Executive was employed by the Corporation during such fiscal
year.

         (c)     In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in



                                      6
<PAGE>   7
Section 9 above, the Executive shall receive as severance an amount equal to
the greater of (i) Six (6) months salary, and (ii) the amount of salary that
would have been payable to the Executive from the date of Notice of Termination
until the end of the Term, had the Corporation not delivered such Notice of
Termination. Such severance pay shall be paid in equal monthly installments,
commencing the month following such termination, and shall be payable in
accordance with the Corporation's customary practices for executive officers.

         (d)     In the event that the employment of the Executive is
terminated due to a Total Disability or the death of the Executive in accordance
with Section 9(b) or 9(c) hereof, then the Executive or his designated
beneficiary, as the case may be, shall be entitled to receive such amounts as
are provided for in any disability policy or life insurance policy provided by
the Corporation for the benefit of the Executive.

         11.     Covenants of The Executive. In order to induce the Corporation
to enter into this Agreement and employ the Executive hereunder, the Executive
hereby covenants and agrees as follows:

         (a)     During the Term and for a period of Twelve (12) months
thereafter, the Executive shall not, without the prior written consent of the
Corporation:

                 (i)      directly or indirectly acquire or own in any manner
         any interest in any person, firm, partnership, corporation,
         association or other entity which competes with the Corporation or any
         of its affiliates or subsidiaries; or

                 (ii)     be employed by, or serve as an employee, agent,
         officer, director of any person, firm, partnership, corporation
         association which competes with the Corporation or any of its
         affiliates or subsidiaries.

The foregoing provisions of this Section 11(a) shall not prevent the Executive
from acquiring and/or owning not more than nine per cent of the equity or debt
securities of any company which has securities listed for trading on a
recognized securities exchange or are regularly traded in the National
Association of Securities Dealers Automated Quotation System.

         (b)     The Executive shall not at any time, other than in the
ordinary course of business of the Corporation, when and if required, disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity, any confidential information relating to the
Corporation or any of its affiliates or subsidiaries, or any information
concerning the financial condition, suppliers, customers, lessors, lessees,
sources of leads for and methods of obtaining new business or the methods
generally of doing and operating the respective businesses of the Corporation,
its affiliates and subsidiaries, except to the extent that such information is
a matter of public knowledge or is required to be disclosed by law or-judicial
or administrative process.

         (c)     During the Term and for a period of Twelve (12) months
thereafter, the Executive shall not, without the prior written consent of the
Corporation, directly or indirectly through any other individual or entity:

                 (i)      solicit, entice, persuade or induce any individual
         who currently is, or at any time during the Term shall be, an employee
         of the Corporation, or any of its affiliates, to



                                      7
<PAGE>   8
         terminate or refrain from renewing or extending such person's
         employment with the Corporation or such subsidiary or affiliate, or to
         become employed by or enter into contractual relations with any other
         individual or entity, and the Executive shall not approach any such
         employee for any such purpose or authorize or knowingly cooperate with
         the taking of any such actions by any other individual or entity; or

                 (ii)     except in accordance with the Executive's duties
         hereunder on behalf of the Corporation, solicit, entice, persuade, or
         induce any individual or entity which currently is, or at any time
         during the Term shall be, a customer, supplier, lessor or lessee of the
         Corporation, or any of its subsidiaries of affiliates, to terminate or
         refrain from renewing or extending its contractual or other
         relationship with the Corporation or such subsidiary or affiliate, and
         the Executive shall not approach any such customer, supplier, lessor
         or lessee for such purpose or authorize or knowingly cooperate with
         the taking of any such actions by any other individual or entity.

         12.     Specific Performance. The Executive acknowledges that a breach
or violation by the Executive of the covenants or agreements contained in
Section 11 of this Agreement would cause irreparable harm and damage to the
Corporation if such provisions are not specifically enforced, the monetary
amount of which would be impossible to ascertain. Therefore, the Corporation
shall be entitled to enforce such provisions in a court of equity by a decree
of specific performance and to obtain an injunction from any court of competent
jurisdiction enjoining and restraining any breach or violation of any or all of
the covenants and agreements contained in Section 11 of this Agreement by the
Executive and/or his employees, associates, partners or agents, or entities
controlled by one or more of them, either directly or indirectly. Such remedies
shall be cumulative and not exclusive and shall be in addition to whatever
other rights or remedies the Corporation shall have for damages for a breach by
the Executive of the covenants or agreements contained in Section 11 or
elsewhere in this Agreement.

         13.     Foreign Corrupt Practices Act. The Executive agrees to comply
in all respects with the U.S. Foreign Corrupt Practices Act of 1977 (the
"FCPA"), as amended, which provides generally that: under no circumstances will
foreign officials, representatives, political parties or holders of public
offices be offered, promised or paid any money, remuneration, things of value,
or provided any other benefit, direct or indirect, in connection with obtaining
or maintaining contracts or orders hereunder. The Executive's failure to comply
in all respects with the provisions of the FCPA shall constitute a material
breach by him of his obligations hereunder and shall entitle SFMT to terminate
this Agreement immediately. A copy of the Corporation's FCPA policy is annexed
hereto as Exhibit C.

         14.     No Delegation. The Executive shall not delegate his employment
obligations under this Agreement to any other person.

         15.     Notices. Any notice required or permitted to be given under
this Agreement shall be in writing and sent by facsimile, with appropriate
confirmation of receipt, certified mail, return receipt requested, or overnight
courier to the following addresses:

                 If to the Corporation:    SFMT, Inc.
                                           477 Madison Avenue, 8th floor



                                      8
<PAGE>   9
                                           New York, New York 10022
                                           Attention: General Counsel
                                           Fax: 212-371-9552

                 If to the Executive:      2 Cobblefield Drive
                                           Mendham, New Jersey 07945

Either party may change the address to which notices, requests, demands and
other communications to such party shall be delivered personally or mailed by
giving notice thereof to the other party hereto in the manner herein provided.
Notices shall be deemed given at the time of receipt.

         16.     Deductions and Withholding. The Executive acknowledges and
agrees that the Company shall be entitled to withhold from the Executive's
compensation hereunder, including Salary and Bonus and other payments made
pursuant to the Agreement, all applicable taxes that are due to the appropriate
jurisdictions, and pay this withholding to the appropriate tax authorities,
consistent with the tax equalization treatment described in Section 6(e)
herein. Tax equalization, applied in the context of monthly withholding, shall
be reconciled at year end.

         17.     Binding Effect. This Agreement shall be for the benefit of and
binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.

         18.     Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements, both oral
and written, between the parties hereto with respect to such subject matter.
This Agreement may not be modified, amended, altered or rescinded in any
manner, except by written instrument signed by both of the parties hereto;
provided, however, that the waiver by any party of compliance by any other
party with respect to any provision hereof or of any breach by such other party
need be signed only by the party waiving such provision or breach; provided,
further, that the waiver by either party hereto of a breach or compliance with
any provision of this Agreement shall not operate nor be construed as a waiver
of any subsequent breach or compliance.

         19.     Severability. In case any one or more of the provisions of
this Agreement shall be held by any court of competent jurisdiction to be
illegal, invalid or unenforceable in any respect, such provision shall be of no
force and effect, but the illegality, invalidity or unenforceability of such
provision shall have no effect upon and shall not impair the enforceability of
any other provision of this Agreement, but this Agreement shall be construed as
if such illegal, invalid or unenforceable provision had never been contained
herein.

         20.     Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within New York.

         21.     Arbitration. Any and all disputes, controversies and claims
arising out of or relating to this Agreement, shall be settled and determined
by arbitration conducted before a panel



                                      9
<PAGE>   10
of three arbitrators in New York in accordance with the rules of the American
Arbitration Association then in effect. The arbitrators' award shall be final
and binding upon the Corporation and the Executive, and judgment confirming
such arbitration may be entered thereon in any court having jurisdiction over
such proceedings.

         22.     Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any manner
the meaning or interpretation of this Agreement.

         23.     Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.


                                            SFMT, INC.




                                       By: /s/ [ILLEGIBLE]
                                          -------------------------


                                          /s/ JAN LOEBER
                                          -------------------------
                                                Jan Loeber

<PAGE>   1
                                                                   Exhibit 10.18

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT, is made and entered into as of the first day
of April, 1996, by and between GTS Group, Inc., a Delaware corporation (the
"Corporation"), and Louis Toth (the "Executive").

                                  WITNESSETH:

         WHEREAS, the Executive has substantial experience in operating
telecommunications ventures; and

         WHEREAS, the Corporation desires to employ the Executive, and the
Executive desires to be employed by the Corporation, in accordance with the
terms and provisions herein contained;

         NOW THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, the parties hereto, intending to be legally bound,
hereby agree as follows:

         1.      Employment.

         (a)     The Corporation hereby employs the Executive, and the
Executive hereby accepts such employment, on the terms, and subject to the
conditions herein contained.

         (b)     The Executive shall be Senior Vice President - Central Europe.
In this capacity as Senior Vice President - Central Europe, the Executive shall
report to and perform such duties and exercise such power and authority as may
from time to time be delegated to the Executive by the Chief Executive Officer
and the Board of Directors.

         (c)     The Executive shall devote all of the Executive's business
time and attention and dedicate with the Executive's best efforts toward the
fulfillment and execution, including performance criteria, of the Executive's
defined duties pursuant to this Employment Agreement.

         2.      Term.

         (a)     The initial term of the employment of the Executive under this
Employment Agreement shall be two years commencing on April 1, 1996, and
continuing, unless sooner terminated pursuant to Section 9.

         (b)     Thereafter this Agreement shall be automatically renewed
annually, unless either party hereto shall deliver written notice in accordance
with Section 15 to the other party at least 120 days prior to the date
termination of the initial term or any extension or renewal there (the "Term")
of its desire to terminate such employment (a "Notice Termination").

         3.      Compensation.

         (a)     During the initial 12 month consecutive period of service, the
Executive shall be paid a salary at the rate of two hundred four thousand seven
hundred fifty dollars ($204,750) per annum, payable in accordance with the
Corporation's customary payroll practices for Executives.
<PAGE>   2
         (b)     At the end of each fiscal year the Corporation shall review
the salary of the Executive, and shall make such adjustments to base salary as
the Corporation shall, in its sole and absolute discretion, deem appropriate.

         (c)     For the purposes of this Agreement, "Salary" shall mean any
payment by the Corporation to the Executive pursuant to this Section 3.

         4.      Bonus Opportunities.

         (a)     As additional compensation opportunities for the Executive
hereunder, the Corporation shall provide to the Executive a bonus program which
allows for possible incentive compensation (the "Bonus") in respect of each
fiscal year of the Corporation. Subject to the provisions of Section 4(b), the
basis for such bonus, shall be based on performance achievements by the
Corporation and the Executive. Incentive award opportunities may range up to
30% of the Salary of the Executive in any fiscal year. The Bonus plan will be
reviewed and adjusted on an annual basis, if deemed appropriate, by the
Corporation in coordination with the Compensation Committee of the Board of
Directors in its sole and absolute discretion.

         (b)     The formula or other methods for determining the Bonus for the
Executive in each fiscal year shall be determined by the Corporation in
coordination with the Compensation Committee of the Board of Directors, and
shall be based upon the performance of the Corporation and the Executive in
such fiscal year as compared with the projected expected performance of the
Corporation for such fiscal years. The actual amount of the Bonus paid to the
Executive in respect to the performance of any fiscal year of the Corporation
shall be subject to the sole and absolute discretion of the Board of Directors
of the Corporation.

         (c)     All bonuses with respect to any fiscal year of the Corporation
shall be paid as soon as practical subsequent to the issuance of the
consolidated financial statements of the Corporation.

         5.      Stock Option Plan.

         (a)     The Corporation has adopted the 1992 Stock Option Plan, as
amended (the "Plan") for its employees.  Subject to the provision of the Plan,
a copy of which is annexed hereto as Exhibit A, and the execution and delivery
of an option agreement (the "Option Agreement"), in the form annexed hereto as
Exhibit B, the Executive is eligible for the Corporation to grant to the
Executive options to purchase Common Stock of the Corporation ("Common Stock").
The specific number and terms of the options are presented in the Plan and the
Option Agreement annexed hereto.

         (b)     In the event that the Corporation establishes one or more
additional stock option plans for its Executives, the Executive may be eligible
to receive options under such plans, as determined by the Compensation
Committee of the Board of Directors of the Corporation.

         6.      Benefits. During the Term, the Executive shall be entitled to
receive such benefits and to participate in such employee group benefit plans
as are generally provided by the Corporation, or made available by the
Corporation, to its Executives, including without limitation, but subject to
the conditions imposed by the carriers, any medical, health, disability and
life insurance policies.

                                       2
<PAGE>   3
         (a)     Additional Benefits. For as long as you are employed in
Hungary, GTS Group, Inc. will provide you with an annual COLA allowance in the
amount of $30,000, paid monthly at the rate of $2,500.

         7.      Expanse Reimbursement.

         (a)     During the Term, the Corporation shall reimburse the Executive
for all reasonable expenditures actually and necessarily paid or incurred by the
Executive in the course of and pursuant to the business of the Corporation.
Such reimbursement shall be subject to the submission to the Corporation by the
Executive of appropriate documentation and/or vouchers, and shall be made in
accordance with the customary procedures of the Corporation for expense
reimbursement, as may from time to time be established.

         (b)     Should the Corporation provide Executive with a credit card,
Executive acknowledges complete personal responsibility for all charges made on
such credit card. Any charges received by the Corporation for expenses not
documented on an approved expense report may be deducted by the Corporation
from the Executive's payroll check. Upon termination of this Agreement, non
approved charges shall be deducted from the last payroll check issued to the
Executive.

         8.      Vacation. In each fiscal year during the Term, the Executive
shall be entitled to 4 weeks vacation time, which shall not be cumulative from
year to year without the prior written consent of the Corporation or unless the
Executive shall be unable to take such vacation due to Executive's duties under
this Agreement; provided, however, that to the extent the Executive cannot take
vacation time during the Term due to his responsibilities under this Agreement,
upon termination, Executive shall be entitled to be compensated for accrued but
unused vacation time,

         9.      Termination.

         (a)     Notwithstanding anything to the contrary contained in this
Agreement, the Corporation shall at all times have the right to terminate 
immediately this Agreement and the employment of the Executive hereunder for
"Cause" by written notice to the Executive in accordance with Section 15. For
the purpose of this Agreement, the term "Cause" shall mean any action of the
Executive or any failure to act by the Executive which constitutes:

                 (i)      fraud, embezzlement or any felony in connection with
         the Executive's duties as an Executive of the Corporation or any
         subsidiary or affiliate of the Corporation, or willful misconduct or
         the commission of any other act which causes or may reasonably be
         expected to cause substantial economic or reputational injury to the
         Corporation or any such subsidiary or affiliate of the Corporation,
         including any violation of the Foreign Corrupt Practices Act, as
         described in Section 13 of this Agreement;

                 (ii)     a continuing conflict of interest or continuing
         failure to follow reasonable directions or instructions of the Board
         of Directors or Chief Executive Officer of the Corporation. A conflict
         of interest or a failure to follow directions of the Corporation shall
         be deemed to be continuing if the Executive shall have received
         written notice thereof and shall have not terminated the conflict of
         interest or failure to follow directions within thirty days after
         receipt of such notice;

                                       3

<PAGE>   4
                 (iii)    an extended period of absence by the Executive from
         the performance of the obligations of the Executive provided hereunder,
         which absence shall be for a reason other than a disability, and which
         has not been approved in writing in advance by the Corporation; or

                 (iv)     a failure to meet minimum satisfactory performance
         requirements for a performance period. For this purpose, the 
         Corporation and the Executive will agree in a separate, written
         document to the terms of each performance period and the minimum
         satisfactory performance requirements applicable to each such
         performance period. This document may be modified or extended only by
         the mutual consent of both parties.

         (b)     Notwithstanding anything to the contrary contained in this
Agreement, the Corporation, by written notice to the Executive, shall at all
times have the right to terminate this Agreement and the employment of the
Executive hereunder if the Executive shall experience a "Total Disability". For
the purpose of this Agreement, the term "Total Disability" shall mean any mental
or physical illness, condition, disability or incapacity as shall:

                 (i)      prevent the Executive from reasonably discharging
         required services and employment duties hereunder;

                 (ii)     be attested to in writing by a physician or a group
         of physicians acceptable to the Corporation; and

                 (iii)    continue during any period of three consecutive
         months or for periods aggregating three months in any eighteen month
         period.

         A Total Disability shall be deemed to have occurred on the last day of
such applicable three month period.

         (c)     This Agreement shall terminate automatically upon the date of
the death of the Executive.

         (d)     The Executive may terminate the Agreement at any time by giving
120 days' written notice to the Corporation in accordance with Section 15. Upon
giving such notice, the Executive shall be continued in employment with the 
Corporation for the full 120 days of the notice period, be continued in 
employment with the Corporation without the existence of an employment 
agreement, or at the discretion of the Corporation may be paid his/her salary 
and have applicable benefits hereunder continued for such 120 day period in
lieu of continued employment. Failure of the Executive to provide the full 120
days notice shall be deemed a breach of the agreement by the Executive and
permit the Corporation to cease immediately the compensation and benefits
provided herein, and if deemed necessary, to take remedial action to prohibit
any further damages as may occur from the breach by the Executive.

         10.     Payments Upon Termination.

         (a)     If the Corporation shall terminate the employment of the
Executive under this Agreement pursuant to Section 9(a) hereof, or if the
employment of the Executive hereunder shall be terminated by the Executive other
than in accordance with Section 2 or Section 9(d), then, in any such event, the
Corporation shall have no obligation to pay to the Executive base salary or any
other compensation or benefits provided under this Agreement for any period 
after the date of such termination, or to pay any Bonus for the


                                       4
<PAGE>   5
year in which such termination occurs; provided, however, that the Corporation
shall pay all Salary earned by the Executive prior to the date of such
termination and the reimbursement of all expenses incurred by the Executive
prior to the date of such termination in accordance with Section 7 hereof. Upon
termination pursuant to Section 9(a) or by the Executive other than in 
accordance with Section 2 or Section 9(d), all options granted to the Executive
pursuant to Section 5 shall immediately be canceled and no further options shall
vest.

         (b)     If the employment of the Executive hereunder shall terminate
pursuant to subsections 9(b) or (c) hereof, if the employment of the Executive
shall be terminated by the Corporation in accordance with Section 2 hereof, or
if the Executive shall be terminated by the Corporation other than in accordance
with the provisions of this Agreement, the Corporation shall pay to the 
Executive or the Executive's Estate, as the case may be, the Salary and target
Bonus for the fiscal year in which the termination occurs, prorated for the 
number of weeks during which the Executive was employed by the Corporation
during such fiscal year.

         (c)     In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in Section 9, the Executive shall receive as
severance an amount equal to number of months/days of the notice period, (e.g.,
four months Salary); provided, however, that in the event that the Executive is
subject to the covenants and agreements set forth in Section 11, the amount of
the severance payable to the Executive shall be equal to the number of 
months/days during which the Executive remains subject to the covenants and
agreements set forth in Section 11. Such severance pay shall be paid in equal
monthly installments, commencing the month following such termination, and
shall be payable in accordance with the Corporation's customary payroll
practices for Executive officers.

         (d)     In the event that the employment of the Executive is terminated
due to a Total Disability or the death of the Executive in accordance with 
Section 9(b) or 9(c) hereof, then the Executive or his designated beneficiary,
as the case may be, shall receive such amounts as are provided for in the 
disability policy or life insurance policy provided by the Corporation for the
benefit of the Executive.

         11.     Covenants of the Executive. In order to induce the Corporation
to enter into this Agreement and employ the Executive hereunder, the Executive
hereby covenants and agrees as follows:

         (a)     During the term and for a period of four months thereafter,
the Executive shall not, without the prior written consent of the Corporation,
directly or indirectly, own, acquire, manage, operate, join, control, finance
or participate in the ownership, management, operation, control or financing
of, or be connected as an officer, director, employee, partner, principal,
agent, representative, consultant or otherwise with or use or permit his/her
name to be used in connection with:

                 (i)      any business or enterprise engaged in the business of
         communications, telecommunications and related industries operating in
         the geographic area of Central Europe, (this subparagraph shall
         include any business operations and activities the Corporation will
         expand into after the date this agreement is extended).

         It is recognized by the Executive that the business of the Corporation
and its affiliates and the Executive's connection there with is or will be
involved in activity

                                       5
<PAGE>   6
throughout the Geographic Area and that more limited geographical limitations
on this non-competition covenant are therefore not appropriate.

         The foregoing provisions of this Section 11 (a) shall not prevent the
Executive from acquiring and/or owning not more than nine per cent of the
equity or debt securities of any company which has securities listed for
trading on a recognized securities exchange or are regularly traded in the
National Association of Securities Dealers Automated Quotation System.

         (b)     The Executive shall not at any time, other than in the ordinary
course of business of the Corporation, when and if required, disclose, directly
or indirectly, to any person, firm, corporation, partnership, association or 
other entity, any confidential information concerning the financial condition,
suppliers, customers, lessors, lessees, sources of leads for and methods of 
obtaining new business or the methods generally of doing and operating the 
respective businesses of the Corporation, its affiliates and subsidiaries, 
except that such information is a matter of public knowledge or is required to
be disclosed by law or judicial or administrative process.

         (c)     During the Term and for a period of four months thereafter,
the Executive shall not, without the prior written consent of the Corporation,
directly or indirectly through any other individual or entity:

                 (i)      solicit, entice, persuade or induce any individual
         who currently is, or at any time during the Term shall be, an employee
         of the Corporation, or any of its affiliates, to terminate or refrain
         from renewing or extending such person's employment with the 
         Corporation or such subsidiary or affiliate, or to become employed by
         or enter into contractual relations with any other individual or
         entity, and the Executive shall not approach any such employee for any
         such purpose or authorize or knowingly cooperate with the taking of
         any such actions by any other individual or entity; or

                 (ii)     except in accordance with the Executive's duties
         hereunder on behalf of the Corporation, solicit, entice, persuade, or
         induce any individual or entity which currently is, or at any time
         during the Term shall be, a customer, supplier, lessor or lessee of
         the Corporation, or any of its subsidiaries or affiliates, to terminate
         or refrain from renewing or extending its contractual or other 
         relationship with the Corporation or such subsidiary or affiliate, and
         the Executive shall not approach any such customer, supplier, lessor
         or lessee for such purpose or authorize or knowingly cooperate with
         the taking of any such actions by any other individual or entity.
         
         (d)     In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in Section 9, the Corporation may, in its
sole discretion, elect to waive the application of the covenants and agreements
set forth in Section 11 to the Executive.

         12.     Specific Performance. The Executive acknowledges that a breach
or violation by the Executive of the covenants or agreements contained in
Sections 11 and 13 of this Agreement would cause irreparable harm and damage to
the Corporation if such provisions are not specifically enforced, the monetary
amount of which would be impossible to ascertain. Therefore, the Corporation
shall be entitled to enforce such provisions in a court of equity by a decree
of specific performance and to obtain an


                                       6
<PAGE>   7
injunction from any court of competent jurisdiction enjoining and restraining
any breach or violation of any or all of the covenants and agreements contained
in Sections 11 and 13 of this Agreement by the Executive and/or his employees,
associates, partners or agents, or entities controlled by one or more of them,
either directly or indirectly. Such remedies shall be cumulative and not
exclusive and shall be in addition to whatever other rights or remedies the
Corporation shall have for damages for a breach by the Executive of the 
covenants or agreements contained in Section 11 or elsewhere in this Agreement.
Notwithstanding anything herein to the contrary, the Corporation hereby
expressly reserves the right to seek damages and other economic remedies for a
breach by the Executive of the covenants or agreements contained in Section 11
or elsewhere in this Agreement.

         13.     Foreign Corrupt Practices Act.  You agree to comply in all
respects with the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), as amended,
which provides generally that: under no circumstances will foreign officials,
representatives, political parties or holders of public offices be offered,
promised or paid any money, remuneration, things of value, or provided any
other benefit, direct or indirect, in connection with obtaining or maintaining
contracts or orders hereunder. Your failure to comply in all respects with the
provisions of the FCPA shall constitute a material breach by you of your
obligations hereunder and shall entitle Global TeleSystems Group, Inc. to
terminate this Agreement immediately. A copy of the Corporation's FCPA policy
is annexed hereto as Exhibit C.

         14.     No Delegation. The Executive shall not delegate his employment
obligations under this Agreement to any other person.

         15.     Notices. Any notice required or permitted must be approved by
the Corporation according to the terms of this Agreement and must be approved
in writing and with appropriate confirmation of receipt, certified mail, return
receipt requested, or overnight courier to the following addresses:

                 If to the Corporation:   Global TeleSystems Group, Inc.
                                          Attn: General Counsel
                                          1751 Pinnacle Drive
                                          North Tower 12th Floor
                                          McLean, VA 22102 USA

                 If to the Executive:     Louis Toth
                                          171 Dreve Richelle
                                          1410 Waterloo, Belgium

         Either party may change the address to which notices, requests,
demands and other communications to such party shall be delivered personally or
mailed by giving notice thereof to the other party hereto in the manner herein
provided. Renewal notices shall be deemed approved at the time when such are
approved by the Compensation Committee of Board at an official meeting.

         16.     Binding Effect.  This Agreement shall be for the benefit of
and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.


                                       7

<PAGE>   8
         17.     Entire Agreement.  This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements, both oral
and written, between the parties hereto with respect to such subject matter.
This Agreement may not be modified, amended, altered or rescinded in any
manner, except by written instrument signed by both of the parties hereto;
provided, however, that the waiver by any party of compliance by any other
party with respect to any provision hereof or of any breach by such other party
need be signed only by the party waiving such provision or breach; provided,
further, that the waiver by either party hereto of a breach or compliance with
any provision of this Agreement shall not operate nor be construed as a waiver
of any subsequent breach or compliance.

         18.     Severability. In case any one or more of the provisions of
this Agreement shall be held by any court of competent jurisdiction to be
illegal, invalid or unenforceable in any respect, such provision shall be not
force and effect, but the illegality, invalidity or unenforceability of any
other provision of this Agreement, but this Agreement shall be construed as if
such illegal, invalid or unenforceable provision had never been contained
herein.

         19.     Choice of Laws.  The Executive and the Corporation intend and
hereby acknowledge that jurisdiction over disputes with regard to this Agreement
shall be exclusively in the courts of the Commonwealth of Virginia, and this 
Agreement shall be governed by the laws of the Commonwealth of Virginia as to 
the validity, interpretation, and enforcement thereof.

         20.     Arbitration. Any and all disputes, controversies and claims
arising out of or relating to this Agreement, shall be settled and determined
by arbitration conducted before a panel of three arbitrators in Virginia in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators' award shall be final and binding upon the Corporation
and the Executive, and judgement confirming such arbitration may be entered
thereon in any court having jurisdiction over such proceedings.

         21.     Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any manner
the meaning or interpretation of this Agreement.

         22.     Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.


                                       8

<PAGE>   9
         IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.


                                           Global TeleSystems Group. Inc.


                                           by: /s/ Rodney J. Peter        
                                               ---------------------------
                                               Title:


                                               /s/ Louis Toth             
                                               ---------------------------
                                               Louis Toth
                                               July 14, 1996


                                       9


<PAGE>   1
                                                                   Exhibit 10.19

                              Employment Agreement

         THIS EMPLOYMENT AGREEMENT, is made and entered into as of the first
day of April, 1996. by and between Global TeleSystems Group, Inc., a Delaware
corporation (the "Corporation"), and Gerald W. Thames (the "Executive").

                                  WITNESSETH:

                 WHEREAS, the Executive has substantial experience operating
international telecommunications ventures; and

                 WHEREAS, the Corporation desires to employ the Executive, and
the Executive desires to be employed by the Corporation, in accordance with the
terms and provisions herein contained;

                 NOW THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, the parties hereto, intending to be legally bound,
hereby agree as follows:

                 1. Employment.

                 (a)      The Corporation hereby employs the Executive, and the
Executive hereby accepts such employment, on the terms, and subject to the
conditions herein contained.

                 (b)      The Executive shall be the President and Chief
Executive Officer of the Corporation. In this capacity as President and Chief
Executive Officer, the Executive, subject to the direction of the Board of
Directors of the Corporation, Executive shall supervise, manager and administer
the operations, business and affairs of the Corporation and shall perform such
duties and exercise such power and authority as may from time to time be
delegated to him by the Board of Directors of the Corporation, consistent with
his position as Chief Executive Officer of the Corporation.

                 (c)      The Executive shall devote all of his business time
and attention and his best efforts to the performance of his duties pursuant to
this Employment Agreement. Executive may, with the consent of the Board of
Directors of the Corporation serve on the board of directors of other
businesses or entities provided that Executive is not involved with the
operations of any such business or entity, that serving as a director of such
entity shall not interfere with Executive's performance of his duties under
this Agreement, and that any entity for which Executive shall serve as a
director shall not compete with the Corporation

                 (d)      The Corporation shall, during the Term, nominate the
Executive for election to the Board of Directors of the Corporation at the
annual meeting of the shareholders of the Corporation.

         2.      Term.

         (a)     The initial term of the employment of the Executive under this
Employment Agreement shall be three years commencing on April 1, 1996, and
continuing, unless sooner terminated pursuant to Section 9.
<PAGE>   2
         (b)     Thereafter this Agreement shall be automatically renewed
annually, unless either party hereto shall deliver written notice in accordance
with Section 15 to the other party at least 180 days prior to the date
termination of the initial term or any extension or renewal there (the "Term")
of its desire to terminate such employment (a "Notice Termination").

         3.      Compensation.

         (a)     During the initial Term, the Executive shall be paid a salary
at the rate of three hundred twenty five thousand dollars ($325,000) per annum,
payable in accordance with the Corporation's customary payroll practices for
Executives.

         (b)     At the end of each fiscal year the Corporation shall review
the salary of the Executive, and shall make such adjustments to base salary as
the Corporation shall, in its sole and absolute discretion, deem appropriate.

         (c)     For the purposes of this Agreement, "Salary" shall mean any
payment by the Corporation        to the Executive pursuant to this Section 3.

         4.      Bonus Opportunities.

         (a)     As additional compensation to the Executive hereunder, the
Corporation shall pay to the Executive a bonus (the "Bonus") in respect of each
fiscal year of the Company. Subject to the provisions of Section 4(b), the
initial target for such Bonus, based on 100% achievement of objectives by the
Corporation shall be fifty (50%) of the Salary of the Executive in any fiscal
year. Payment of the Bonus will be subject to and adjusted upwards for
accomplishment of objectives. The Bonus plan will be reviewed and adjusted
upward on an annual basis, if deemed appropriate by the Board of Directors of
the Corporation in its sole and absolute discretion.

         (b)     The formula or other methods for determining the Bonus for the
Executive in each fiscal year shall be determined by the Corporation in
coordination with the Compensation Committee of the Board of Directors, and
shall be based upon the performance of the Corporation and the Executive in
such fiscal year as compared with the projected expected performance of the
Corporation for such fiscal years. The actual amount of the Bonus paid to the
Executive in respect to the performance of any fiscal year of the Corporation
shall be subject to the sole and absolute discretion of the Board of Directors
of the Corporation.

         (c)     All bonuses with respect to any fiscal year of the Corporation
shall be paid as soon as practical subsequent to the issuance of the
consolidated financial statements of the Corporation.

         5.      Stock Option Plan

         (a)     The Corporation has adopted the 1992 Stock Option Plan, as
amended (the "Plan") for its employees.  Subject to the provision of the Plan,
a copy of which is annexed hereto as Exhibit A, and the execution and delivery
of an option agreement (the "Option Agreement"), in the form annexed hereto as
Exhibit B, the Executive is eligible for the Corporation to grant to the
Executive options to purchase Common Stock of the Corporation ("Common Stock").
The specific number and terms of the options are presented in the Plan and the
Option Agreement annexed hereto.



                                      2
<PAGE>   3
         (b)     In the event that the Corporation establishes one or more
additional stock option plans for its Executives, the Executive may be eligible
to receive options under such plans, as determined by the Compensation
Committee of the Board of Directors of the Corporation.

         6.      Benefits. During the Term, the Executive shall be entitled to
receive such benefits and to participate in such employee group benefit plans
as are generally provided by the Corporation, or made available by the
Corporation, to its Executives, including without limitation, but subject to
the conditions imposed by the carriers, any medical, health, disability and
life insurance policies. In addition, during the Term. the Corporation shall
provide to the Executive use of a late model automobile acceptable to the
Corporation, at the Corporation's expense, in an amount not to exceed $750.00
per month. The Corporation shall insure said automobile for collision, property
damage, medical payment for injury and liability.

         7.      Expense Reimbursement.

         (a)     During the Term, the Corporation shall reimburse the Executive
for all reasonable expenditures actually and necessarily paid or incurred by
the Executive in the course of and pursuant to the business of the Corporation.
Such reimbursement shall be subject to the submission to the Corporation by the
Executive of appropriate documentation and/or vouchers, and shall be made in
accordance with the customary procedures of the Corporation for expense
reimbursement, as may from time to time be established.

         (b)     Should the Corporation provide Executive with a credit card,
Executive acknowledges complete personal responsibility for all charges made on
such credit card. Any charges received by the Corporation for expenses not
documented on an approved expense report may be deducted by the Corporation
from the Executive's payroll check. Upon termination of this Agreement, non
approved charges shall be deducted from the last payroll check issued to the
Executive.

         (c)     It is contemplated by the parties hereto that Executive may
travel and/or commute extensively in connection with Executive's services under
this Agreement. In connection with such travel, the Corporation shall pay for
or reimburse Executive for such travel expenses, including meals and lodging,
in accordance with the customer practices of the Corporation for such
expenditures.

   8.      Vacation. In each fiscal year during the Term, the Executive shall be
entitled to 4 weeks vacation time, which shall not be cumulative from year to
year without the prior written consent of the Corporation or unless the
Executive shall be unable to take such vacation due to Executive's duties under
this Agreement; provided, however, that to the extent the Executive cannot take
vacation time during the Term due to his responsibilities under this Agreement,
upon termination, Executive shall be entitled to be compensated for accrued but
unused vacation time.

         9.      Termination.

         (a)     Notwithstanding anything to the contrary contained in this
Agreement, the Corporation shall at all times have the right to terminate
immediately this Agreement and the employment of the Executive hereunder for
"Cause" by written notice to the Executive in accordance with Section 15. For
the purpose of this Agreement, the term "Cause" shall mean any action of the
Executive or any failure to act by the Executive which constitutes:



                                      3
<PAGE>   4
                 (i)      fraud, embezzlement or any felony in connection with
         the Executive's duties as an Executive of the Corporation or any
         subsidiary or affiliate of the Corporation, or willful misconduct or
         the commission of any other act which causes or may reasonably be
         expected to cause substantial economic or reputational injury to the
         Corporation or any such subsidiary or affiliate of the Corporation,
         including any violation of the Foreign Corrupt Practices Act, as
         described in Section 13 of this Agreement;

                 (ii)     a continuing conflict of interest or continuing
         failure to follow reasonable directions or instructions of the Board
         of Directors or Chief Executive Officer of the Corporation. A conflict
         of interest or a failure to follow directions of the Corporation shall
         be deemed to be continuing if the Executive shall have received
         written notice thereof and shall have not terminated the conflict of
         interest or failure to follow directions within thirty days after
         receipt of such notice;

                 (iii)    an extended period of absence by the Executive from
         the performance of the obligations of the Executive provided
         hereunder, which absence shall be for a reason other than a
         disability, and which has not been approved in writing in advance by
         the Corporation; or

                 (iv)     a failure to meet minimum satisfactory performance
         requirements for a performance period. For this purpose, the
         Corporation and the Executive will agree in a separate, written
         document to the terms of each performance period and the minimum
         satisfactory performance requirements applicable to each such
         performance period. This document may be modified or extended only by
         the mutual consent of both parties.

         (b)     Notwithstanding anything to the contrary contained in this
Agreement, the Corporation, by written notice to the Executive, shall at all
times have the right to terminate this Agreement and the employment of the
Executive hereunder if the Executive shall experience a "Total Disability".
For the purpose of this Agreement, the term "Total Disability" shall mean any
mental or physical illness, condition, disability or incapacity as shall:

                 (i)      prevent the Executive from reasonably discharging
         required services and employment duties hereunder,

                 (ii)     be attested to in writing by a physician or a group
         of physicians acceptable to the Corporation; and

                 (iii)    continue during any period of three consecutive
         months or for periods aggregating three months in any eighteen month
         period.

         A Total Disability shall be deemed to have occurred on the last day of
such applicable three month period.

         (c)     This Agreement shall terminate automatically upon the date of
the death of the Executive

         (d)     The Executive may terminate the Agreement at any time by
giving 180 days' written notice to the Corporation in accordance with Section
15. Upon giving such notice, the Executive shall be continued in employment
with the Corporation for the full 180 days) of the notice period, be continued
in employment with the Corporation without



                                      4
<PAGE>   5
the existence of an employment agreement, or at the discretion of the
Corporation may be paid his/her salary and have applicable benefits hereunder
continued for such 180 day period in lieu of continued employment. Failure of
the Executive to provide the full 180 days notice shall be deemed a breach of
the agreement by the Executive and permit the Corporation to cease immediately
the compensation and benefits provided herein, and if deemed necessary, to take
remedial action to prohibit any further damages as may occur from the breach by
the Executive.

         10.     Payments Upon Termination.

         (a)     If the Corporation shall terminate the employment of the
Executive under this Agreement pursuant to Section 9(a) hereof, or if the
employment of the Executive hereunder shall be terminated by the Executive
other than in accordance with Section 2 or Section 9(d), then, in any such
event, the Corporation shall have no obligation to pay to the Executive base
salary or any other compensation or benefits provided under this Agreement for
any period after the date of such termination, or to pay any Bonus for the year
in which such termination occurs; provided, however, that the Corporation shall
pay all Salary earned by the Executive prior to the date of such termination
and the reimbursement of all expenses incurred by the Executive prior to the
date of such termination in accordance with Section 7 hereof. Upon termination
pursuant to Section 9(a) or by the Executive other than in accordance with
Section 2 or Section 9(d), all options granted to the Executive pursuant to
Section 5 shall immediately be canceled and no further options shall vest.

         (b)     If the employment of the Executive hereunder shall terminate
pursuant to subsections 9(b) or (c) hereof, if the employment of the Executive
shall be terminated by the Corporation in accordance with Section 2 hereof, or
if the Executive shall be terminated by the Corporation other than in
accordance with the provisions of this Agreement, the Corporation shall pay to
the Executive or the Executive's Estate, as the case may be, the Salary and
target Bonus for the fiscal year in which the termination occurs, prorated for
the number of weeks during which the Executive was employed by the Corporation
during such fiscal year.

         (c)     In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in Section 9, the Executive shall receive as
severance an amount equal to number of months/days of the notice period, (e.g.,
twelve months Salary); provided, however, that in the event that the Executive
is subject to the covenants and agreements set forth in Section 11, the amount
of the severance payable to the Executive shall be equal to the number of
months/days during which the Executive remains subject to the covenants and
agreements set forth in Section 11. Such severance pay shall be paid in equal
monthly installments, commencing the month following such termination, and
shall be payable in accordance with the Corporation's customary payroll
practices for Executive officers.

         (d)     In the event that the employment of the Executive is
terminated due to a Total Disability or the death of the Executive in
accordance with Section 9(b) or 9(c) hereof, then the Executive or his
designated beneficiary, as the case may be, shall receive such amounts as are
provided for in the disability policy or life insurance policy provided by the
Corporation for the benefit of the Executive.

         11.     Covenants of the Executive. In order to induce the Corporation
to enter into this Agreement and employ the Executive hereunder, the Executive
hereby covenants and agrees as follows:



                                      5
<PAGE>   6
         (a)     During the term and for a period of twelve months thereafter,
the Executive shall not, without the prior written consent of the Corporation:

                 (i)      directly or indirectly, own, acquire in any manner
         any interest in any person, firm, partnership, corporation,
         association or other entity which competes with the Corporation or any
         of its affiliates or subsidiaries; or

                 (ii)     be employed by, or serve as an employee, agent,
         officer, director of, any person, firm, partnership, corporation, or
         provider of cross-border telecommunications services, including long
         distance services, for major international carriers and other
         telecommunications operators in Western Europe and independent
         operators and developers of telecommunications companies in China,
         CIS, India and the Pacific Rim which provides voice and data
         telecommunications services to business customers and other
         telecommunications operators.

         The foregoing provisions of this Section 11(a) shall not prevent the
Executive from acquiring and/or owning not more than nine per cent of the
equity or debt securities of any company which has securities listed for
trading on a recognized securities exchange or are regularly traded in the
National Association of Securities Dealers Automated Quotation System.

         (b)     The Executive shall not at any time, other than in the
ordinary course of business of the Corporation, when and if required, disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity, any confidential information concerning the
financial condition, suppliers, customers, lessors, lessees, sources of leads
for and methods of obtaining new business or the methods generally of doing and
operating the respective businesses of the Corporation, its affiliates and
subsidiaries, except that such information is a matter of public knowledge or
is required to be disclosed by law or judicial or administrative process.

         (c)     During the Term and for a period of twelve months thereafter,
the Executive shall not, without the prior written consent of the Corporation,
directly or indirectly through any other individual or entity:

                 (i)      solicit, entice, persuade or induce any individual
         who currently is, or at any time during the Term shall be, an employee
         of the Corporation, or any of its affiliates, to terminate or refrain
         from renewing or extending such person's employment with the
         Corporation or such subsidiary or affiliate, or to become employed by
         or enter into contractual relations with any other individual or
         entity, and the Executive shall not approach any such employee for any
         such purpose or authorize or knowingly cooperate with the taking of
         any such actions by any other individual or entity; or

                 (ii)     except in accordance with the Executive's duties
         hereunder on behalf of the Corporation, solicit, entice, persuade, or
         induce any individual or entity which currently is, or at any time
         during the Term shall be, a customer, supplier, lessor or lessee of
         the Corporation, or any of its subsidiaries or affiliates, to
         terminate or refrain from renewing or extending its contractual or
         other relationship with the Corporation or such subsidiary or
         affiliate, and the Executive shall not approach any such customer,
         supplier, lessor or lessee for such purpose or authorize or knowingly
         cooperate with the taking of any such actions by any other individual
         or entity.



                                      6
<PAGE>   7
         (d)     In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in Section 9, the Corporation may, in its
sole discretion, elect to waive the application of the covenants and agreements
set forth in Section 11 to the Executive.

         12.     Specific Performance. The Executive acknowledges that a breach
or violation by the Executive of the covenants or agreements contained in
Sections 11 and 13 of this Agreement would cause irreparable harm and damage to
the Corporation if such provisions are not specifically enforced, the monetary
amount of which would be impossible to ascertain. Therefore, the Corporation
shall be entitled to enforce such provisions in a court of equity by a decree
of specific performance and to obtain an injunction from any court of competent
jurisdiction enjoining and restraining any breach or violation of any or all of
the covenants and agreements contained in Sections 11 and 13 of this Agreement
by the Executive and/or his employees, associates, partners or agents, or
entities controlled by one or more of them, either directly or indirectly. Such
remedies shall be cumulative and not exclusive and shall be in addition to
whatever other rights or remedies the Corporation shall have for damages for a
breach by the Executive of the covenants or agreements contained in Section 11
or elsewhere in this Agreement. Notwithstanding anything herein to the
contrary, the Corporation hereby expressly reserves the right to seek damages
and other economic remedies for a breach by the Executive of the covenants or
agreements contained in Section 11 or elsewhere in this Agreement.

         13.     Foreign Corrupt Practices Act.    You agree to comply in all
respects with the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), as
amended, which provides generally that: under no circumstances will foreign
officials, representatives, political parties or holders of public offices be
offered, promised or paid any money, remuneration, things of value, or provided
any other benefit, direct or indirect, in connection with obtaining or
maintaining contracts or orders hereunder. Your failure to comply in all
respects with the provisions of the FCPA shall constitute a material breach by
you of your obligations hereunder and shall entitle Global TeleSystems Group,
Inc. to terminate this Agreement immediately. A copy of the Corporation's FCPA
policy is annexed hereto as Exhibit C.

         14.     No Delegation.  The Executive shall not delegate his
employment obligations under this Agreement to any other person.

         15.     Notices.  Any notice required or permitted must be approved by
the Corporation according to the terms of this Agreement and must be approved
in writing and with appropriate confirmation of receipt, certified mail, return
receipt requested, or overnight courier to the following addresses:

                          If to the Corporation:  Global TeleSystems Group, Inc.
                                                  Attn: General Counsel
                                                  1751 Pinnacle Drive
                                                  North Tower 12th Floor
                                                  McLean, VA 22102 USA

                          If to the Executive:    Gerald W. Thames
                                                  865 Malvern Hill
                                                  Alpharetta, Georgia 30202



                                      7
<PAGE>   8
                               with a copy to:    Jerrold W. Hestor, Esq.
                                                  3941 Holcomb Bridge Road
                                                  Suite 200
                                                  Norcross, Georgia 30092

         Either party may change the address to which notices, requests,
demands and other communications to such party shall be delivered personally or
mailed by giving notice thereof to the other party hereto in the manner herein
provided. Renewal notices shall be deemed approved at the time when such are
approved by the Compensation Committee of Board at an official meeting.

         16.     Binding Effect.   This Agreement shall be for the benefit of
and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.

         17.     Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements, both oral
and written, between the parties hereto with respect to such subject matter.
This Agreement may not be modified, amended, altered or rescinded in any
manner, except by written instrument signed by both of the parties hereto;
provided, however, that the waiver by any party of compliance by any other
party with respect to any provision hereof or of any breach by such other party
need be signed only by the party waiving such provision or breach; provided,
further, that the waiver by either party hereto of a breach or compliance with
any provision of this Agreement shall not operate nor be construed as a waiver
of any subsequent breach or compliance.

         18.     Severability. In case any one or more of the provisions of
this Agreement shall be held by any court of competent jurisdiction to be
illegal, invalid or unenforceable in any respect, such provision shall be not
force and effect, but the illegality, invalidity or unenforceability of any
other provision of this Agreement, but this Agreement shall be construed as if
such illegal, invalid or unenforceable provision had never been contained
herein.

         19.     Choice of Laws.  The Executive and the Corporation intend and
hereby acknowledge that jurisdiction over disputes with regard to this
Agreement shall be exclusively in the courts of the Commonwealth of Virginia,
and this Agreement shall be governed by the laws of the Commonwealth of
Virginia as to the validity, interpretation, and enforcement thereof.

         20.     Arbitration.  Any and all disputes, controversies and claims
arising out of or relating to this Agreement, shall be settled and determined
by arbitration conducted before a panel of three arbitrators in Virginia in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators' award shall be final and binding upon the Corporation
and the Executive, and judgement confirming such arbitration may be entered
thereon in any court having jurisdiction over such proceedings.

         21.     Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any manner
the meaning or interpretation of this Agreement.



                                      8
<PAGE>   9
         22.     Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.

                                    Global TeleSystems Group, Inc.

                                  by:       [ILLEGIBLE]                    
                                      -----------------------------
                                      Title:

                                      /s/ GERALD W. THAMES           
                                      -----------------------------  
                                      Gerald W. Thames



                                      9

<PAGE>   1
                                                                  Exhibit 10.20

                              Employment Agreement

         THIS EMPLOYMENT AGREEMENT, is made and entered into as of the first
day of April, 1996, by and between GTS Group, Inc., a Delaware corporation (the
"Corporation"), and Raymond I. Marks (the "Executive").

                                  WITNESSETH:

         WHEREAS, the Executive has substantial experience operating
international telecommunications ventures; and

         WHEREAS, the Corporation desires to employ the Executive, and the
Executive desires to be employed by the Corporation, in accordance with the
terms and provisions herein contained;

         NOW THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, the parties hereto, intending to be legally bound,
hereby agree as follows:

         1.      Employment.

         (a)     The Corporation hereby employs the Executive, and the
Executive hereby accepts such employment, on the terms, and subject to the
conditions herein contained.

         (b)     The Executive shall be Senior Vice President - Asia. In this
capacity as Senior Vice President - Asia, the Executive shall report to and
perform such duties and exercise such power and authority as may from time to
time be delegated to the Executive by the Chief Executive Officer and the Board
of Directors.

         (c)     The Executive shall devote all of the Executive's business
time and attention and dedicate with the Executive's best efforts toward the
fulfillment and execution, including performance criteria, of the Executive's
defined duties pursuant to this Employment Agreement.

         2.      Term.

         (a)     The initial term of the employment of the Executive under this
Employment Agreement shall be three years commencing on April 1, 1996, and
continuing, unless sooner terminated pursuant to Section 9.

         (b)     Thereafter this Agreement shall be automatically renewed
annually, unless either party hereto shall deliver written notice in accordance
with Section 15 to the other party at least 180 days prior to the date
termination of the initial term or any extension or renewal there (the "Term")
of its desire to terminate such employment (a "Notice of Termination").

         3.      Compensation.

         (a)     During the initial 12 month consecutive period of service, the
Executive shall be paid a salary at the rate of two hundred thirty one thousand
eight dollars ($231,008) per annum, payable in accordance with the
Corporation's customary payroll practices for Executives.
<PAGE>   2
         (b)     At the end of each fiscal year the Corporation shall review
the salary of the Executive, and shall make such adjustments to base salary as
the Corporation shall, in its sole and absolute discretion, deem appropriate.

         (c)     For the purposes of this Agreement, "Salary" shall mean any
payment by the Corporation to the Executive pursuant to this Section 3.

         4.      Bonus Opportunities.

         (a)     As additional compensation opportunities for the Executive
hereunder, the Corporation shall provide to the Executive a bonus program which
allows for possible incentive compensation (the "Bonus") in respect of each
fiscal year of the Corporation. Subject to the provisions of Section 4(b), the
basis for such bonus, shall be based on performance achievements by the
Corporation and the Executive. Incentive award opportunities may range up to
30% of the Salary of the Executive in any fiscal year. The Bonus plan will be
reviewed and adjusted on an annual basis, if deemed appropriate, by the
Corporation in coordination with the Compensation Committee of the Board of
Directors in its sole and absolute discretion.

         (b)     The formula or other methods for determining the Bonus for the
Executive in each fiscal year shall be determined by the Corporation in
coordination with the Compensation Committee of the Board of Directors, and
shall be based upon the performance of the Corporation and the Executive in
such fiscal year as compared with the projected expected performance of the
Corporation for such fiscal years. The actual amount of the Bonus paid to the
Executive in respect to the performance of any fiscal year of the Corporation
shall be subject to the sole and absolute discretion of the Board of Directors
of the Corporation.

         (c)     All bonuses with respect to any fiscal year of the Corporation
shall be paid as soon as practical subsequent to the issuance of the
consolidated financial statements of the Corporation.

         5.      Stock Option Plan.

         (a)     The Corporation has adopted the 1992 Stock Option Plan, as
amended (the "Plan") for its employees.  Subject to the provision of the Plan,
a copy of which is annexed hereto as Exhibit A, and the execution and delivery
of an option agreement (the "Option Agreement"), in the form annexed hereto as
Exhibit B, the Executive is eligible for the Corporation to grant to the
Executive options to purchase Common Stock of the Corporation ("Common Stock").
The specific number and terms of the options are presented in the Plan and the
Option Agreement annexed hereto.

         (b)     In the event that the Corporation establishes one or more
additional stock option plans for its Executives, the Executive may be eligible
to receive options under such plans, as determined by the Compensation
Committee of the Board of Directors of the Corporation.

         6.      Benefits.        During the Term, the Executive shall be
entitled to receive such benefits and to participate in such employee group
benefit plans as are generally provided by the Corporation, or made available
by the Corporation, to its Executives, including without limitation, but
subject to the conditions imposed by the carriers, any medical, health,
disability and life insurance policies.





                                       2
<PAGE>   3
         (a)     Additional Benefits.      The Corporation shall pay to the
Executive an amount equal to $15,000 per annum as additional compensation for
all periods during the Term in which the Executive shall be based outside of
the United States of America.

         7.      Expense Reimbursement.

         (a)     During the Term, the Corporation shall reimburse the Executive
for all reasonable expenditures actually and necessarily paid or incurred by
the Executive in the course of and pursuant to the business of the Corporation.
Such reimbursement shall be subject to the submission to the Corporation by the
Executive of appropriate documentation and/or vouchers, and shall be made in
accordance with the customary procedures of the Corporation for expense
reimbursement, as may from time to time be established.

         (b)     Should the Corporation provide Executive with a credit card,
Executive acknowledges complete personal responsibility for all charges made on
such credit card. Any charges received by the Corporation for expenses not
documented on an approved expense report may be deducted by the Corporation
from the Executive's payroll check. Upon termination of this Agreement, non
approved charges shall be deducted from the last payroll check issued to the
Executive.

         8.      Vacation. In each fiscal year during the Term, the Executive
shall be entitled to 4 weeks vacation time, which shall not be cumulative from
year to year without the prior written consent of the Corporation or unless the
Executive shall be unable to take such vacation due to Executive's duties under
the Agreement; provided, however, that to the extent the Executive cannot take
vacation time during the Term due to his responsibilities under this Agreement,
upon termination, Executive shall be entitled to be compensated for accrued but
unused vacation time.

         9.      Termination.

         (a)     Notwithstanding anything to the contrary contained in this
Agreement, the Corporation shall at all times have the right to terminate
immediately this Agreement and the employment of the Executive hereunder for
"Cause" by written notice to the Executive in accordance with Section 15. For
the purpose of this Agreement, the term "Cause" shall mean any action of the
Executive or any failure to act by the Executive which constitutes:

                 (i)      fraud, embezzlement or any felony in connection with
         the Executive's duties as an Executive of the Corporation or any
         subsidiary or affiliate of the Corporation, or willful misconduct or
         the commission of any other act which causes or may reasonably be
         expected to cause substantial economic or reputational injury to the
         Corporation or any such subsidiary or affiliate of the Corporation,
         including any violation of the Foreign Corrupt Practices Act, as
         described in Section 13 of this Agreement;

                 (ii)     a continuing conflict of interest or continuing
         failure to follow reasonable directions or instructions of the Board
         of Directors or Chief Executive Officer of the Corporation. A conflict
         of interest or a failure to follow directions of the Corporation shall
         be deemed to be continuing if the Executive shall have received
         written notice thereof and shall have not terminated the conflict of
         interest or failure to follow directions within thirty days after
         receipt of such notice;





                                       3
<PAGE>   4
              (iii)  an extended period of absence by the Executive from
       the performance of the obligations of the Executive provided
       hereunder, which absence shall be for a reason other than a
       disability, and which has not been approved in writing in advance
       by the Corporation; or
       
              (iv)   a failure to meet minimum satisfactory performance
       requirements for a performance period. For this purpose, the
       Corporation and the Executive will agree in a separate, written
       document to the terms of each performance period and the minimum
       satisfactory performance requirements applicable to each such
       performance period. This document may be modified or extended
       only by the mutual consent of both parties.
       
       (b)    Notwithstanding anything to the contrary contained in this
Agreement, the Corporation, by written notice to the Executive, shall at
all times have the right to terminate this Agreement and the employment
of the Executive hereunder if the Executive shall experience a "Total
Disability". For the purpose of this Agreement, the term "Total
Disability" shall mean any mental or physical illness, condition,
disability or incapacity as shall:

              (i)    prevent the Executive from reasonably discharging
       required services and employment duties hereunder;
       
              (ii)   be attested to in writing by a physician or a group
       of physicians acceptable to the Corporation; and
       
              (iii)  continue during any period of three consecutive
       months or for periods aggregating three months in any eighteen
       month period.
       
       A Total Disability shall be deemed to have occurred on the last
day of such applicable three month period.

       (c)    This Agreement shall terminate automatically upon the date
of the death of the Executive.

       (d)    The Executive may terminate the Agreement at any time by
giving 180 days' written notice to the Corporation in accordance with
Section 15. Upon giving such notice, the Executive shall be continued in
employment with the Corporation for the full 180 days) of the notice
period, be continued in employment with the Corporation without the
existence of an employment agreement, or at the discretion of the
Corporation may be paid his/her salary and have applicable benefits
hereunder continued for such 180 day period in lieu of continued
employment. Failure of the Executive to provide the full 180 days notice
shall be deemed a breach of the agreement by the Executive and permit
the Corporation to cease immediately the compensation and benefits
provided herein, and if deemed necessary, to take remedial action to
prohibit any further damages as may occur from the breach by the
Executive.

       10.    Payments Upon Termination.

       (a)    If the Corporation shall terminate the employment of the
Executive under this Agreement pursuant to Section 9(a) hereof, or if the
employment of the Executive hereunder shall be terminated by the Executive
other than in accordance with Section 2 or Section 9(d), then, in any such
event, the Corporation shall have no obligation to pay to the Executive base
salary or any other compensation or benefits provided under this Agreement for
any period after the date of such termination, or to pay any Bonus for the


                                       4
<PAGE>   5
year in which such termination occurs; provided, however, that the Corporation
shall pay all Salary earned by the Executive prior to the date of such
termination and the reimbursement of all expenses incurred by the Executive
prior to the date of such termination in accordance with Section 7 hereof. Upon
termination pursuant to Section 9(a) or by the Executive other than in
accordance with Section 2 or Section 9(d), all options granted to the Executive
pursuant to Section 5 shall immediately be canceled and no further options
shall vest.

       (b)    If the employment of the Executive hereunder shall terminate
pursuant to subsections 9(b) or (c) hereof, if the employment of the Executive
shall be terminated by the Corporation in accordance with Section 2 hereof, or
if the Executive shall be terminated by the Corporation other than in
accordance with the provisions of this Agreement, the Corporation shall pay to
the Executive or the Executive's Estate, as the case may be, the Salary and
target Bonus for the fiscal year in which the termination occurs, prorated for
the number of weeks during which the Executive was employed by the Corporation
during such fiscal year.

       (c)    In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in Section 9, the Executive shall receive as
severance an amount equal to number of months/days of the notice period, (e.g.,
six months Salary); provided, however, that in the event that the Executive is
subject to the covenants and agreements set forth in Section 11, the amount of
the severance payable to the Executive shall be equal to the number of
months/days during which the Executive remains subject to the covenants and
agreements set forth in Section 11. Such severance pay shall be paid in equal
monthly installments, commencing the month following such termination, and
shall be payable in accordance with the Corporation's customary payroll
practices for Executive officers.

       (d)    In the event that the employment of the Executive is terminated
due to a Total Disability or the death of the Executive in accordance with
Section 9(b) or 9(c) hereof, then the Executive or his designated beneficiary,
as the case may be, shall receive such amounts as are provided for in the
disability policy or life insurance policy provided by the Corporation for the
benefit of the Executive.

       11.    Covenants of the Executive. In order to induce the Corporation to
enter into this Agreement and employ the Executive hereunder, the Executive
hereby covenants and agrees as follows:

       (a)    During the term and for a period of six months thereafter, the
Executive shall not, without the prior written consent of the Corporation,
directly or indirectly, own, acquire, manage, operate, join, control, finance
or participate in the ownership, management, operation, control or financing
of, or be connected as an officer, director, employee, partner, principal,
agent, representative, consultant or otherwise with or use or permit his/her
name to be used in connection with:

              (i)    any business or enterprise engaged in the business of
       communications, telecommunications and related industries operating in
       the geographic area of Asia to include India, (this subparagraph shall
       include any business operations and activities the Corporation will
       expand into after the date this agreement is extended).

       It is recognized by the Executive that the business of the Corporation
and its affiliates and the Executive's connection there with is or will be
involved in activity


                                       5
<PAGE>   6
throughout the Geographic Area and that more limited geographical limitations
on this non-competition covenant are therefore not appropriate.

       The foregoing provisions of this Section 11 (a) shall not prevent the
Executive from acquiring and/or owning not more than nine per cent of the
equity or debt securities of any company which has securities listed for
trading on a recognized securities exchange or are regularly traded in the
National Association of Securities Dealers Automated Quotation System.

       (b)    The Executive shall not at any time, other than in the ordinary
course of business of the Corporation, when and if required, disclose, directly
or indirectly, to any person, firm, corporation, partnership, association or
other entity, any confidential information concerning the financial condition,
suppliers, customers, lessors, lessees, sources of leads for and methods of
obtaining new business or the methods generally of doing and operating the
respective businesses of the Corporation, its affiliates and subsidiaries,
except that such information is a matter of public knowledge or is required to
be disclosed by law or judicial or administrative process.

       (c)    During the Term and for a period of six months thereafter, the
Executive shall not, without the prior written consent of the Corporation,
directly or indirectly through any other individual or entity:

              (i)    solicit, entice, persuade or induce any individual who
       currently is, or at any time during the Term shall be, an employee of
       the Corporation, or any of its affiliates, to terminate or refrain from
       renewing or extending such person's employment with the Corporation or
       such subsidiary or affiliate, or to become employed by or enter into
       contractual relations with any other individual or entity, and the
       Executive shall not approach any such employee for any such purpose or
       authorize or knowingly cooperate with the taking of any such actions by
       any other individual or entity; or

              (ii)   except in accordance with the Executive's duties hereunder
       on behalf of the Corporation, solicit, entice, persuade, or induce any
       individual or entity which currently is, or at any time during the Term
       shall be, a customer, supplier, lessor or lessee of the Corporation, or
       any of its subsidiaries or affiliates, to terminate or refrain from
       renewing or extending its contractual or other relationship with the
       Corporation or such subsidiary or affiliate, and the Executive shall not
       approach any such customer, supplier, lessor or lessee for such purpose
       or authorize or knowingly cooperate with the taking of any such actions
       by any other individual or entity.

       (d)    In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in Section 9, the Corporation may, in its
sole discretion, elect to waive the application of the covenants and agreements
set forth in Section 11 to the Executive.

       12.    Specific Performance. The Executive acknowledges that a breach or
violation by the Executive of the covenants or agreements contained in Sections
11 and 13 of this Agreement would cause irreparable harm and damage to the
Corporation if such provisions are not specifically enforced, the monetary
amount of which would be impossible to ascertain. Therefore, the Corporation
shall be entitled to enforce such provisions in a court of equity by a decree
of specific performance and to obtain an


                                       6
<PAGE>   7
injunction from any court of competent jurisdiction enjoining and restraining
any breach or violation of any or all of the covenants and agreements contained
in Sections 11 and 13 of this Agreement by the Executive and/or his employees,
associates, partners or agents, or entities controlled by one or more of them,
either directly or indirectly. Such remedies shall be cumulative and not
exclusive and shall be in addition to whatever other rights or remedies the
Corporation shall have for damages for a breach by the Executive of the
covenants or agreements contained in Section 11 or elsewhere in this Agreement.
Notwithstanding anything herein to the contrary, the Corporation hereby
expressly reserves the right to seek damages and other economic remedies for a
breach by the Executive of the covenants or agreements contained in Section 11
or elsewhere in this Agreement.

       13.    Foreign Corrupt Practices Act .    You agree to comply in all
respects with the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), as
amended, which provides generally that: under no circumstances will foreign
officials, representatives, political parties or holders of public offices be
offered, promised or paid any money, remuneration, things of value, or provided
any other benefit, direct or indirect, in connection with obtaining or
maintaining contracts or orders hereunder. Your failure to comply in all
respects with the provisions of the FCPA shall constitute a material breach by
you of your obligations hereunder and shall entitle Global TeleSystems Group,
Inc. to terminate this Agreement immediately. A copy of the Corporation's FCPA
policy is annexed hereto as Exhibit C.

       14.    No Delegation.       The Executive shall not delegate his
employment obligations under this Agreement to any other person.

       15.    Notices.  Any notice required or permitted must be approved by the
Corporation according to the terms of this Agreement and must be approved in
writing and with appropriate confirmation of receipt, certified mail, return
receipt requested, or overnight courier to the following addresses:

                        If to the Corporation:   Global TeleSystems Group, Inc.
                                                 Attn: General Counsel        
                                                 1751 Pinnacle Drive          
                                                 North Tower 12th Floor       
                                                 McLean, VA 22102 USA         

                        If to the Executive:     Raymond I. Marks
                                                 6804 Westbrook Road
                                                 Baltimore, Md. 21215

       Either party may change the address to which notices, requests, demands
and other communications to such party shall be delivered personally or mailed
by giving notice thereof to the other party hereto in the manner herein
provided. Renewal notices shall be deemed approved at the time when such are
approved by the Compensation Committee of Board at an official meeting.

       16.    Binding Effect.      This Agreement shall be for the benefit of 
and binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.


                                       7
<PAGE>   8
       17.    Entire Agreement.    This Agreement constitutes the entire 
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements, both oral
and written, between the parties hereto with respect to such subject matter.
This Agreement may not be modified, amended, altered or rescinded in any
manner, except by written instrument signed by both of the parties hereto;
provided, however, that the waiver by any party of compliance by any other
party with respect to any provision hereof or of any breach by such other party
need be signed only by the party waiving such provision or breach; provided,
further, that the waiver by either party hereto of a breach or compliance with
any provision of this Agreement shall not operate nor be construed as a waiver
of any subsequent breach or compliance.

       18.    Severability.   In case any one or more of the provisions of this
Agreement shall be held by any court of competent jurisdiction to be illegal,
invalid or unenforceable in any respect, such provision shall be not force and
effect, but the illegality, invalidity or unenforceability of any other
provision of this Agreement, but this Agreement shall be construed as if such
illegal, invalid or unenforceable provision had never been contained herein.

       19.    Choice of Laws.   The Executive and the Corporation intend and
hereby acknowledge that jurisdiction over disputes with regard to this
Agreement shall be exclusively in the courts of the Commonwealth of Virginia,
and this Agreement shall be governed by the laws of the Commonwealth of
Virginia as to the validity, interpretation, and enforcement thereof.

       20.    Arbitration.   Any and all disputes, controversies and claims
arising out of or relating to this Agreement, shall be settled and determined
by arbitration conducted before a panel of three arbitrators in Virginia in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators' award shall be final and binding upon the Corporation
and the Executive, and judgement confirming such arbitration may be entered
thereon in any court having jurisdiction over such proceedings.

       21.    Section Headings.   The section headings contained in this
Agreement are for reference purposes only and shall not affect in any manner
the meaning or interpretation of this Agreement.

       22.    Counterparts.   This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.



                                       8
<PAGE>   9
       IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.

                                           Global TeleSystems Group, Inc.


                                           By: /s/ [ILLEGIBLE]                
                                               -------------------------------
                                               Title:


                                               /s/ RAYMOND I. MARKS 
                                               -------------------------------
                                               Raymond I. Marks



                                       9

<PAGE>   1
                                                                 Exhibit 10.21


                              Employment Agreement

    THIS EMPLOYMENT AGREEMENT, is made and entered into as of the first day of
April, 1996, by and between GTS Group, Inc., a Delaware corporation (the
"Corporation"), and Henry Radzikowski (the "Executive").

                              W I T N E S S E T H:

         WHEREAS, the Executive has substantial experience in operating
telecommunications ventures, specifically in Russia and the CIS; and

         WHEREAS, the Corporation has telecommunications ventures, operations,
or businesses in Russia, the CIS and Eastern Europe (the "Territory"), and
desires to employ the Executive, and the Executive desires to be employed by
the Corporation, in accordance with the terms and provisions herein contained;

         NOW THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, the parties hereto, intending to be legally bound,
hereby agree as follows:

    1.   Employment.

    (a)  The Corporation hereby employs the Executive, and the Executive hereby
accepts such employment, on the terms, and subject to the conditions herein
contained.

    (b) The  Executive shall be the Chief Executive Officer in the Territory
for the Corporation. In this capacity as Chief Executive Officer, the Executive
shall report to and perform such duties and exercise such power and authority
as may from time to time be delegated to the Executive by the Chief Executive
Officer and the Board of Directors of the Corporation.

    (c) The Executive shall devote all of the Executive's business time and
attention and dedicate with the Executive's best efforts toward the fulfillment
and execution, including performance criteria, of the Executive's defined
duties pursuant to this Employment Agreement.

    (d) Initially, the Executive shall be required to reside in Moscow and work
from the Corporation's Moscow offices. The Corporation reserves the right to
require that the Executive will move to and reside in and operate from the
Corporation's office in another major city within the Territory, should the
Corporation deem such a move to be appropriate and necessary in light of the
Corporation's operations from time to time.

    (e)  From time to time, the Corporation may, at its discretion, and with
the agreement of the Executive, change the Territory of Operations.

    2.   Term.

    (a) The initial term of the employment of the Executive under this
Employment Agreement shall be three years commencing on April 1, 1996, and
continuing, unless sooner terminated pursuant to Section 9.

    (b) Thereafter this Agreement shall be automatically renewed annually,
unless either party hereto shall deliver written notice in accordance with
Section 15 to the other party at least 180 days prior to the date termination
of the initial term or any extension or





<PAGE>   2
renewal there (the "Term") of its desire to terminate such employment (a
"Notice of Termination").

    3.   Compensation.

    (a)  During the initial 12 month consecutive period of service, the
Executive shall be paid a salary at the rate of two hundred ten thousand dollars
($210,000) per annum, payable in accordance with the Corporation's customary
payroll practices for Executives.

    (b)  At the end of each fiscal year the Corporation shall review the salary
of the Executive, and shall make such adjustments to base salary as the
Corporation shall, in its sole and absolute discretion, deem appropriate.

    (c)  For the purposes of this Agreement, "Salary" shall mean any payment by
the Corporation to the Executive pursuant to this Section 3.

    4.   Bonus Opportunities.

    (a)  As additional compensation opportunities for the Executive hereunder,
the Corporation shall provide to the Executive a bonus program which allows for
possible incentive compensation (the "Bonus") in respect of each fiscal year of
the Corporation. Subject to the provisions of Section 4(b), the basis for such
bonus, shall be based on performance achievements by the Corporation and the
Executive. Incentive award opportunities may range up to 30% of the Salary of
the Executive in any fiscal year. The Bonus plan will be reviewed and adjusted
on an annual basis, if deemed appropriate, by the Corporation in coordination
with the Compensation Committee of the Board of Directors in its sole and
absolute discretion.

    (b)  The formula or other methods for determining the Bonus for the
Executive in each fiscal year shall be determined by the Corporation in
coordination with the Compensation Committee of the Board of Directors, and
shall be based upon the performance of the Corporation and the Executive in
such fiscal year as compared with the projected expected performance of the
Corporation for such fiscal years. The actual amount of the Bonus paid to the
Executive in respect to the performance of any fiscal year of the Corporation
shall be subject to the sole and absolute discretion of the Board of Directors
of the Corporation.

    (c)  All bonuses with respect to any fiscal year of the Corporation shall
be paid as soon as practical subsequent to the issuance of the consolidated
financial statements of the Corporation.

    5.   Stock Option Plan.

    (a)  The Corporation has adopted the 1992 Stock Option Plan, as amended
(the "Plan") for its employees. Subject to the provision of the Plan, a copy of
which is annexed hereto as Exhibit A, and the execution and delivery of an
option agreement (the "Option Agreement"), in the form annexed hereto as
Exhibit B, the Executive is eligible for the Corporation to grant to the
Executive options to purchase Common Stock of the Corporation ("Common Stock").
The specific number and terms of the options are presented in the Plan and the
Option Agreement annexed hereto.

    (b)  In the event that the Corporation establishes one or more additional
stock option plans for its Executives, the Executive may be eligible to receive
options under





                                       2
<PAGE>   3
such plans, as determined by the Compensation Committee of the Board of
Directors of the Corporation.

    6.   Benefits. During the Term, the Executive shall be entitled to receive
such benefits and to participate in such employee group benefit plans as are
generally provided by the Corporation, or made available by the Corporation, to
its Executives, including without limitation, but subject to the conditions
imposed by the carriers, any medical, health, disability and life insurance
policies.

    (a)  Additional Benefits. During the Term, the Corporation shall provide to
the Executive, at the Corporation's expense, use of a late model automobile
appropriate in the geographic location of Executive's residence, and acceptable
to the Corporation.

    (b)  During the Term, the Corporation shall provide business class
transportation to and from the United States for one trip per annum for
Executive and Executive's immediate family living with Executive in Moscow.

    (c)  During the Term, the Corporation shall provide housing residence, at a
suitable international standard, in the city of residence of the Executive.

    (d)  The Corporation shall pay to the Executive during the Term the sum of
ninety six thousand ($96,000) per annum as compensation for tax equalization,
foreign service and hardship pay (hereinafter, "Compensation Premium" in
connection with the requirement that the Executive reside in Moscow for so long
as the Executive is required to live in Moscow. This amount shall be paid at
the same time as the Executive's salary.

    (e)  The Executive and the Corporation will develop and agree upon a formal
Compensation Premium, which will be reviewed and adjusted periodically, in
conformance with international practices for employing executives overseas.

    7.   Expense Reimbursement.

    (a)  During the Term, the Corporation shall reimburse the Executive for all
reasonable expenditures actually and necessarily paid or incurred by the
Executive in the course of and pursuant to the business of the Corporation.
Such reimbursement shall be subject to the submission to the Corporation by the
Executive of appropriate documentation and/or vouchers, and shall be made in
accordance with the customary procedures of the Corporation for expense
reimbursement, as may from time to time be established.

    (b)  Should the Corporation provide Executive with a credit card, Executive
acknowledges complete personal responsibility for all charges made on such
credit card. Any charges received by the Corporation for expenses not documented
on an approved expense report may be deducted by the Corporation from the
Executive's payroll check. Upon termination of this Agreement, non approved
charges shall be deducted from the last payroll check issued to the Executive.

    8.   Vacation. In each fiscal year during the Term, the Executive shall be
entitled to 4 weeks vacation time, which shall not he cumulative from year to
year without the prior written consent of the Corporation or unless the
Executive shall be unable to take such vacation due to Executive's duties under
this Agreement; provided, however, that to the extent the Executive cannot take
vacation time during the Term due to his responsibilities under this Agreement,
upon termination, Executive shall be entitled to be compensated for accrued but
unused vacation time.





                                       3
<PAGE>   4
    9.   Termination.

    (a)  Notwithstanding anything to the contrary contained in this Agreement,
the Corporation shall at all times have the right to terminate immediately this
Agreement and the employment of the Executive hereunder for "Cause" by written
notice to the Executive in accordance with Section 15. For the purpose of this
Agreement, the term "Cause" shall mean any action of the Executive or any
failure to act by the Executive which constitutes:

         (i) fraud, embezzlement or any felony in connection with the
    Executive's duties as an Executive of the Corporation or any subsidiary or
    affiliate of the Corporation, or willful misconduct or the commission of
    any other act which causes or may reasonably be expected to cause
    substantial economic or reputational injury to the Corporation or any such
    subsidiary or affiliate of the Corporation, including any violation of the
    Foreign Corrupt Practices Act, as described in Section 13 of this
    Agreement;

         (ii)    a continuing conflict of interest or continuing failure to
    follow reasonable directions or instructions of the Board of Directors or
    Chief Executive Officer of the Corporation. A conflict of interest or a
    failure to follow directions of the Corporation shall be deemed to be
    continuing if the Executive shall have received written notice thereof and
    shall have not terminated the conflict of interest or failure to follow
    directions within thirty days after receipt of such notice;

         (iii)   an extended period of absence by the Executive from the
    performance of the obligations of the Executive provided hereunder, which
    absence shall be for a reason other than a disability, and which has not
    been approved in writing in advance by the Corporation; or

         (iv)    a failure to MEET MINIMUM satisfactory performance
    requirements for a performance period. For this purpose, the Corporation
    and the Executive will agree in a separate, written document to the terms
    of each performance period and the minimum satisfactory performance
    requirements applicable to each such performance period. This document may
    be modified or extended only by the mutual consent of both parties.

    (b)  Notwithstanding anything to the contrary contained in this Agreement,
the Corporation, by written notice to the Executive, shall at all times have
the right to terminate this Agreement and the employment of the Executive
hereunder if the Executive shall experience a "Total Disability". For the
purpose of this Agreement, the term "Total Disability" shall mean any mental or
physical illness, condition, disability or incapacity as shall:

         (i)     prevent the Executive from reasonably discharging required
    services and employment duties hereunder;

         (ii)    be attested to in writing by a physician or a group of
    physicians acceptable to the Corporation; and

         (iii)   continue during any period of three consecutive months or for
    periods aggregating three months in any eighteen month period.





                                       4
<PAGE>   5
    A Total Disability shall be deemed to have occurred on the last day of such
applicable three month period.

    (c)  This Agreement shall terminate automatically upon the date of the
death of the Executive.

    (d)  The Executive may terminate the Agreement at any time by giving 180
days' written notice to the Corporation in accordance with Section 15. Upon
giving such notice, the Executive shall be continued in employment with the
Corporation for the full 180 days) of the notice period, be continued in
employment with the Corporation without the existence of an employment
agreement, or at the discretion of the Corporation may be paid his/her salary
and have applicable benefits hereunder continued for such 180 day period in
lieu of continued employment. Failure of the Executive to provide the full 180
days notice shall be deemed a breach of the agreement by the Executive and
permit the Corporation to cease immediately the compensation and benefits
provided herein, and if deemed necessary, to take remedial action to prohibit
any further damages as may occur from the breach by the Executive

    10.  Payments Upon Termination.

    (a)  If the Corporation shall terminate the employment of the Executive
under this Agreement pursuant to Section 9(a) hereof, or if the employment of
the Executive hereunder shall be terminated by the executive other than in
accordance with Section 2 or Section 9(d), then, in any such event, the
Corporation shall have no obligation to pay to the Executive base salary or any
other compensation or benefits provided under this Agreement for any period
after the date of such termination, or to pay any Bonus for the year in which
such termination occurs; provided, however, that the Corporation shall pay all
Salary earned by the Executive prior to the date of such termination and the
reimbursement of all expenses incurred by the Executive prior to the date of
such termination in accordance with Section 7 hereof. Upon termination pursuant
to Section 9(a) or by the Executive other than in accordance with Section 2 or
Section 9(d), all options granted to the Executive pursuant to Section 5 shall
immediately be canceled and no further options shall vest.

    (b)  If the employment of the Executive hereunder shall terminate pursuant
to subsections 9(b) or (c) hereof, if the employment of the Executive shall be
terminated by the Corporation in accordance with Section 2 hereof, or if the
Executive shall be terminated by the Corporation other than in accordance with
the provisions of this Agreement, the Corporation shall pay to the Executive or
the Executive's Estate, as the case may be, the Salary and target Bonus for the
fiscal year in which the termination occurs, prorated for the number of weeks
during which the Executive was employed by the Corporation during such fiscal
year.

    (c)  In the event that the Corporation terminates the employment of the
Executive by delivering notice in accordance with Section 2, or for any reason
other than those set forth in Section 9, the Executive shall receive as
severance an amount equal to number of months/days of the notice period, (e.g.,
nine months Salary); provided, however, that in the event that the Executive is
subject to the covenants and agreements set forth in Section 11, the amount of
the severance payable to the Executive shall be equal to the number of
months/days during which the Executive remains subject to the covenants and
agreements set forth in Section 11. Such severance pay shall be paid in equal
monthly installments, commencing the month following such termination, and
shall be payable in accordance with the Corporation's customary payroll
practices for Executive officers.





                                       5
<PAGE>   6

         (d)     In the event that the employment of the Executive is
terminated due to a Total Disability or the death of the Executive in
accordance with Section 9(b) or 9(c) hereof, then the Executive or his
designated beneficiary, as the case may be, shall receive such amounts as are
provided for in the disability policy or life insurance policy provided by the
Corporation for the benefit of the Executive.

         11.     Covenants of the Executive. In order to induce the Corporation
to enter into this Agreement and employ the Executive hereunder, the Executive
hereby covenants and agrees as follows:

         (a)     During the term and for a period of nine months thereafter,
the Executive shall not, without the prior written consent of the Corporation,
directly or indirectly, own, acquire, manage, operate, join, control, finance
or participate in the ownership, management, operation, control or financing
of, or be connected as an officer, director, employee, partner, principal,
agent, representative, consultant or otherwise with or use or permit his/her
name to be used in connection with:

                 (i)      any business or enterprise engaged in the business of
         communications, telecommunications and related industries operating in
         the geographic area of Russia which is defined as the CIS/EE, (this
         subparagraph shall include any business operations and activities the
         Corporation will expand into after the date this agreement is
         extended).

         It is recognized by the Executive that the business of the Corporation
and its affiliates and the Executive's connection there with is or will be
involved in activity throughout the Geographic Area and that more limited
geographical limitations on this non-competition covenant are therefore not
appropriate.

         The foregoing provisions of this Section 11(a) shall not prevent the
Executive from acquiring and/or owning not more than nine per cent of the
equity or debt securities of any company which has securities listed for
trading on a recognized securities exchange or are regularly traded in the
National Association of Securities Dealers Automated Quotation System.

         (b)     The Executive shall not at any time, other than in the
ordinary course of business of the Corporation, when and if required, disclose,
directly or indirectly, to any person, firm, corporation, partnership,
association or other entity, any confidential information concerning the
financial condition, suppliers, customers, lessors, lessees, sources of leads
for and methods of obtaining new business or the methods generally of doing and
operating the respective businesses of the Corporation, its affiliates and
subsidiaries, except that such information is a matter of public knowledge or
is required to be disclosed by law or judicial or administrative process.

         (c)     During the Term and for a period of nine months thereafter,
the Executive shall not, without the prior written consent of the Corporation,
directly or indirectly through any other individual or entity:

                 (i)      solicit, entice, persuade or induce any individual
         who currently is, or at any time during the Term shall be, an employee
         of the Corporation, or any of its affiliates, to terminate or refrain
         from renewing or extending such person's employment with the
         Corporation or such subsidiary or affiliate, or to become employed by
         or enter into contractual relations with any other individual or
         entity, and the Executive shall not approach any such employee for any
         such purpose or





                                       6
<PAGE>   7
         authorize or knowingly cooperate with the taking of any such actions
         by any other individual or entity; or

                 (ii)     except in accordance with the Executive's duties
         hereunder on behalf of the Corporation, solicit, entice, persuade, or
         induce any individual or entity which currently is, or at any time
         during the Term shall be, a customer, supplier, lessor or lessee of
         the Corporation, or any of its subsidiaries or affiliates, to
         terminate or refrain from renewing or extending its contractual or
         other relationship with the Corporation or such subsidiary or
         affiliate, and the Executive shall not approach any such customer,
         supplier, lessor or lessee for such purpose or authorize or knowingly
         cooperate with the taking of any such actions by any other individual
         or entity.

         (d)     In the event that the Corporation terminates the employment of
the Executive by delivering notice in accordance with Section 2, or for any
reason other than those set forth in Section 9, the Corporation may, in its
sole discretion, elect to waive the application of the covenants and agreements
set forth in Section 11 to the Executive.

         12.     Specific Performance.     The Executive acknowledges that a
breach or violation by the Executive of the covenants or agreements contained
in Sections 11 and 13 of this Agreement would cause irreparable harm and damage
to the Corporation if such provisions are not specifically enforced, the
monetary amount of which would be impossible to ascertain. Therefore, the
Corporation shall be entitled to enforce such provisions in a court of equity
by a decree of specific performance and to obtain an injunction from any court
of competent jurisdiction enjoining and restraining any breach or violation of
any or all of the covenants and agreements contained in Sections 11 and 13 of
this Agreement by the Executive and/or his employees, associates, partners or
agents, or entities controlled by one or more of them, either directly or
indirectly. Such remedies shall be cumulative and not exclusive and shall be in
addition to whatever other rights or remedies the Corporation shall have for
damages for a breach by the Executive of the covenants or agreements contained
in Section 11 or elsewhere in this Agreement. Notwithstanding anything herein
to the contrary, the Corporation hereby expressly reserves the right to seek
damages and other economic remedies for a breach by the Executive of the
covenants or agreements contained in Section 11 or elsewhere in this Agreement.

         13.     Foreign Corrupt Practices Act.    You agree to comply in all
respects with the U.S. Foreign Corrupt Practices Act of 1977 (FCPA), as
amended, which provides generally that: under no circumstances will foreign
officials, representatives, political parties or holders of public offices be
offered, promised or paid any money, remuneration, things of value, or provided
any other benefit, direct or indirect, in connection with obtaining or
maintaining contracts or orders hereunder. Your failure to comply in all
respects with the provisions of the FCPA shall constitute a material breach by
you of your obligations hereunder and shall entitle Global TeleSystems Group,
Inc. to terminate this Agreement immediately. A copy of the Corporation's FCPA
policy is annexed hereto as Exhibit C.

         14.     No Delegation.   The Executive shall not delegate his
employment obligations under this Agreement to any other person.

         15.     Notices.         Any notice required or permitted must be
approved by the Corporation according to the terms of this Agreement and must
be approved in writing





                                       7
<PAGE>   8
and with appropriate confirmation of receipt, certified mail, return receipt
requested, or overnight courier to the following addresses:

                        If to the Corporation: Global TeleSystems Group, Inc.
                                               Attn: General Counsel 
                                               1751 Pinnacle Drive   
                                               North Tower 12th Floor
                                               McLean, VA 22102 USA  
                           
                        If to the Executive:   Henry Radzikowski
                                               Posledny Per.19, Apt. 6
                                               Moscow, Russia         

         Either party may change the address to which notices, requests,
demands and other communications to such party shall be delivered personally or
mailed by giving notice thereof to the other party hereto in the manner herein
provided. Renewal notices shall be deemed approved at the time when such are
approved by the Compensation Committee of Board at an official meeting.

         16.     Binding Effect. This Agreement shall be for the benefit of and
binding upon the parties hereto and their respective heirs, personal
representatives, legal representatives, successors and, where applicable,
assigns.

         17.     Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, understandings and arrangements, both oral
and written, between the parties hereto with respect to such subject matter.
This Agreement may not be modified, amended, altered or rescinded in any
manner, except by written instrument signed by both of the parties hereto;
provided, however, that the waiver by any party of compliance by any other
party with respect to any provision hereof or of any breach by such other party
need be signed only by the party waiving such provision or breach; provided,
further, that the waiver by either party hereto of a breach or compliance with
any provision of this Agreement shall not operate nor be construed as a waiver
of any subsequent breach or compliance.

         18.     Severability. In case any one or more of the provisions of
this Agreement shall be held by any court of competent jurisdiction to be
illegal, invalid or unenforceable in any respect, such provision shall be not
force and effect, but the illegality, invalidity or unenforceability of any
other provision of this Agreement, but this Agreement shall be construed as if
such illegal, invalid or unenforceable provision had never been contained
herein.

         19.     Choice of Laws. The Executive and the Corporation intend and
hereby acknowledge that jurisdiction over disputes with regard to this
Agreement shall be exclusively in the courts of the Commonwealth of Virginia,
and this Agreement shall be governed by the laws of the Commonwealth of
Virginia as to the validity, interpretation, and enforcement thereof.

         20.     Arbitration. Any and all disputes, controversies and claims
arising out of or relating to this Agreement, shall be settled and determined
by arbitration conducted before a panel of three arbitrators in Virginia in
accordance with the rules of the American Arbitration Association then in
effect. The arbitrators' award shall be final and





                                       8
<PAGE>   9
binding upon the Corporation and the Executive, and judgement confirming such
arbitration may be entered thereon in any court having jurisdiction over such
proceedings.

         21.     Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any manner
the meaning or interpretation of this Agreement.

         22.     Counterparts.    This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.

         IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.

                                        Global TeleSystems Group, Inc.

                                        by: /s/ Rodney J. Puelo
                                           -------------------------------------
                                           Title:

                                           [/s/ HENRY RADZIKOWSKI]
                                           -------------------------------------
                                           Henry Radzikowski





                                       9

<PAGE>   1
                                                                   Exhibit 10.22

                                                                       ANNEX III

                                   SFMT, INC.
                            EQUITY COMPENSATION PLAN


         1.      PURPOSE OF THE PLAN.

                 The purpose of the SFMT, Inc. Equity Compensation Plan is to
enable key Employees, Officers and Eligible Independent Contractors of the
Company, through the grant of restricted stock or other equity-based awards
provided hereunder, to (i) own shares of stock in the Company, (ii) participate
in the shareholder value which has been created, (iii) have a mutuality of
interest with other shareholders and (iv) enable the Company to attract, retain
and motivate individuals of particular merit.

         2.      DEFINITIONS.

                 For purposes of the Plan, the following terms shall be defined
as set forth below:

                 "Board" means the Board of Directors of the Company.

                 "CEO" means the Chief Executive Officer of the Company.

                 "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.

                 "Committee" means the Committee designated by the Board to
administer the Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be exercised by the
Board.

                 "Common Stock" means the Common Stock of the Company, par
value of $.01 per share.

                 "Company" means SFMT, Inc. a Delaware corporation, including
any wholly owned subsidiary or affiliate, or any successor organization.

                 "Disinterested Person" means a disinterested person as defined
in the Rules.

                 "Eligible Independent Contractor" means an independent
contractor hired by the Company to provide services on a regular basis for the
Company.

                 "Employee " means an employee of the Company.
<PAGE>   2
                                       2


                 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

                 "Fair Market Value" means the fair market value of the Common
Stock as determined objectively by the Committee, in good faith, using such
criteria as it deems relevant; provided, however, that where there is a public
market for the Common Stock, the fair market value per share of Common Stock
shall be the average of the last reported bid and asked prices of the Common
Stock on the date of grant, as reported in The Wall Street Journal (or, if not
so reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation ("NASDAQ") System; or, in the event the Common
Stock is listed on a national securities exchange, within the meaning of
Section 6 of the Exchange Act, the fair market value per share of Common Stock
shall be the closing price on such exchange on the date of grant of the Option,
as reported in The Wall Street Journal.

                 "Officer" means an elected or appointed officer of the
Company.

                 "Participant" means a key Employee, Officer or Eligible
Independent Contractor to whom an award is granted pursuant to the Plan.

                 "Plan" means the SFMT, Inc. Equity Compensation Plan, as
hereinafter amended from time to time.

                 "Restricted Stock" means an award of shares of Common Stock
that is subject to the restrictions described in Section 6.

                 "Rules" means the regulations promulgated by the Securities
and Exchange Commission under Section 16 of the Exchange Act.

                 Except where otherwise indicated by the context, any masculine
terminology used herein shall also include the feminine and vice versa, and the
definition of any term herein in the singular shall also include the plural and
vice versa.

         3.      STOCK SUBJECT TO THE PLAN.

                 (a)      Aggregate Number of Shares. The aggregate number of
shares of Common Stock that may be issued or transferred under the Plan is 4%
of the total number of shares of SFMT Common Stock outstanding at the beginning
of the calendar year, subject to adjustment pursuant to Section 3(b) below.
Such shares may include authorized but unissued shares or reacquired shares. In
the event the number of shares of Common Stock issued under the Plan and the
number of shares of Common Stock subject to outstanding awards (taking into
account the share counting requirements established under the Rules) equals the
maximum number of shares of Common Stock authorized under the Plan, no further
awards shall be made unless the Plan is amended (in accordance with the Rules,
if applicable) or additional shares of Common Stock become available for
further awards under the Plan. Any shares of Restricted Stock that are
forfeited or settled in cash or otherwise terminated
<PAGE>   3
                                       3



without a delivery of shares of Common Stock to the Participant, including
shares withheld in payment of taxes relating to awards will again be available
for awards under the Plan, except that, if any such shares could not again be
available under Rule 16b-3 for awards to a Participant who is subject to
Section 16 of the Exchange Act, such shares of Common Stock shall be available
exclusively for awards to Participants who are not subject to Section 16.

                 The Committee may adopt reasonable counting procedures,
consistent with Rule 16b-3, to ensure appropriate counting, avoid double
counting and make adjustments if the number of shares of Common Stock actually
delivered differs from the number of shares of Common Stock previously counted
in connection with an award.

                 (b)      Changes in Capitalization. If any change is made to
the Common Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination of shares, or
exchange of shares or any other change in capital structure made without
receipt of consideration), then unless such event or change results in the
termination of all outstanding awards under the Plan, the Board or the
Committee shall preserve the value of the outstanding awards by adjusting the
maximum number and class of shares issuable under the Plan to reflect the
effect of such event or change in the Company's capital structure, and by
making appropriate adjustments to the number and class of shares subject to an
outstanding award except that any fractional shares resulting from such
adjustments shall be eliminated by rounding any portion of a share equal to.500
or greater up, and any portion of a share equal to less than .500 down, in each
case to the nearest whole number.

         4.      ADMINISTRATION OF THE PLAN.

                 (a)      Administration by the Committee. The Plan shall be
administered by the Committee designated by the Board which shall consist of
not less than two Disinterested Persons who shall be appointed by the Board.

                 (b)      Awards of Restricted Stock. It is intended that the
awards granted by the Committee shall be awards of Restricted Stock. In the
event that the Committee determines, in its sole discretion, that an award of
Restricted Stock would not be appropriate with respect to any individual who
has been recommended for an award by the CEO (by reason of domestic or foreign
tax considerations or otherwise), the Committee shall have the authority to
grant to any such individual any other variety of equity-based compensation
award, including, but not limited to, phantom stock, phantom units, stock
appreciation rights, performance shares or performance units. The Committee
shall not, however, have the authority to grant stock options pursuant to the
Plan.

                 (c)      Authority of the Committee. The Committee shall,
subject to the limitations and terms of the Plan, have the authority:
<PAGE>   4
                                       4


                          (i)     to approve the recommendations of the CEO as
to the identity of the individuals to whom awards may from time to time be
granted hereunder;

                          (ii)    to determine the number of shares to be
covered by each such award granted hereunder;

                          (iii)   to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder;

                          (iv)    to determine whether, to what extent and
under what circumstances Common Stock and other amounts payable with respect to
an award under this Plan shall be deferred either automatically or at the
election of the Participant;

                          (v)     to amend the terms of any outstanding award
(with the consent of the Participant) to reflect terms not otherwise
inconsistent with the Plan, including amendments concerning vesting
acceleration or forfeiture waiver regarding any award or the extension of a
Participant's right with respect to awards granted under the Plan, as a result
of termination of employment or service (or otherwise), based on such factors
as the Committee shall determine, in its sole discretion; and

                          (vi)    to delegate to officers or managers of the
Company or any subsidiary, or committees thereof, the authority, subject to
such terms as the Committee shall determine, to perform administrative
functions and, with respect to Participants not subject to Section 16 of the
Exchange Act, to perform any such other functions as the Committee may
determine, to the extent permitted under Rule 16b-3 and applicable law.

                 (d)      Authority to Adopt Rules. The Committee shall have
the authority to adopt, alter and repeal such administrative rules, guidelines
and practices governing the Plan as it shall, from time to time, deem advisable
to interpret the terms and provisions of the Plan and any award issued under
the Plan (and any agreements relating thereto and to otherwise supervise the
administration of the Plan). All decisions made by the Committee pursuant to
the provisions of the Plan shall be final and binding on all persons, including
the Company and the Participants.

         5.      ELIGIBILITY TO PARTICIPATE IN THE PLAN.

                 Officers, key Employees and Eligible Independent Contractors
who are recommended by the CEO and approved by the Committee shall be eligible
to be granted awards under the Plan.

         6.      RESTRICTED STOCK.

                 (a)      Administration. The CEO shall recommend the
individuals to whom Restricted Stock awards shall be made and such
recommendations shall be subject to the
<PAGE>   5
                                       5


approval of the Committee. The Committee shall determine the time or times at
which grants of Restricted Stock will be made, the number of shares to be
awarded, the price (if any) to be paid by the recipient of Restricted Stock
(subject to Section 6(b)), the time or times within which such awards may be
subject to forfeiture and all other conditions of the awards. The Committee may
condition the grant or vesting of Restricted Stock upon the attainment of
specified performance goals or such other factors as the Committee may
determine, in its sole discretion. The provisions of Restricted Stock awards
need not be the same with respect to each recipient.

                 (b)      Restrictions and Conditions.

                          (i)     The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award unless and
until such recipient has executed an agreement evidencing the award and has
delivered a fully executed copy thereof to the Company, and has otherwise
complied with the applicable terms and conditions of such award.

                          (ii)    The purchase price for shares of Restricted
Stock shall be established by the Committee and may be zero, unless otherwise
required under applicable state law.

                          (iii)   Awards of Restricted Stock must be accepted
within a period of sixty (60) days (or such shorter period as the Committee may
specify at grant) after the grant date, by executing a Restricted Stock
agreement and paying whatever price (if any) is required under Section
6(b)(ii).

                          (iv)    Except as otherwise specified by the
Committee, each Participant receiving a Restricted Stock award shall be issued
a certificate in respect of such shares of Restricted Stock. Such certificate
shall be registered in the name of such Participant, and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:

                          "The transferability of this certificate and the
                          shares of stock represented hereby are subject to the
                          terms and conditions (including forfeiture) of the
                          SFMT, Inc. Equity Compensation Plan and an agreement
                          entered into between the registered owner and SFMT,
                          Inc. Copies of such Plan and agreement are on file at
                          the offices of SFMT, Inc., 477 Madison Avenue, 8th
                          Floor, New York, NY 10022."

                          (v)     The Committee shall require that the stock
certificates evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Common Stock covered by such award.
<PAGE>   6
                                       6



                          (vi)    Subject to the provisions of this Plan and
the Restricted Stock award agreement, during a period set by the Committee
commencing with the date of such award (the "Restriction Period"), the
Participant shall not be permitted to sell, transfer, pledge, assign or
otherwise encumber shares of Restricted Stock awarded under the Plan. Within
these limits, the Committee, in its sole discretion, may provide for the lapse
of such restrictions in installments and may accelerate or waive such
restrictions in whole or in part, based on service, performance and such other
factors or criteria as the Committee may determine, in its sole discretion. In
the event that the Committee does not establish a specific Restriction Period
with respect to an award of Restricted Stock hereunder, the restrictions imposed
upon such award of Restricted Stock shall lapse in accordance with the
following schedule:

<TABLE>
<CAPTION>
                 Anniversary of Date of Grant      Percentage Vested
                 ----------------------------      -----------------
                 <S>                             <C>
                 First                             0%
                 Second                            33-1/3%
                 Third                             62-2/3%
                 Fourth                            100%
</TABLE>

                          (vii) Each Restricted Stock award agreement shall
provide that the Restricted Stock covered by the agreement shall be subject to
a "substantial risk forfeiture" (within the meaning of Section 83 Of the Code)
for a period to be determined by the Committee.

                          (viii) Except as provided in the Restricted Stock
award agreement, the Participant shall have, with respect to the shares of
Restricted Stock, all of the rights of a stockholder of the Company, including
the right to vote the shares and the right to receive any cash dividends. The
Committee, in its sole discretion, as determined at the time of award, may
permit or require the payment of cash dividends to be deferred and, if the
Committee so determines, reinvested in additional Restricted Stock to the
extent shares are available under Section 3.

                          (ix)    Subject to the applicable provisions of the
Restricted Stock award agreement and this Section 6, upon termination of a
Participant's employment or other service providing relationship with the
Company for any reason during the Restriction Period, all shares still subject
to restriction shall be forfeited by the Participant.

                          (x)     In the event of hardship or other special
circumstances of a Participant whose employment or other service providing
relationship with the Company is involuntarily terminated, the Committee may,
in it sole discretion, waive in whole or in part any or all remaining
restrictions with respect to such Participant's shares of Restricted Stock,
based on such factors as the Committee may deem appropriate.
<PAGE>   7
                                       7


                          (xi)    If and when the Restriction Period expires
without a prior forfeiture of the Restricted Stock subject to such Restriction
Period, the certificates for such shares shall be delivered to the Participant
promptly.

                          (xii) For purposes of this Section 6, a Restricted
Stock award will be considered to have been granted on the date that the
Committee takes the requisite action to grant the award.

         7.      AMENDMENT AND TERMINATION.

                 The Board may amend, alter or discontinue the Plan at any time
and from time to time (either by resolution or unanimous consent), but no
amendment, alteration or discontinuation shall be made which would impair the
rights of a Participant under a Restricted Stock award theretofore granted,
without the Participant's consent, or which, without the approval of the
Company's stockholders, would require stockholder approval under the Rules or
under the requirements of any applicable federal or state law or regulation;
provided, however, that any amendment which, under the requirements of
applicable federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Common Stock may then be
listed or quoted must be approved by the stockholders of the Company, shall not
be effective unless and until such stockholder approval has been obtained in
compliance with such law; and provided, further, that any amendment that must
be approved by the stockholders of the Company in order to maintain the
continued qualification of the Plan under Rule 16b-3(c)(2)(ii) under the
Exchange Act, or any successor provision, shall not be effective unless and
until such stockholder approval has been obtained in compliance with such Rule.
The Committee may amend the terms of any Restricted Stock award theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any Participant without the Participant's consent.  Notwithstanding
any provision herein to the contrary, the Board shall have broad authority to
amend the Plan, and the Committee shall have the authority to amend any
Restricted Stock awards, to take into account changes in applicable tax laws,
securities laws, accounting rules and other applicable state and federal laws.

         8.      UNFUNDED STATUS OF THE PLAN.

                 The Plan is intended to constitute an unfunded plan for
incentive compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company. In its sole discretion, the Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock or payments in lieu thereof or with respect to awards
hereunder.
<PAGE>   8
                                       8





    9.   General Provisions.


         (a) Representations. The Committee may require each person receiving
Common Stock upon the expiration of any Restriction Period under the Plan to
represent to and agree with the Company in writing that the Participant is
acquiring the shares without a view to distribution thereof. The certificates
for such shares may include any legend which the Committee deems appropriate to
reflect any restrictions on transfer.

         (b) No Restriction on Adoption of Other Compensation Arrangements.
Nothing contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements (subject to stockholder approval, if such
approval is required) and such arrangements may be either generally applicable
or applicable only in specific cases.

         (c) No Rights to Continuing Employment. The adoption of the Plan shall
not confer upon any Participant any right to continued employment with the
Company nor shall it interfere in any way with the right of the Company to
terminate its relationship with any of its employees, directors or independent
contractors at any time.

         (d) Tax Withholding. No later than the date as of which an amount
first becomes includible in the gross income of the Participant for applicable
income tax purposes with respect to any award under the Plan, the Participant
shall pay to the Company or make arrangements satisfactory to the Committee
regarding the payment of any federal, state or local taxes of any kind required
by law to be withheld with respect to such amount. Unless otherwise determined
by the Committee, the minimum required withholding obligations may be settled
with Common Stock, including Common Stock that is part of the award that gives
rise to the withholding requirement. The obligations of the Company under the
Plan shall be conditional upon such payment or arrangements and the Company
shall to the extent permitted by law have the right to deduct any such taxes
from any payment of any kind otherwise due to the Participant.

         (e) Right of First Refusal. At the time of grant, the Committee may
provide in connection with any grant made under this Plan that the shares of
Common Stock received as a result of such grant shall be subject to a right of
first refusal pursuant to which the Participant shall be required to offer to
the Company any shares that the Participant wishes to sell with the price being
the then Fair Market Value of the Common Stock, subject to such other terms and
conditions as the Committee specifies at the time of grant.

         (f) Reinvestment of Dividends. The reinvestment of dividends in
additional Restricted Stock at the time of any dividend payment shall only be
permissible if sufficient shares of Common Stock are available under Section 3
for such reinvestment.
<PAGE>   9
                                       9

         (g) Designation of a Beneficiary. The Committee shall establish such
procedures as it deems appropriate for a Participant to designate a beneficiary
to whom any amounts payable in the event of the Participant's death are to be
paid.

         (h) Governing Law. The Plan shall be governed by and subject to the
laws of the State of Delaware and to all applicable laws and to the approvals
by any governmental or regulatory agency as may be required.

         (i) Severability. If any provision of this Plan shall be held illegal
or invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of this Plan, but this Plan shall be construed and
enforced as if such illegal or invalid provision had never been included
herein.

         (j) Compliance with Rule 16b-3. It is the intent of the Company that
this Plan comply in all respects with applicable provisions of Rule l6b-3 under
the Exchange Act in connection with any grant of Restricted Stock. Accordingly,
if any provision of this Plan or any agreement hereunder does not comply with
the requirements of Rule, 16b-3 as then applicable to any such Participant, or
would cause any Participant to no longer be deemed a "disinterested person"
within the meaning of Rule 16b-3, such provision shall be construed or deemed
amended to the extent necessary to conform to such requirements with respect to
such Participant. In addition, the Board shall have no authority to make any
amendment, alteration, suspension, discontinuation, or termination of the Plan
or any agreement hereunder to take other action if and to the extent such
authority would cause a Participant's transactions under the Plan not to be
exempt, or the Participant no longer to be deemed "disinterested persons,"
under Rule 16b-3 of the Exchange Act.

    10.  EFFECTIVE DATE AND TERM OF THE PLAN.

         The Plan shall be effective as of its approval by the affirmative
votes of a majority of shares of Common Stock present or represented by proxy
at the next annual or special meeting of the Company's stockholders. No
Restricted Stock award shall be granted pursuant to the Plan on or after
November 14, 2002, but awards granted prior to such date may extend beyond that
date.

<PAGE>   1
                                                                   Exhibit 10.23

                                    FORM OF
                      Non-Statutory Stock Option Agreement

        This Non-Statutory Stock Option Agreement ("Option Agreement") entered
into as of April 1, 1996, by and between Global TeleSystems Group, Inc., a
Delaware corporation (the "Company"), and ________________, an employee of the
Company ("Optionee").

        1.      Option Agreement Pursuant to Plan.  This Option Agreement is
entered into pursuant to the 1992 Stock Option Plan of the Company, as amended
November 15, 1994 (the "Plan"), is subject to and incorporates herein the
provisions of the Plan and pursuant to the GTS 1996 Top Talent Retention Program
(the "Retention Program"). The provisions of this Option Agreement are
qualified in their entirety by reference to the Plan and in the event of a
conflict between the provisions of this Agreement and the provisions of the
Plan, the provisions of the Plan shall control. Capitalized terms used in this
Option Agreement shall have the same meanings given to them in the Plan, unless
otherwise indicated in this Agreement.

        2.      Grant of Option.  The Company hereby grants to Optionee the
right and option ("Option") to purchase all or any part of an aggregate of _____
shares of the common stock of the Company on the terms and conditions set forth
herein ("Optioned Shares"). The Option is not, and is not intended to meet the
requirements for an incentive stock option within the meaning of Section 422 of
the Internal Revenue Code (the "Code"). For purposes of Section 4 of this 
Agreement, _______________ Optioned Shares shall be referred to as "Performance
Shares" and _______________ Optioned Shares shall be referred to as
"Nonperformance Shares".

        3.      Exercise Price and Consideration for Exercise.

        (a)     Exercise Price.  The exercise price for the purchase of the
Optioned Shares purchasable upon exercise of the Option shall be fifteen
dollars and forty cents ($15.40) for each of the Optioned Shares, for a total
exercise price of ____________________ for _____________________ Optioned 
Shares.

        (b)     Consideration.  The consideration to be paid for the Shares to
be issued upon exercise of an Option shall be payment in cash or by check or
with Shares of the Company's Common Stock as provided below.

        4.      Term and Vesting of Option.
        
        (a)     Term.  The term of the Option shall commence on April 1, 1996
(the "Grant Date") and terminate on March 30, 2006 or on such earlier date as
provided hereinafter. In no event shall the term of the Option be longer than
ten (10) years and one (1) day from the Grant Date. The vested portion of the
Option shall be exercisable as to any part or all of the aggregate number of
Optioned Shares as provided below.

        (b)     Vesting.  The Nonperformance Shares shall become exercisable as
follows: (i) one-fourth (1/4) of the Nonperformance Shares as of the date of
the first anniversary of the Grant Date, (ii) an additional one-fourth (1/4) of
the Nonperformance Shares as of the second anniversary of the Grant Date, (iii)
an additional one-fourth (1/4) of the Nonperformance Shares as of the third
anniversary of the Grant Date, and (iv) an additional one-fourth (1/4) of the
Nonperformance Shares as of the fourth anniversary of the Grant Date, subject
to the Optionee's Continuous Employment during such time. The Option may not be
exercised for fractional shares or for less than ten (10) Shares.

<PAGE>   2
        (c)     The Performance Shares shall become fully exercisable upon the
fifth anniversary of the Date of Grant.  The Performance Shares shall, however,
contain accelerated vesting performance events which shall be based upon the 
achievement of the corporate performance goals (the "Goals") associated with the
Retention Program as approved by the Compensation Committee (the "Committee") of
the Board of Directors of the Company (and as may be amended by the Committee 
from time to time).  Upon the achievement of each of the Goals, the Performance
Shares may be exercised to purchase up to 25% of the Performance Shares relating
to the Performance Option.  The Goals are set forth in Appendix A to this 
Agreement.

        (d)     The right to purchase Shares as provided in Sections 4(b) and
4(c) may be exercised in a cumulative fashion, such that any right to purchase
Shares which becomes exercisable on a given date shall remain exercisable until
the date stated in any applicable provision of Section 5.

        5.      Time and Method for Exercising the Option.

        (a)     Time.  Optionee may exercise the Option in one or more
installments and from time to time with respect to the vested portion of the
Option.

        (b)     Termination; Disability; Retirement; Death.

        (1)     Termination of Status as Employee.  If Optionee shall cease to
be an Employee for any reason other than permanent and total disability (within
the meaning of Section 22(e)(3) of the Code as determined in the sole discretion
of the Board of Directors of the Company), retirement or death, the Option shall
automatically terminate thirty (30) days following the date he ceases to be an
Employee.  Prior to such termination of the Option, the Optionee may exercise
the Option to the extent that Optionee was entitled to exercise on the
termination date, subject to the condition that no Option shall be exercised
after the expiration of the Option period.

        (2)     Disability of Optionee.  In the event of the permanent and
total disability (within the meaning of Section 22(e)(3) of the Code as
determined in the sole discretion of the Board of Directors of the Company)
during the Option period of Optionee who is at the time of commencement of such
disability, or was within the 90-day period prior thereto, an Employee and who
was in continuous Employment as such from the date of the grant of the Option
until the date of disability or termination, the Option may be exercised at any
time within one (1) year following the date of disability, but only to the
extent that the Optionee was entitled to exercise the Option at the time of the
termination or disability, whichever comes first, subject to the condition that
no Option shall be exercised after the expiration of the Option period.

        (3)     Retirement of Optionee.  In the event of the retirement during
the Option period of Optionee who is at the time of such retirement, or was
within the 90-day period prior thereto, an Employee and who was in Continuous
Employment as such from the date of the grant of the Option until the date of 
the retirement, then the Option may be exercised by the Optionee at any time 
within ninety (90) days following the retirement date, but only to the extent 
that the Optionee was entitled to exercise the Option at the time of the 
retirement of Optionee, subject to the condition that no Option shall be 
exercised after the expiration of the Option period.  For purposes of this 
paragraph (3), the term "retirement" shall mean voluntary termination of 
employment by an Employee who is at least age fifty-five (55) and who has 
completed five (5) years of employment with the Company, or termination of 
service on the Board of Directors by a Non-Employee

                                      2

<PAGE>   3
Director who is at least age fifty-five (55) and who has completed five (5)
years of service on the Board of Directors.

        (4)     Death of Optionee or Employee.  In the event of the death
during the Option period of Optionee who at the time of his death is, or was
within the 30-day period immediately prior thereto, an Employee and who was in
Continuous Employment as such from the date of the grant of the Option until
the date of death, the Option may be exercised for a period of up to one (1)
year following the date of death, at any time prior the expiration of the
Option Period, by the Optionee or, if applicable, Optionee's estate or by a
person who acquired the right to exercise the Option by bequest, inheritance or
otherwise as a result of the Optionee's death, but only to the extent that the
Optionee was entitled to exercise the Option at the time of Employee's death
subject to the condition that no Option shall be exercised after the expiration
of the Option period.

        (c)     Method

        (1)     Notice and Payment.  An option shall be deemed to be exercised 
when written notice of such exercise has been given company in accordance with
the terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company.  As soon as administratively practicable following the
exercise of an Option in the manner set forth above, the Company shall issue or
cause its transfer agent to issue stock certificates representing the Shares
purchased.

        (2)     Exercise of Option With Stock or Net of Exercise Price.  An
Optionee may elect to exercise an Option in whole or in part by (i) delivering
whole shares of the Company's Common Stock previously owned by such Optionee
(whether or not acquired through the prior exercise of a stock option) having
a fair market value equal to the option price; or (ii) directing the Company to
withhold from the Shares that would otherwise be issued upon exercise of the
Option that number of whole Shares having a fair market value equal to the
Option price.  Shares of the Company's Common Stock so delivered or withheld
shall be valued at their fair market value at the close of last business day
immediately preceding the date of exercise of the Option, as determined by the
Board of Directors of the Company.  Any balance of the Option price shall be
paid in cash.  After the Registration Date, any exercise of the Option by any
person subject to short-swing trading liability under Section 16(b) of the
Exchange Act shall comply with the relevant requirements of Exchange Act Rule
16b-3(d) or (e), regarding participant directed transactions.

        (3)     Voting and Dividend Rights.  Until the issuance of such stock
certificates (as evidenced by the appropriate entry on the books of the Company
or of a duly authorized transfer agent of the Company), no right to vote or
receive dividends or any other rights as a stockholder shall exist with respect
to the Optioned Shares notwithstanding the exercise of the Option.  No
adjustment will be made for a dividend or other rights for which the record
date occurs prior to the date the stock certificates are issued.

        6.      Non-Transferability of Options and Shares of Common Stock.

        (a)     Options.  The Option may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by 
the laws of descent and distribution and may be exercised, during the lifetime
of the Optionee, only by the Optionee.  Notwithstanding the preceding sentence,
the Option may be transferred to a spouse of the Optionee only upon approval of
the Board of Directors of the Company, providing all the conditions of
exercisability and vesting have been met.  The Optionee may designate a
beneficiary who may (i) exercise an Option under Section 5(b)(4) above, or (ii)
receive Shares issued pursuant to the



                                      3
<PAGE>   4
exercise of an Option where the death of the Optionee occurs between the date
on which the Optionee exercises the Option and the date the Company issues the
Shares.

        (b)     Shares of Common Stock.  Except as otherwise provided by the
Board of Directors of the Company, Optioned Shares acquired under an Option may
not be sold, pledged, assigned, hypothecated, transferred or disposed of in any
manner other than by will or by the laws of descent and distribution (provided
the Optionee's assigns or successors to such Optioned Shares remain subject to
the terms and conditions of this Agreement, including the Company's right of
first refusal to repurchase the Optioned Shares) without the Optionee first
offering to the Company the right to purchase the Optioned Shares at the fair
market value of the Shares on the date such offer is received by the Secretary
of the Company.  If the Company fails to accept the offer to purchase such
Shares within Seven (7) days after receipt of such offer, the Optionee shall be
free to sell or transfer such Shares at the same fair market value at which
they were offered to the Company.  If the Optionee does not sell or transfer
such Shares within Ninety (90) days thereafter, then the restrictions of this
Section 10 of the Plan shall remain in effect.  The certificates representing
the Optioned Shares shall bear a legend which shall give notice of such
restrictions on the transferability of the Optioned Shares.

        7.      Tax Withholding on the Option.  Upon each exercise of the 
Option, Optionee agrees to make appropriate arrangements acceptable to the
Company for satisfaction of any applicable federal, state or local income and
employment tax withholding requirements as provided in the Plan.  Without
limitation, when an Optionee is required to pay to the Company an amount with
respect to income or employment tax withholding obligations in connection with 
the exercise of an Option, the Optionee may elect, prior to the date the amount
of such withholding is determined (the "Tax Date") to make such payment, or such
increased payment as the Optionee elects to make up to the maximum federal,
state and local marginal tax rates (including any related obligation under the
Federal Insurance Contribution Act) applicable to the Optionee and the
particular transaction, by (i) delivering cash; (ii) delivering part or all of
the payment in previously owned stock (whether or not acquired through the
prior exercise of a stock option); or (iii) irrevocably directing the Company
to withhold from the Shares that would otherwise be issued upon exercise of the
Option that number of whole Shares having a fair market value equal to the
amount of tax required or elected to be withheld (a "Withholding Election"). 
If an Optionee's Tax Date is deferred beyond the date of exercise and the
Optionee makes a Withholding Election, the Optionee will receive the full amount
of Shares otherwise issuable upon exercise of the Option minus the number of 
Shares necessary to satisfy his or her minimum withholding requirements measured
on the date the Option is exercised (or such higher payment as he or she may 
have elected to make) with adjustments to be made in cash after the Tax Date.

        After the Registration Date, any withholding of Shares with respect to
taxes arising in connection with the exercise of an Option by any person subject
to short-swing trading liability under Section 16(b) of the Exchange Act shall
satisfy the following conditions:

                (i)     An advance election to withhold Shares in settlement of
        a tax liability must satisfy the requirements of Exchange Act Rule
        16b-3(d)(1)(i), regarding participant-directed transactions;

                (ii)    Absent such an election, the withholding of Shares to
        settle a tax liability may occur only during the quarterly window period
        described in Exchange Act Rule 16b-3(e);

                (iii)   Absent an advance election or window-period
        withholding, the Optionee may deliver Shares owned prior to the exercise
        of an Option to settle a tax liability arising upon exercise of the 
        Option, in accordance with Exchange Act Rule 16b-3(f); or




                                      4
<PAGE>   5
        (iv) The delivery of previously acquired Shares (but not the
withholding of newly acquired Shares) will be allowed where an election under
Section 83(b) of the Code accelerates the Tax Date to a day that occurs less
than six months after the advance election and is not within the quarterly
window period described in Exchange Act Rule 16b-3(e).

        Any adverse consequences incurred by an Optionee with respect to his or
her participation in this Agreement, the use of Shares to pay any part of the
Option price or income or employment tax arising in connection with the
exercise of an Option shall be the sole responsibility of the Optionee. The
Company does not warrant or represent to the Optionee any tax consequence of
any transaction under this Agreement.

        8.      Notices. All notices to the Company under this Agreement shall
be in writing and shall be delivered by personal service or telegram,
telecopier, or registered or certified mail (if such service is not available,
then by first class mail), postage pre-paid, to such address as may be
designated from time to time by the Company, and which shall initially be:

                        Global TeleSystems Group, Inc.
                        1751 Pinnacle Drive 
                        North Tower, 12th Floor
                        McLean, Virginia 22102
                        Telecopier: 703-918-0338
                        Attention: Corporate Secretary

        All notices shall be deemed given when received.

        9.      No Effect on Terms of Employment. This Option Agreement shall
not affect any right or power of the Company to terminate or change the terms
of employment of Employee at any time and for any reason whatsoever, with or
without cause.

        10.     Integration. This Option Agreement and the Plan constitute the
entire agreement between the Company and Optionee pertaining to the subject
matter hereof, and supersede all oral and prior written or implied agreements
and understandings between the parties.

        11.     Waiver. Any failure to enforce any terms or conditions of this
Option Agreement by the Company shall not be deemed a waiver of that term or
condition, nor shall any waiver or relinquishment of any right or power at any
one time or times be deemed a waiver or relinquishment of that right or power
for all or any other times.

        12.     Severability of Provisions. If any provision of this Option
Agreement shall be held invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereof; and this Option
Agreement shall be construed and enforced as if it did not include such 
provision.

        13.     Successors. This Option Agreement shall be binding upon and
inure to the benefit of any successor or successors of the company and any
assigns, successors or heirs of Optionee. Where the context permits, "Optionee"
as used in this Option Agreement shall include Optionee's executor,
administrator or other legal representative or the person or persons to whom
Optionee's rights pass by will or the applicable laws of descent and
distribution. Nothing in this Option Agreement shall be interpreted as imposing
any liability on the Company in favor of Optionee or such transferee of option
rights with respect to any loss, cost or expense which Optionee or



                                       5
<PAGE>   6
transferee may incur in connection with, or arising out of any transaction
involving the Option granted hereunder.

        14.  Amendment of Option Agreement. This Option Agreement cannot be
amended except by a writing executed by the Company and the Optionee.

        15.  Applicable Law: Headings. This Option Agreement shall be governed
by and construed and enforced in accordance with the laws of the State of
Virginia applicable to agreements made and to be performed exclusively in the
State of Virginia. The headings in this Option Agreement are solely for
convenience of reference and shall not affect its meaning or interpretation.

IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement to be
effective as of the date first written above.




Global TeleSystems Group, Inc.


/s/ [ILLEGIBLE]
- ---------------------------------            ----------------------------------
by:






                                       6

<PAGE>   1
                                                                 Exhibit 10.24

                             AMENDED AND RESTATED

           1992 STOCK OPTION PLAN OF GLOBAL TELESYSTEMS GROUP, INC.


                           (as of January 16, 1997)

        1.      PURPOSES OF THE PLAN.  The purposes of the Amended and Restated
1992 Stock Option Plan of Global TeleSystems Group, Inc. are to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentives to Employees of the Company
and its Parent or Subsidiaries, and to promote the success of the business of
the Company and its Parent or Subsidiaries.  At the discretion of the
Committee, Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options.

        2.      DEFINITIONS.  As used herein, and in any Option granted
hereunder, the following definitions shall apply:

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

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

        (c)     "Common Stock" shall mean the Common Stock of the Company, par
value $.01 per share.

        (d)     "Company" shall mean Global TeleSystems Group, Inc., a Delaware
corporation, including any wholly owned subsidiary or affiliate, and except as
provided in Section 11 below, its successors in interest.

        (e)     "Committee" shall mean the Compensation Committee appointed by
the Board in accordance with Section 4 of the Plan.  If the Board does not
appoint or ceases to maintain a Committee, the term "Committee" shall refer to
the Board.

        (f)     "Continuous Employment" shall mean the absence of any
interruption or termination of service as an Employee by the Company, its
Parent or any Subsidiary.  For purposes of the preceding sentence, service
shall not be considered interrupted during any period of vacation, sick leave,
military leave or any other absence approved by the Board and shall not be
considered terminated as a result of transfer between locations within the
Company or its Parent or any Subsidiary or among the Company, its Parent and
any Subsidiary.

        (g)     "Employee" shall mean any person, including any officer
(whether or not he or she is a director of the Company its Parent or a
Subsidiary), employed by the Company, its Parent or any Subsidiary.







<PAGE>   2
        (h)     "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.

        (i)     "Incentive Stock Option" shall mean any option granted under
this Plan and any other option granted to an Employee in accordance with the
provisions of Section 422 of the Code and the regulations promulgated
thereunder.

        (j)     "Non-employee Director" shall mean a "non-employee director"
within the meaning of Rule 16b-3 promulgated under the Exchange Act.

        (k)     "Nonstatutory Stock Option" shall mean any Option granted under
the Plan that is not an Incentive Stock Option.

        (l)     "Option" shall mean a stock option granted pursuant to the
Plan.

        (m)     "Option Agreement" shall mean a written agreement between the
Company and the Optionee regarding the grant and exercise of Options to
purchase Shares and the terms and conditions thereof as determined by the
Committee pursuant to the Plan.

        (n)     "Optioned Shares" shall mean the Common Stock subject to an
Option.

        (o)     "Optionee" shall mean an Employee who receives an Option under
the Plan.

        (p)     "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.

        (q)     "Plan" shall mean this Amended and Restated 1992 Stock Option
Plan of Global TeleSystems Group, Inc.

        (r)     "Registration Date" shall mean the effective date of the first
registration statement filed by the Company, pursuant to Section 12(g) of the
Exchange Act, with respect to any class of the Company's equity securities.

        (s)     "Securities Act" shall mean the Securities Act of 1933, as
amended.

        (t)     "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.

        (u)     "Subsidiary" shall mean a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.

        3.      Stock Subject to the Plan.  Without limiting the application of
Section 11 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is 18.5% of the total number of Shares
outstanding at the beginning of each calendar year.  The Shares may include
authorized but unissued or reacquired Common Stock.  If an Option is surrendered
for cash or other consideration or expires or becomes unexercisable for any
reason without having been exercised in full, the Shares which were subject to
the Option but as to 


<PAGE>   3
which the Option was not exercised shall become available for future Option
grants under the Plan, unless the Plan shall have been terminated.  Shares
subject to an Option that is forfeited or settled in cash or otherwise
terminated without a delivery of Shares to the Optionee, including Shares
withheld in payment of taxes relating to awards and the number of Shares equal
to the number of Shares surrendered in payment of the exercise price of Options
(or any other awards in the nature of purchase rights) or taxes relating to
awards, will again be available for awards under the Plan.

        The Committee may adopt reasonable counting procedures to ensure
appropriate counting, avoid double counting and make adjustments if the number
of Shares actually delivered differs from the number of Shares previously
counted in connection with an award.

        The Company intends that as long as it is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act and is not an
investment company registered or required to be registered under the Investment
Company Act of 1940, all offers and sales of Options and Common Stock issuable
upon exercise of any Option shall be exempt from registration under the
provisions of Section 5 of the Securities Act, and the Plan shall be
administered in such a manner so as to preserve such exemption.  The Company
intends that the Plan shall constitute a written compensatory benefit plan
within the meaning of Rule 701(b) of 17 CFR Section 230.701 promulgated by the
Securities and Exchange Commission pursuant to such Act.  The Committee shall
designate which Options granted under the Plan by the Company are intended to
be granted in reliance on Rule 701.

        4.      Administration of the Plan.

        (a)     Procedure.  The Plan shall be administered by the Board.  The
Board may appoint a Compensation Committee consisting of not less than two (2)
members of the Board to administer the Plan, subject to the direction of the
Board and such terms and conditions as the Board may prescribe.  Once
appointed, the Committee shall continue to serve until otherwise directed by
the Board.

        From time to time, the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the Committee and, thereafter, directly administer the
Plan.  Members of the Board or Committee who are either eligible for Options or
have been granted Options may vote on any matters affecting the administration
of the Plan or the grant of Options pursuant to the Plan, except that no such
member shall act upon the granting of an Option to himself or herself, but any
such member may be counted in determining the existence of a quorum at any
meeting of the Board or the Committee during which action is taken with respect
to the granting of an Option to him or her.

        The Committee shall meet as such times and places and upon such notice
as the Chairperson determines.  A majority of the Committee shall constitute a
quorum.  Any acts by the Committee may be taken at any meeting at which a quorum
is present and shall be by
<PAGE>   4

majority vote of those members entitled to vote. Additionally, any acts reduced
to writing or approved in writing by all of the members of the Committee shall
be valid acts of the Committee.

         (b)     Procedure After Registration Date. Notwithstanding subsection
(a) above, after the Registration Date, the Plan shall be administered either
by: (i) the full Board; or (ii) a Committee of two (2) or more directors, each
of whom is a Non-Employee Director.  After the Registration Date, the Board
shall take all action necessary to administer the Plan in accordance with the
then effective provisions of Rule 16b-3 promulgated under the Exchange Act,
provided that any amendment to the Plan required for compliance with such
provisions shall be made in accordance with Section 13 of the Plan.

         (c)     Powers of the Committee. Subject to the provisions of the
Plan, the Committee shall have discretionary authority: (i) to determine, upon
review of relevant information, the fair market value of the Common Stock; (ii)
to determine the exercise price of Options to be granted, the persons to whom
and the time or times at which Options shall be granted, and the number of
Shares to be represented by each Option; (iii) to interpret the Plan; (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan; (v) to
establish the terms and conditions of each Option granted under the Plan (which
terms and conditions need not be identical in any two Options) and, with the
consent of the holder thereof, to modify or amend any Option; (vi) to authorize
any person to execute on behalf of the Company any instruments required to
effect the grant of an Option awarded by the Committee; (vii) to accelerate or
(with the consent of an Optionee) to defer an exercise date of any Option
subject to the provisions of Section 9(a) of the Plan; (viii) to determine
whether Options granted under the Plan will be Incentive Stock Options or
Nonstatutory Stock Options; and (ix) to make all other determinations deemed
necessary or advisable for the administration of the Plan.

         (d)     Effect of Committee's Decision. All decisions, determinations
and interpretations of the Committee shall be final and binding on all
potential or actual Optionees, any other holder of an Option or other equity
security of the Company and all other persons.  In any controversy regarding
the administration of the Plan, any arbitrator or court reviewing any
decision, determination or interpretation by the Committee shall not set aside
or modify such decision, determination or interpretation unless it is
arbitrary, capricious or clearly contrary to the terms of the Plan.

         5.      Eligibility

         (a)     Persons Eligible to Participate. Options under the Plan may be
granted only to Employees whom the Committee may designate from time to time.
Incentive Stock Options may be granted only to Employees.  An Optionee who has
been granted an Option may receive an additional Option or Options, if he or
she is otherwise eligible for such grant.  However, the aggregate fair market
value (determined in accordance with the provisions of Section 8(a) of the
Plan) of the Shares subject to one or more Incentive Stock Options that are
exercisable for the first time by an Optionee during any calendar year (under
all stock option plans of the Company and its Parents and Subsidiaries) shall
not exceed $100,000 (determined as of the grant date).
<PAGE>   5
         (b)     No Right to Continuing Employment. Neither the establishment
nor operation of the Plan shall confer upon any Optionee or any other person
any right with respect to continuation of employment or other service with the
Company, its Parent or any Subsidiary, nor shall the Plan interfere in any way
with the right of the Optionee or other person or the right of the Company,
Parent or Subsidiary to terminate such employment or service at any time.

         6.      Term of Plan. The Plan shall become effective upon its
adoption by the Board or its approval by vote of the holders of the outstanding
Shares of the Company Common Stock entitled to vote on the adoption of the Plan
(in accordance with the provisions of Section 18 hereof), whichever is earlier.
The Plan shall continue until November 14, 2004 unless sooner terminated under
Section 13 of the Plan.

         7.      Term of Option. Unless the Committee determines otherwise, at
the time of the grant of an Option, the term of each Nonstatutory Stock Option
granted under the Plan shall be ten (10) years and one (1) day from the date of
grant; and the term of each Incentive Stock Option shall be ten (10) years from
the date of grant.  No option shall be exercisable after the expiration of its
term. In all cases the terms of an Option shall be set forth in the Option
Agreement.

         8.      Option Price, Consideration and Restrictions.

         (a)     Option Price. Except as provided in subsection (b), the option
price for the Shares to be issued pursuant to any Option shall be such price as
is determined by the Committee which, in the case of Incentive Stock Options,
shall in no event be less than the fair market value of such Shares on the date
the Option is granted.  Fair market value of the Common Stock shall be
determined by the Committee using such criteria as it deems relevant, provided
however, that where there is a public market for the Common Stock, the fair
market value per Share shall be the average of the last reported bid and asked
prices of the Common Stock on the date of grant, as reported in The Wall Street
Journal (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System; or, in
the event the Common Stock is listed on a national securities exchange, within
the meaning of Section 6 of the Exchange Act, the fair market value per Share
shall be the closing price on such exchange on the date of grant of the Option,
as reported in The Wall Street Journal.

         (b)     Ten Percent Shareholders. No Incentive Stock Option shall be
granted to any Employee who, at the date such Option is granted, owns (within
the meaning of Section 424(d) of the code) more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company, its Parent
or any Subsidiary, unless the option price for the Shares to be issued pursuant
to such Incentive Stock Option is equal to at least 110 percent (110%) of the
fair market value of such Shares on the grant date as determined by the
Committee in the manner set forth in subsection (a) above.

         (c)     Consideration. The consideration to be paid for the Shares to
be issued upon exercise of an Option shall be payment in cash or by check or
with Shares of the Company's Common Stock.  The Committee may also, in its
discretion, authorize at the time of the grant of
<PAGE>   6
the Option payment in some other consideration or method (such as by promissory
note) for the issuance of Shares as may be permitted under Sections 408 and 409
of the California General Corporation Law. Any cash or other property received
by the Company from the sale of Common Stock pursuant to the Plan shall
constitute part of the general assets of the Company.

        9.      Exercise of Option.

                (a) Vesting Period. Any Option granted hereunder shall be
exercisable at such times and under such conditions as determined by the
Committee and as shall be permissible under the terms of the Plan, which times
and conditions shall be specified in the Option Agreement evidencing the grant
of the Option. Unless the Committee specifically determines otherwise in the
Option Agreement, each Option shall vest and become exercisable, cumulatively,
by an Optionee, to the extent of (i) one-third (1/3) of the Optioned Shares as
of the first anniversary of the date on which the Option is granted, (ii)
two-thirds (2/3) of the Optioned Shares as of the second anniversary of the
date on which the Option is granted, and (iii) all of the Optioned Shares as of
the third anniversary of the date on which the Option is granted, subject to the
Optionee's Continuous Employment; provided, however, that the Optionee must
complete twelve (12) months of employment to exercise an Incentive Stock
Option. An Option may not be exercised for fractional Shares or for less than
ten (10) Shares.

                (b) Exercise Procedures. An Option shall be deemed to be
exercised when written notice of such exercise has been given to the Company in
accordance with the terms of the Option by the person entitled to exercise the
Option and full payment for the Shares with respect to which the Option is
exercised has been received by the Company. As soon as administratively
practicable following the exercise of an Option in the manner set forth above,
the Company shall issue or cause its transfer agent to issue stock certificates
representing the Shares purchased. Until the issuance of such stock certificates
(as evidenced by the appropriate entry on the books of the company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends
or any other rights as a stockholder shall exist with respect to the Optioned
Shares notwithstanding the exercise of the Option. Except as provided in Section
11 below, no adjustment will be made for a dividend or other rights for which
the record date occurs prior to the date the stock certificates are issued.

                (c) Exercise of Option with Stock or Net of Exercise Price. The 
Committee, in its discretion, may permit an Optionee to exercise an Option in
whole or in part by (i) delivering whole Shares of the Company's Common Stock
previously owned by such Optionee (whether or note acquired through the prior
exercise of a stock option) having a fair market value equal to the option
price; or (ii) directing the Company to withhold from the Shares that would
otherwise be issued upon exercise of the Option that number of whole Shares
having a fair market value equal to the Option price. Shares of the Company's
Common Stock so delivered or withheld shall be valued at their fair market value
at the close of the last business day immediately preceding the date of exercise
of the Option, as determined by the Committee. Any balance of the Option price
shall be paid in cash. Any Shares delivered or withheld in accordance with this
provision 
<PAGE>   7
shall again become available for purposes of the Plan and for Options
subsequently granted thereunder.

        (d)     Termination of Status as Employee.  If an Optionee shall cease
to be an Employee for any reason other than permanent and total disability
(within the meaning of Section 22(e)(3) of the Code as determined in the sole
discretion of the Committee), retirement or death, such individual's Option
shall automatically terminate thirty (30) days following the date he or she
ceases to be an Employee, unless the Committee, in its discretion, determines
to permit a longer post-employment exercise period (which shall in no event
extend beyond the term of the relevant Option). Prior to such termination of
the Option, the Optionee may exercise his or her Option to the extent that he
or she was entitled to exercise on the exercise date subject to the condition
that no Option shall be exercised after the expiration of the Option period.

        (e)     Disability of Optionee.  In the event of the permanent and
total disability (within the meaning of Section 22(e)(3) of the Code as
determined in the sole discretion of the Committee) during the Option period of
an Optionee who is at the time of such disability, or was within the 90-day
period prior thereto, an Employee and who was in Continuous Employment as such
from the date of the grant of the Option until the date of disability or
termination, the Option may be exercised at any time within one (1) year
following the date of disability (or such longer period as may be established
by the Committee, in its discretion), but only to the extent that the Optionee
was entitled to exercise the Option at the time of the termination or
disability, whichever comes first, subject to the condition that no Option
shall be exercised after the expiration of the Option period.

        (f)     Retirement of Optionee.  In the event of the retirement during
the Option period of an Optionee who is at the time of such retirement, or was
within the 90-day period prior thereto, an Employee and who was in Continuous
Employment as such from the date of the grant of the Option until the date of
the retirement, the Option may be exercised by the Optionee at any time within
ninety (90) days following the retirement date or such longer period as may be
established by the Committee, in its discretion), but only to the extent that
the Optionee was entitled to exercise the Option at the time of his or her
retirement, subject to the condition that no Option shall be exercised after
the expiration of the Option period.  For purposes of this Section 9, the term
"retirement" shall mean voluntary termination of employment by an Employee who
is at least age fifty-five (55) and who has completed five (5) years of
employment with the Company.

        (g)     Death of Optionee.  In the event of the death during the Option
period of an Optionee who is at the time of his or her death, or was within the
90-day period immediately prior thereto, an Employee and who was in Continuous
Employment as such from the date of the grant of the Option until the date of
death, the Option may be exercised for a period up to one (1) year following
the date of death or such longer period as may be established by the
Committee, in its discretion), at any time prior to the expiration of the
Option period, by the Optionee's estate or by a person who acquired the right
to exercise the Option by bequest, inheritance or otherwise as a result of the
Optionee's death, but only to the extent that the





<PAGE>   8
Optionee was entitled to exercise the Option at the time of the death, subject
to the condition that no Option shall be exercised after the expiration of the
Option period.

        (h)     Tax Withholding.  When an Optionee is required to pay to the
Company an amount with respect to income or employment tax withholding
obligations in connection with the exercise of an Option granted under the
Plan, the Optionee may elect, prior to the date the amount of such withholding
is determined (the "Tax Date") to make such payment, or such increased payment
as the Optionee elects to make up to the maximum federal, state and local
marginal tax rates (including any related obligation under the Federal
Insurance Contribution Act) applicable to the Optionee and the particular
transaction, by (i) delivering cash; (ii) delivering part or all of the payment
in previously owned stock (whether or not acquired through the prior exercise of
a stock option); or (iii) subject to the consent of the Committee, irrevocably
directing the Company to withhold from the Shares that would otherwise be
issued upon exercise of the Option that number of whole Shares having a fair
market value equal to the amount of tax required or elected to be withheld (a
"Withholding Election").  If an Optionee's Tax Date is deferred beyond the date
of exercise and the Optionee makes a Withholding Election, the Optionee will
receive the full amount of Shares otherwise issuable upon exercise of the
Option minus the number of Shares necessary to satisfy his or her minimum
withholding requirements measured on the date the Option is exercised (or such
higher payment as he or she may have elected to make) with adjustments to be
made in cash after the Tax Date.

        Any adverse consequences incurred by an Optionee with respect to his or
her participation in the Plan, the use of Shares to pay any part of the Option
price or income or employment tax arising in connection with the exercise of an
Option (including without limitation any adverse tax consequences arising as
result of a disqualifying disposition within the meaning of Section 422 of the
Code) shall be the sole responsibility of the Optionee.  The Company does not
warrant or represent to the Optionee any tax consequence of any transaction
under this Plan, including the initial and continuing satisfaction of the
conditions for an Incentive Stock Option under Section 422 of the Code.

        10.     Non-Transferability of Options and Shares of Common Stock.

        (a)     Options.  An Option may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution and may be exercised, during the lifetime
of the Optionee, only by the Optionee.  Notwithstanding the preceding
sentence, the Option may be transferred to a spouse of the Optionee only upon
approval of the Committee, providing all the conditions of exercisability and
vesting have been met.  If the Option Agreement permits, the Optionee may
designate a beneficiary who may (i) exercise an Option under Section 9(g)
above, or (ii) receive Shares issued pursuant to the exercise of an Option
where the death of an Optionee occurs between the date on which the Optionee
exercises the Option and the date the Company issues the Shares.

        (b)     Shares of Common Stock.  The Committee may impose such other
restrictions on Shares issued under this Plan as it deems advisable.  Except as
otherwise provided by the Committee, Optioned Shares acquired under an Option
may not be sold, pledged, assigned,

<PAGE>   9
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution (provided the assigns or successors in
interests to such Optioned Shares remained subject to the terms and conditions
of this Plan including the Company's rights of first refusal to repurchase the
Optioned Shares) without the Optionee first offering to the Company the right
to purchase the Optioned Shares at the fair market value of the Shares on the
date such offer is received by the Secretary of the Company. If the Company
fails to accept the offer to purchase such Shares within seven (7) days after
receipt of such offer, the Optionee shall be free to sell or transfer such
Shares at the same fair market value at which they were offered to the Company.
If the Optionee does not sell or transfer such Shares within ninety (90) days,
then the restrictions of this Section 10 shall remain in effect. The
certificates representing the Optioned Shares shall bear a legend which shall
give notice of such restrictions on the transferability of the Optioned Shares.

         11.     Adjustments Upon Changes in Capitalization. Subject to any
required action by the shareholders of the Company, the number of Shares of
Common Stock covered by each outstanding Option and the per share price thereof
in each such Option, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares of Common Stock resulting from a stock
split, reverse stock split, combination, reclassification, the payment of a
stock dividend on the Common Stock or any other increase or decrease in the
number of such Shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected without
receipt of consideration." Such adjustment shall be made by the Committee,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issue by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class,
shall affect (and no adjustment by reason thereof shall be made with respect
to) the number or price of Shares subject to an Option.

         The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the number or class of securities
covered by an Option, as well as the price to be paid therefor, in the event of
the Company's effecting one or more reorganizations, recapitalizations, rights
offerings, or other increases or reductions of the number of Shares of its
outstanding Common Stock, or in the event of the Company's being consolidated
with or merged into any other corporation.

         Unless otherwise determined by the Board, upon the dissolution or
liquidation of the Company or upon any merger or consolidation, if the Company
is not the surviving corporation, the Options granted hereby shall terminate
and thereupon become null and void; provided, however, that the Optionee shall
be given not less than ten (10) days' notice of such event and the
exercisability of each outstanding Option shall be accelerated so that the
Optionee may within such period exercise up to the entire unexercised portion
of his or her option. Upon the occurrence of any such event, any option not
exercised pursuant thereto shall terminate.

         12.     Time of Granting Options. Unless otherwise specified by the
Committee or as may be required by applicable law, regulation or rule
(including rules of stock

<PAGE>   10
exchanges or other self-regulatory organizations), the date of grant of an
Option under the Plan shall be the date on which the Committee makes the
determination to grant such Option or if later, the date on which are satisfied
any conditions precedent to such grant.  As soon as feasible after the
Committee makes its determination regarding the grant of an Option, the
Committee shall notify the individual or class of persons who are the
recipients of the grant.

        13.     Amendment and Termination of the Plan. The Board may amend or
terminate the Plan from time to time in such respects as the board may deem
advisable, except that amendments or modifications to the Plan shall be subject
to shareholder approval (a) if such amendment or modification increases the
Shares available for issuance under the Plan or (b) to the extent required by
applicable law, regulation or rule (including rules of stock exchanges or other
self-regulatory organizations).  Any amendment or termination of the Plan shall
not adversely affect any Option already granted without the relevant Optionee's
consent; and if no such consent is secured such Option shall remain in full
force and effect as if the Plan had not been amended or terminated.

        14.     Conditions Upon Issuance of Shares.  Shares shall not be issued
with respect to an Option granted under the Plan unless the exercise of such
Option and the issuance and delivery of such Shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares
may then be listed, and shall be further subject to the approval of counsel for
the Company with respect to such compliance.  As a condition to the exercise of
an Option, the Company may require the person exercising such Option to
represent and warrant, at the time of any such exercise, that the Shares are
being purchased only for investment and without any present intention to sell
or distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.

        15.     Reservations of Shares.  During the term of this Plan, the
Company will at all times reserve and keep available the number of Shares as
shall be sufficient to satisfy the requirements of the Plan.  Inability of the
Company to obtain from any regulatory body having jurisdiction and authority
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder shall relieve the Company of any liability in respect
to the nonissuance or sale of such Shares as to which such requisite authority
shall not have been obtained.

        16.     Information to Optionee.  During the term of any Option granted
under the Plan, the Company shall provide or otherwise make available to each
Optionee a copy of its annual report to shareholders and financial information
which is provided to its shareholders in accordance with the provisions of the
Company's Bylaws and applicable law.
        
        17.     Option Agreement.  All Options granted under Plan shall be
evidenced by Option Agreements.
<PAGE>   11
        18.     Shareholder Approval. This amendment and restatement of the
Plan shall be subject to approval by the affirmative vote of the holders of a
majority of the securities of the Company present, or represented, and entitled
to vote at a meeting duly held, within twelve (12) months before or after the
adoption, in accordance with the applicable laws of the State of Delaware.

        19.     Best Payments. If the gross amount of any payment or benefit
under the Plan, either separately or in combination with any other payment or
benefit payable by the Company, its Parent or any Subsidiary or pursuant to a
plan of the Company, its Parent of any Subsidiary would constitute a parachute 
payment within the meaning of Code Section 280G, then the total payments and
benefits accrued and payable under this Plan shall not exceed the amount
necessary to maximize the amount received by the Optionee after payment of all
employment, income and excise taxes imposed on the Optionee with respect to such
payments and benefits. The Optionee may elect, by written notice to the Board,
which items of compensation, if any, shall be reduced so as to meet the
requirements of the preceding sentence. If there is a dispute between the
Company and the Optionee regarding (i) the extent, if any, to which any payments
or benefits to the Optionee are parachute payments or excess parachute payments,
under Code Section 280G, (ii) the base amount of such Optionee's compensation,
under Code Section 280G, or (iii) the status of such Optionee as a disqualified
individual, under Code Section 280G, such dispute shall be resolved as provided
in Section 20 below. Within 30 days of the Optionee's receiving notice of (a) a
change of control of the Company within the meaning of Code Section 280G or (b)
the Optionee's termination of service with the Company, its Parent or Subsidiary
or the Company's receiving notice of such termination, either the Optionee or
the Company may request, in accordance with Section 20 below, (a) a
determination of the amount of any parachute payment, excess parachute payment,
or base amount of compensation, or (b) a determination of the reduction
necessary to maximize the amount receivable by the Optionee as described above.
Any fees, costs or expenses incurred by the Optionee in connection with such
determinations shall be paid by the Optionee.

        20.     Mandatory Arbitration. Any dispute arising out of or relating
to this Plan or any Option Agreement shall be resolved solely by arbitration
before one arbitrator in accordance with the Employee Benefit Plan Claim Rules
of the American Arbitration Association. The location of the arbitration
proceeding shall be in Washington, D.C. Judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction. Each party to any
dispute regarding the Plan or an Option Agreement shall pay the costs and fees
(including attorneys' fees) of presenting his, her or its case in arbitration.
All other costs of arbitration, including the costs of any transcript of the
proceedings, administrative fees and the arbitrator's fees, shall be borne
equally by the parties. All statutes of limitation which would otherwise be
applicable shall apply to any arbitration proceeding. The provisions of this
Section 20 are exclusive for all purposes and applicable to any and all
disputes arising out of or relating to the Plan or any Option Agreement. The
arbitrator who hears and decides any dispute shall have jurisdiction and
authority to award only compensatory damages to make whole a person or entity
sustaining foreseeable economic loss, and shall not have jurisdiction or
authority to make any other award of any type, including, without limitation,
punitive damages, unforeseeable
<PAGE>   12
economic damages, adverse tax consequences, damages for pain, suffering or
emotional distress, or any other kind or form of damages. The remedy, if any,
awarded by the arbitrator shall be the sole and exclusive remedy for any
dispute which is subject to arbitration under this Plan.

        21.  Governing Law. The validity, construction and effect of the Plan
and any agreement hereunder shall be determined in accordance with the laws of
the State of Delaware and applicable federal law.

        22.  COMPLIANCE WITH RULE 16b-3. It is the intent of the Company that
this Plan comply in all respects with applicable provisions of Rule 16b-3 under
the Exchange Act in connection with any grant of Options. Accordingly, if any
provision of this Plan or any agreement hereunder does not comply with the
requirements of Rule 16b-3 as then applicable to any such Optionee, such
provision shall be construed or deemed amended to the extent necessary to
conform to such requirements with respect to such Optionee. In addition, the
Board shall have no authority to make any amendment, alteration, suspension,
discontinuation, or termination of the Plan or any agreement hereunder to take
other action if an to the extent such authority would cause an Optionee's
transactions under the Plan not to be exempt under Rule 16b-3 of the Exchange 
Act.





<PAGE>   1
                                                                   Exhibit 10.25

                                 GTS - Hermes
                            1994 Stock Option Plan

                       Non-Qualified Stock Option Grant

        1.      Grant of Option Pursuant to Plan:  An Option to purchase a
total of shares of Stock, par value $.01 of GTS-Hermes, Inc., a Delaware
corporation (hereinafter the "Company") is hereby granted to Jan Loeber
(hereinafter the "Participant"), on this 1st day of January, 1996, subject in
all respects to the terms and provisions of the GTS-Hermes, Inc. 1994 Stock
Option Plan (hereinafter the "Plan"), which has been adopted by the Company and
which is incorporated herein by reference (capitalized terms used in this
Option Grant shall have the same meanings given to them in the Plan).  The
Option is not, and is not intended to meet the requirements for an incentive
stock option within the meaning of Section 422 of the Code.

        2.      Option Price and Vesting of Option:  The Option price as
determined by the Committee in accordance with the terms of the Plan is
$57,142.86 per share of Stock.  The shares (i.e., "Optioned Shares") shall
become exercisable (i.e., "Vest") in accordance with the following schedule:


<TABLE>
<CAPTION>
                                    Percentage of
                     Number          Common Stock          Aggregate
Vesting Date       of Shares         Outstanding          Option Price
- ------------       ---------        -------------         ------------
<S>                <C>              <C>                   <C>

January 1, 1997     1.1666             1.1666%             $66,662.00

January 1, 1998     1.1667             1.1667%             $66,669.00

January 1, 1999     1.1667             1.1667%             $66,669.00

</TABLE>


        3.      Term of Option.

        (a)     General:  In all events, this Option will expire no longer than
10 years and one day after the date of grant.

        (b)     Participant's Separation from Service:  Except as otherwise
provided below, upon Participant's separation from service with the Company,
the Option will expire on the earlier of (i) the expiration of the original
exercise period under the Option, (ii) the 30th day following separation from
service with the Company; provided, however, that in the event the Participant's
employment is terminated under Participant's employment contract "for cause",
the Option shall immediately expire upon such termination.

        (c)     Retirement of Participant:  If Participant retires from the
Company on or after reaching age 55 with 5 years of service with the Company,
the Option will expire on the earlier of (i) the expiration of the original
exercise period under the Option, or (ii) the 90th day following retirement
from the Company. If a retired participant dies during this 90-day period, then
the Option will expire on the earlier of (i) the expiration of the original
exercise period under the Option, or (ii) the first anniversay of the date of
such death.  During these exercise periods, Participant (or Beneficiary in the
case of Participant's death) can exercise only the Optioned Shares that were
vested as of the date of retirement.

        (d)     Death or Disability of Participant:  If Participant dies or
becomes disabled (as determined under the Company's long-term disability plan)
the Option will expire on the earlier of (i) the expiration of the original
exercise period under the Option, or (ii) the 365th day following the date of
death or disability.  If a disabled participant dies during this 365-day
period, then the Option will expire on the earlier of 

<PAGE>   2
(i) the expiration of the original exercise period under the Option, or (ii)
the first anniversary of the date of such death. During these exercise periods,
Participant (or Beneficiary in the case of Participant's death) can exercise 
only the Optioned Shares that were vested as of the date of death or disability.

        4.      Method of Exercising Option.

        (a)     Notice: Participant may exercise all or a portion of his or her
vested Optioned Shares by giving the Company written notice of the exercise
specifying the number of shares to be purchased.

        (b)     Consideration: Such notice shall be accompanied by payment in
full of the purchase price, either by certified or bank check, or such other
instrument as the Committee may accept. In addition, payment may be made in the
form of unrestricted Stock already owned by Participant as of the date of
exercise. If payment is made in the form of Stock, the value of such Stock
shall be the Fair Market Value of such Stock as of the exercise date.

        5.      Company's Right to Cash Out Option:  On receipt of written
notice to exercise, the Committee may, in its sole discretion, elect  to cash
out all or part of the portion of the Option to be exercised by paying
Participant an amount, in cash or Stock, equal to the excess of the Fair Market
Value of the Stock over the Option price (i.e., "the Spread Value") on the
effective date of such cash-out. Any Stock to be issued with respect to the
Spread Value may be in the form of Restricted Stock.

        6.      Cashless Exercise of Option: To the extent permitted under the
applicable laws and regulations under Section 16 of the Securities Exchange Act
of 1934, as amended, and the Rules promulgated thereunder, and with the consent
of the Committee, the Company agrees to cooperate in a "cashless exercise" of
an Option. The cashless exercise shall be effected by the Participant
delivering to the Securities Broker instructions to sell a sufficient number of
Shares of Stock to cover the costs and expenses associated therewith.

        7.      Shareholder Rights of Participant: Participant shall generally
have the rights to dividends or other rights of a shareholder with respect to
Optioned Shares when Participant has given written notice of exercise, has
paid in full for such shares, and if requested by the Committee, has
represented in writing that the Participant is acquiring the Stock without a
view to distribution thereof.

        8.      Right of First Refusal: The Stock received upon exercise of all
or a portion of this Option will be subject to a right of first refusal by the
Company pursuant to which Participant will be required to offer the Company
any shares Participant wishes to sell with the price being the then Fair Market
Value of the Stock.

        9.      Change in Control Provisions: In the event there is a Change in
Control or Potential Change in Control of the Company (as defined in Section 7
of the Plan) and the Option has been held for more than six months as of the
date of such Change in Control or Potential Change in Control, then (i) all
Optioned Shares will become fully vested and exercisable immediately, and (ii)
the value of all Optioned Shares may be cashed out on the basis of the Change
in Control Price (as defined in Section 7(d) of the Plan). The Committee will
notify Participant in writing of these special exercise rights if the Company
experiences a Change in Control or Potential Change in Control.

        10.     Transferability of Option: This Option will not be transferable
by Participant otherwise than by will or by laws of descent and distribution,
and this Option will be exercisable, during Participant's lifetime, only by 
Participant.


                                       2
<PAGE>   3
        11.     Withholding Obligation of Participant: No later than the date
as of which an amount first becomes includible in the gross income of the
Participant for Federal income tax purposes with respect to any Optioned Shares
under the Plan, the Participant shall pay to the Company, or make arrangement
satisfactory to the Committee regarding the payment of, any Federal, state or
local taxes of any kind required by law to be withheld with respect to such
amount. Unless otherwise determined by the Committee, the minimum required
withholding obligations may be settled with Stock, including Stock that is part
of the Optioned Shares that give rise to the withholding requirement.

        12.     Notices: All notices to the Company under this Option shall be
in writing and shall be delivered by personal service or telegram, telecopier,
or registered or certified mail (if such service is not available, then by
first class mail), postage prepaid, to such address as may be designated from
time to time by the Company, and which shall initially be:

                GTS-Hermes, Inc.
                c/o Global TeleSystems Group, Inc.
                1751 Pinnacle Drive
                North Tower 12th Floor
                McLean, Virginia 22102
                Telecopier: (703) 918-0338
                Attention: General Counsel

All notices shall be deemed given when received.

        13.     Integration: This Option and the Plan constitute the entire
agreement between the Company and the Participant pertaining to the subject
matter hereof, and supersede all oral and prior written or implied agreements
and understandings between the parties.

        14.     Waiver: Any failure to enforce any terms or conditions of this
Option by the Company shall not be deemed a waiver of that term or condition,
nor shall any waiver or relinquishment of any right or power at any one time or
times be deemed a waiver or relinquishment of that right or power for all or any
other times.

        15.     Severability of Provisions: If any provision of this Option
shall be held invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision hereof; and this Option shall be construed
and enforced as if it did not include such provision.

        16.     Amendment of Option: This Option cannot be amended except by a
writing executed by the Company and Participant.

        17.     Successors: This Option shall be binding upon and inure to the
benefit of any successor or successors of the Company and any assigns,
successors or heirs of Participant. Where the contest permits, "Participant" as
used in this Option shall include Participant's executor, administrator or
other legal representative or the person or persons to whom Participant's
rights pass by will or the applicable laws of descent and distribution. Nothing
in this Option shall be interpreted as imposing any liability on the Company in
favor of Participant or such transferee of such option rights with respect to
any loss, cost or expense which Participant or transferee may incur in
connection with, or arising out of any transaction involving the Option 
granted hereunder.

        18.     Applicable Law: This Option shall be governed by and
construed and 


                                       3
<PAGE>   4
enforced in accordance with the laws of the State of Delaware.


                                                       GTS - Hermes, Inc.


                                                  By:  /s/ [ILLEGIBLE]
                                                     -------------------------
                                                     Title: Vice President


        The Participant acknowledges receipt of a copy of the Plan, a copy of
which is attached hereto, and represents that he is familiar with the terms and
provisions thereof.  The Participant hereby accepts this Option subject to all
the terms and provisions of the Plan.  The Participant hereby agrees to accept
as binding, conclusive, and final all decisions and interpretations of the
Committee, upon any questions arising under the Plan. As a condition to the
issuance of shares of Stock of the Company under this Option, the Participant 
agrees to remit to the Company at the time of any exercise of this Option any
taxes required to be withheld by the Company under federal, state, or local law
as a result of the exercise of this Option.


Dated: January 1, 1996

                                                       /s/ JAN LOEBER
                                                     -------------------------
                                                     Jan Loeber





                                      4

<PAGE>   1
                                                                    Exhibit 21.1

                              List of Subsidiaries

1.      GTS Group, Inc. (Delaware)
2.      TeleSystems Services, Inc. (Delaware)
3.      San Francisco/Moscow Teleport, Inc. (Delaware)
4.      San Francisco International Teleport, Inc. (Delaware)
5.      SFMT, Inc. (Delaware)
6.      GTS Finance, Inc. (Delaware)
7.      SFMT-China, Inc. (Delaware)
8.      SFMT-CIS, Inc. (Delaware)
9.      SFMT (Cyprus) Limited (Cyprus)
10.     GTS-Czech, Inc. (Delaware)
11.     SFMT-Datacom, Inc. (Delaware)
12.     GTS-Europe South, Inc. (Delaware)
13.     GTS-Hermes, Inc. (Delaware)
14.     GTS-Hungaro, Inc. (Delaware)
15.     GTS-Poland, Inc. (Delaware)
16.     SFMT-Rusnet, Inc. (Delaware)
17.     SFMT-Sovintel 1, Inc. (Delaware)
18.     SFMT-Sovintel 2, Inc. (Delaware)
19.     GTS Cellular, Inc. (Delaware)
20.     GTS Transpacific Ventures Limited (Delaware)
21.     GTS-India, Inc. (Delaware)
22.     GTS-Bulgaria, Inc. (Delaware)
23.     Sovinet (Virginia General Partnership)
24.     Telecom Consulting & Advisory Services, Inc. (Delaware)
25.     C-Datacom International, Inc. (Delaware)
26.     GTS Management Services, Inc. (Delaware)
27.     Archangelsk Cellular Network (Russia)
28.     Astrakhan Mobile (Russia)
29.     Chuvashi Mobile (Russia)
30.     EDN Sovintel (Russia)
31.     Lipetsk Mobile (Russia)
32.     Mar Mobile (Russia)
33.     Penza Mobile (Russia)
34.     Prymtelefon (Russia)
35.     Saratov Mobile (Russia)
36.     SFIT, Ltd., Co. (Russia)
37.     SFMT-Irkutsk (Russia)
38.     SFMT-Krasnodar
39.     TeleRoss (Russia)
40.     SFMT-Novosibirsk (Russia)
<PAGE>   2
                                       2

41.     SFMT-Tiumen (Russia)
42.     SFMT-Ufa (Russia)
43.     SFMT-Vladivostok (Russia)
44.     Sovam Teleport (Russia)
45.     Volgograd Mobile (Russia)
46.     Votec Mobile (Russia)
47.     Murmansk Mobile (Russia)
48.     Saratov Mobile (Russia)
49.     Parma Mobile (Russia)
50.     GTS Cellular (Russia)
51.     SFMT-Ekaterinburg (Russia)
52.     SFMT-Siktivkar (Russia)
53.     SFMT-Nizhny Novgorod (Russia)
54.     SFMT-Archangelsk (Russia)
55.     SFMT-Khabarovsk (Russia)
56.     TeleRoss Voronezh (Russia)
57.     TeleCommunications of Moscow (Russia)
58.     Sovam Teleport Kiev Division L.L.C. (Ukraine)
59.     Eurohivo (Hungary)
60.     Montana Telecom Ltd. (Hungary)
61.     GTS-Hungary (Hungary)
62.     GTS-System Ltd. (Hungary)
63.     CzechCom s.r.o. (Czech Republic)
64.     SFMT-Czech Net, spol. s.r.o. (Czech Republic)
65.     GTS-Ukraine (Ukraine)
66.     GTS Ukrainian Telesystems L.L.C. (Delaware)
67.     SIPF Bancomsviaz (Ukraine)
68.     Hermes Europe Railtel, B.V. (The Netherlands)
69.     Vostok Mobile, B.V. (The Netherlands)
70.     VM Resources, B.V. (The Netherlands)
71.     CommStruct International B.V. (The Netherlands) 
72.     GTS S.A.M. (Monaco)
73.     GTS Monaco Access S.A.M. (Monaco)
74.     Shanghai V-Tech Telecommunications and Engineering Limited Liability
        Company (China)
75.     Beijing Global Tong DaTelecommunications Systems Corporation Limited
        (China)
76.     Shanghai Global Intelligent TeleSystems Co., Ltd. (China)
77.     American China Investment Corporation (Canada)
78.     Beijing Tianmu Satellite Communications Technology Company, Ltd. (China)
79.     GTS China Investments L.L.C. (Delaware)
80.     C-Datacom International (France)
<PAGE>   3
                                       3

81.     GTS-Bulgaria EOOD (Bulgaria)
82.     Sitel-VSAT s.r.o. (Slovakia)
83.     GTS-Vox Limited (England and Wales)
84.     Global TeleSystems (UK) Limited (England and Wales)

<PAGE>   1
                                                                    Exhibit 23.2

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 31, 1997 (Global TeleSystems Group, Inc.),
February 21, 1997 (EDN Sovintel), and June 11, 1997 except for Note 9, which is
as of July 15, 1997 (Hermes Europe Railtel B.V.), in the Registration Statement
(Form S-1) and related Prospectus of Global TeleSystems Group, Inc. dated on or
about September 26, 1997.

                                            /s/ Ernst & Young LLP


Vienna, Virginia
September 26, 1997 

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 12/31/96
audited financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                          57,874
<SECURITIES>                                         0
<RECEIVABLES>                                    8,920
<ALLOWANCES>                                       782
<INVENTORY>                                          0
<CURRENT-ASSETS>                                85,145
<PP&E>                                          42,025
<DEPRECIATION>                                   6,562
<TOTAL-ASSETS>                                 237,378
<CURRENT-LIABILITIES>                           44,688
<BONDS>                                         60,150
                                0
                                          0
<COMMON>                                             2
<OTHER-SE>                                     113,666
<TOTAL-LIABILITY-AND-EQUITY>                   237,378
<SALES>                                          4,907
<TOTAL-REVENUES>                                24,117
<CGS>                                            4,200
<TOTAL-COSTS>                                   18,941
<OTHER-EXPENSES>                                64,254
<LOSS-PROVISION>                                   752
<INTEREST-EXPENSE>                              11,122
<INCOME-PRETAX>                               (66,631)
<INCOME-TAX>                                     1,360
<INCOME-CONTINUING>                           (67,991)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (67,991)
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                        0
        

</TABLE>

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 6/30/97
unaudited financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               JUN-30-1997
<CASH>                                          14,587
<SECURITIES>                                         0
<RECEIVABLES>                                   11,216
<ALLOWANCES>                                     1,366
<INVENTORY>                                      1,813
<CURRENT-ASSETS>                                33,715
<PP&E>                                          44,613
<DEPRECIATION>                                   9,198
<TOTAL-ASSETS>                                 198,340
<CURRENT-LIABILITIES>                           33,093
<BONDS>                                         84,090
                                0
                                          0
<COMMON>                                             2
<OTHER-SE>                                      76,276
<TOTAL-LIABILITY-AND-EQUITY>                   198,340
<SALES>                                          1,439
<TOTAL-REVENUES>                                17,295
<CGS>                                            1,155
<TOTAL-COSTS>                                   12,963
<OTHER-EXPENSES>                                38,201
<LOSS-PROVISION>                                   584
<INTEREST-EXPENSE>                               7,163
<INCOME-PRETAX>                               (38,870)
<INCOME-TAX>                                       817
<INCOME-CONTINUING>                           (39,687)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (39,687)
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                        0
        

</TABLE>


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