GLOBAL TELESYSTEMS GROUP INC
S-3/A, 1999-02-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>   1
 
   
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1999
    
 
   
                                                      REGISTRATION NO. 333-70871
    
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
 
   
                                 PRE-EFFECTIVE
    
   
                                AMENDMENT NO. 1
    
 
   
                                    FORM S-3
    
 
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                             ---------------------
                         GLOBAL TELESYSTEMS GROUP, INC.
               (Exact name of registrant as specified in charter)
 
<TABLE>
<S>                             <C>                             <C>
           DELAWARE                          4813                         94-3068423
 (State or other jurisdiction
      of incorporation or        (Primary Standard Industrial          (I.R.S. Employer
         organization)            Classification Code Number)       Identification Number)
</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)
                             ---------------------
                                GRIER C. RACLIN
                              1751 PINNACLE DRIVE
                           NORTH TOWER -- 12TH FLOOR
                                MCLEAN, VA 22102
                                 (703) 918-4573
 
 (Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                             ---------------------
                                   Copies to:
   
                                 LINDA C. QUINN
    
   
                              SHEARMAN & STERLING
    
   
                              599 LEXINGTON AVENUE
    
   
                               NEW YORK, NY 10022
    
   
                                 (212) 848-8747
    
                             ---------------------
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
 
     If the securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box.  [ ]
 
     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [X]
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]
- ---------------------.
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering.  [ ]
- ---------------------.
 
   
     If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box.  [ ]
    
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2
 
   
                 SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1999
    
 
PROSPECTUS
                               13,909,753 SHARES
 
                         GLOBAL TELESYSTEMS GROUP, INC.
[GLOBAL TELESYSTEMS GROUP, INC. LOGO]
 
                                  COMMON STOCK
 
                             ---------------------
 
   
     The selling stockholders listed under "Principal and Selling Stockholders"
in this prospectus are selling to 13,909,753 shares of Global TeleSystems Group,
Inc.'s common stock. Our shares currently trade on the Nasdaq National Market
under the symbol "GTSG."
    
 
   
     These stockholders may sell their shares in the over-the-counter market, in
the Nasdaq National Market, in privately negotiated transactions or otherwise at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. This prospectus also may be
used by transferees of these stockholders or by other persons acquiring shares,
including brokers who borrow the shares to settle short sales of shares of the
common stock.
    
 
   
     These stockholders will receive all of the net proceeds from the sale of
shares and will pay all underwriting discounts and selling commissions, if any.
We will not receive any of the net proceeds from their sales. We will be
responsible for paying all other expenses relating to the offer and sale of the
shares.
    
 
   
      INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 15 OF THIS PROSPECTUS.
    
 
                             ---------------------
 
     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
 
                             ---------------------
 
   
The date of this Prospectus is February 12, 1999.
    
 
   
THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
    
<PAGE>   3
 
                   EXPLANATORY NOTE CONCERNING ESPRIT TELECOM
 
   
     Except as otherwise set forth herein, the information concerning Esprit
Telecom Group plc contained in this prospectus, including financial information,
has been furnished by Esprit Telecom Group plc or has been taken from or based
upon publicly available documents and records on file with the Securities
Exchange Commission and other public sources. We are not responsible either for
the accuracy or completeness of this information or for any failure by Esprit
Telecom Group plc to disclose events which may have occurred or may affect the
significance or accuracy of this information but which are unknown to us. This
prospectus does not contain all of the information about Esprit Telecom that may
be important to you. You may find more comprehensive financial and other
information concerning Esprit Telecom Group plc in the documents that it files
with the Securities and Exchange Commission. You may read and obtain copies of
these reports at the offices of the Securities and Exchange Commission as set
forth in "Where You Can Find More Information."
    
 
                             ---------------------
 
   
Russia On Line(TM) is a trademark of GTS.
    
<PAGE>   4
 
                                    SUMMARY
 
   
     This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all the information you should
consider before investing in the Common Stock. The terms "we" and "GTS" refer to
Global TeleSystems Group, Inc. and its subsidiaries, except where it is clear
from the context that we are referring to our predecessor. For the definition of
capitalized terms used in this prospectus, please see Exhibit A to this
prospectus.
    
 
   
                                      GTS
    
 
   
     We provide a broad range of telecommunications services to businesses,
other telecommunications service providers and consumers in Russia, the
Commonwealth of Independent States, which we refer to as the CIS, and Central
Europe. In addition, through our wholly owned subsidiary, Hermes Europe Railtel
B.V., which we refer to as HER, we are developing and operating the initial
segments of a high capacity fiber optic network that is designed to link a
majority of the largest Western and Central European cities. HER's network is
intended to transport voice, data and multimedia/image traffic for other
telecommunication service providers, or carriers, throughout Western and Central
Europe.
    
 
In these regions, we own and operate the following types of telecommunications
businesses:
 
- - international long distance businesses,
 
- - local access networks,
 
- - cellular telecommunications networks,
 
- - a domestic long distance business,
 
- - data networks, and
 
- - carriers' carrier networks.
 
   
     Western Europe. In Western Europe, we believe we are well positioned to
become the leading independent carriers' carrier (i.e., carrier of other
telecommunications service providers' traffic) through two of our ventures, HER
and GTS-Monaco Access S.A.M., which we refer to as GTS-Monaco Access.
    
 
     HER's goal is to become the leading carriers' carrier throughout Europe by
providing carriers with cross-border telecommunications transmission capacity
over a high capacity fiber optic network covering approximately 25,000
kilometers that HER manages from a central location. HER's target customers are
traditional public telecommunications operators and new entrants, such as
alternative carriers, global consortia of telecommunications companies,
international carriers, Internet backbone networks, resellers of
telecommunications services, value-added networks and other providers of
telecommunications services.
 
   
     HER's network is designed to link a majority of Western and Central
European cities. As of December 31, 1998, HER's network linked Brussels,
Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich,
Geneva, Stuttgart, Munich, Dusseldorf, Milan, Berlin, Copenhagen and Stockholm.
HER began commercial service over the Brussels-Amsterdam portion of the network
in late 1996 and the London-Paris portion in November
    
                                        1
<PAGE>   5
 
1997. The rest of the cities were connected to the network in 1998. The full
25,000 kilometer network is expected to become fully operational during the year
2000.
 
     HER also has leased capacity on a transatlantic cable linking the European
network with North America and is exploring various options for linking its
network to Russia. Our network connections to other continents will satisfy the
needs of HER's European customers who wish to transmit traffic to other
continents and will appeal to non-European customers with traffic terminating in
Europe.
 
     GTS-Monaco Access, in partnership with the Principality of Monaco, operates
an international gateway in Monaco that carries and routes international calls
to other telecommunications operators.
 
   
     Central Europe. In Central Europe, our goal is to become one of the leading
alternative telecommunications providers in the region. We currently provide
private data communications services to government and commercial customers in
Hungary, the Czech Republic, Slovakia and Romania. In the Czech Republic, we
provide outgoing voice services and operate an international gateway and a data
service network. In Hungary, we operate a nationwide microwave network and a
satellite communications system that employs frequencies in the Ku band or C
band and very small receiving dishes known as a very small aperture terminal or
VSAT. VSAT systems employ satellite transponders; the receiving dishes may be
leased or owned by the VSAT user. We believe that this is the largest VSAT
network in Central Europe based on the number of VSAT sites. We have also signed
an agreement to provide international data services in Poland, subject to the
receipt of necessary governmental approvals. In Central Europe, we intend to
expand our service offerings as the regulatory environment permits, build on our
existing VSAT and international gateway infrastructure and provide a broad range
of services to our target markets.
    
 
   
     Russia and CIS. In Russia and the other independent countries of the CIS,
our goal is to become the premier alternative telecommunications service
provider. To reach our goal, we have partnered with regional telephone companies
and with Rostelecom, the national long distance carrier in Russia. We currently
operate in 31 regions and the city of Moscow in Russia, as well as in 14 cities
in the CIS. We believe we are well-positioned to become the leading independent
telecommunications service provider in Russia. We conduct our operations in
Russia and the other independent countries of the CIS through five separate
businesses:
    
 
   
- - EDN Sovintel, which we refer to as Sovintel, which provides Moscow, and
  recently St. Petersburg, with international long distance and local telephone
  services and access to domestic long distance carriers;
    
 
   
- - TeleCommunications of Moscow, which we refer to as TCM, which provides local
  access services in Moscow;
    
 
- - TeleRoss, which provides domestic long distance services in fourteen cities in
  Russia, including Moscow and very small aperture terminal service to customers
  outside its primary long distance satellite network;
 
   
- - Sovam Teleport, which we refer to as Sovam, which provides data services,
  including high-speed data transmission, electronic mail, Internet access
  services, and Russia On Line, the first Russian language Internet service; and
    
 
                                        2
<PAGE>   6
 
   
- - Our cellular operations, which we refer to as GTS Cellular, which consist of
  cellular networks in 14 regions in Russia and in Kiev, Ukraine, with licenses
  covering regions with an aggregate population of approximately 48 million
  people at September 30, 1998.
    
 
   
     In total, our ventures in Russia and the other independent countries of the
CIS carried approximately 442 million minutes of traffic for the year ended
December 31, 1997 and 462 million minutes of traffic for the nine months ended
September 30, 1998. In addition, we had approximately 34,100 customers,
including approximately 25,200 cellular subscribers, as of September 30, 1998.
    
 
     We do not currently own or operate significant telecommunication assets in
Asia.
 
                                        3
<PAGE>   7
 
     The following table provides you with certain information, as of September
30, 1998, about the principal ventures through which we conduct our business:
 
   
<TABLE>
<CAPTION>
                             COUNTRY/REGION       GTS                             PRINCIPAL
       COMPANY NAME          OF OPERATIONS     OWNERSHIP        PARTNER(S)         BUSINESS
       ------------          --------------   ------------    --------------  ------------------
<S>                          <C>              <C>             <C>             <C>
WESTERN EUROPE
  HER......................  Western Europe         90%(1)    One railway     Carriers' Carrier
  GTS-Monaco Access........  Monaco                 50%       Principality    Carriers' Carrier;
                                                              of Monaco         International
                                                                                Gateway
CENTRAL EUROPE
  GTS-Hungary..............  Hungary                99%             --        VSAT Network
  CzechNet.................  Czech Republic        100%             --        International Long
                                                                                Distance; Data
                                                                                and Internet
 
CIS
  Sovintel.................  Russia                 50%       Rostelecom      International Long
                                                                                Distance; Local
                                                                                Access
  TCM......................  Russia                 95%(2)    MTU Inform and  Local Access Lines
                                                                others
  TeleRoss.................  Russia                 50%(3)    Various local   Domestic Long
                                                                PTOs            Distance
  Sovam....................  Russia                100%(4)    N/A             Data and Internet
  GTS Cellular.............  CIS                50-100%(5)    Primarily       Basic Cellular
                                                              various local
                                                                PTOs
</TABLE>
    
 
- -------------------------
 
(1) As a result of the sales in March 1998 and October 1998 by two of the other
    shareholders in HER of their ownership interests, we currently own
    approximately 89.9% of HER.
 
   
(2) During the quarter ended September 30, 1998, GTS purchased the remaining
    47.36% interest in GTS-Vox Limited, the intermediate holding company of TCM.
    As a result, we have a 95% interest in TCM.
    
 
   
(3) TeleRoss consists of (i) TeleRoss Operating Company, its wholly owned
    subsidiary that operates a domestic long distance network and (ii) 14 joint
    ventures that are 50% beneficially-owned by us and which we refer to as the
    TeleRoss Ventures. For a more detailed description of TeleRoss, see
    "Business -- Russia and the CIS -- TeleRoss."
    
 
   
(4) During the first quarter of 1998, we purchased our minority partner's 33.3%
    interest in Sovam, thereby making Sovam our wholly owned subsidiary.
    
 
   
(5) We conduct our cellular operations through (i) our wholly owned subsidiary,
    Vostok Mobile B.V., which owns between 50% and 100% of a series of 13
    cellular joint ventures in various regions in Russia, (ii) PrimTelefone, a
    50% owned venture in Vladivostok and four other cities in the Primorsky
    region of Russia and (iii) Golden Telecom (formerly Bancomsvyaz), an
    approximately 57% beneficially owned venture in Kiev, Ukraine. We completed
    a restructuring of the capital and ownership of Golden Telecom in June 1998.
    For a more comprehensive description of our cellular operations, see
    "Business -- Russia and the CIS -- GTS Cellular."
    
 
                                        4
<PAGE>   8
 
                               BUSINESS STRATEGY
 
   
     We seek to become the leading independent carriers' carrier in Europe
through the development of a European fiber optic network and an international
gateway in Monaco. We have recently developed a business plan to offer a broad
range of integrated telecommunications services to businesses and other high
usage customers in certain metropolitan markets throughout Europe. In addition,
our goal in emerging markets is to become the leading alternative to the
incumbent telecommunications service providers and a leading provider of
value-added services.
    
 
   
     Western Europe. We believe we are well-positioned to become the leading
independent carriers' carrier within Western Europe through the development of
HER's European fiber optic network and the operation of GTS-Monaco Access's
international gateway. HER and GTS-Monaco Access seek to complement and enhance
the services that large established national carriers and new market entrants,
provide thereby enhancing their ability to satisfy the needs of their end-user
customers. HER entered the European market for these services ahead of its
competition and a wide variety of carriers use its network and service offerings
to meet their needs. HER intends to provide its customers with high quality
transmission and advanced network capabilities at a competitive price by
utilizing advanced, uniform technology across the entire region. HER will also
provide redundant routing for higher levels of reliability.
    
 
   
     European Services Strategy. In June 1998, we began implementing our
European services strategy. We believe the combination of these factors provides
us with an opportunity to develop local networks and provide other services
targeted at end-user customers. Through GTS Business Services -- Western Europe,
we intend to enter up to 50 metropolitan markets as a reseller of services to
end-users. Through GTS Access Services, we propose to develop competitive local
exchange carriers in up to 12 European cities. We believe that the European
business and user market is sizable and offers the potential for significant
growth. Also, European telecommunications regulations are being liberalized.
    
 
   
     We intend to implement our European services strategy in one or more of the
following ways:
    
 
          - the construction of fiber loop networks,
 
          - the purchase or lease of dark fiber,
 
          - obtaining of high frequency microwave licenses for "wireless fiber,"
            or
 
          - partnership with, or acquisition of, resellers or facilities-based
            competitive local exchange carriers.
 
   
Our decision to enter a particular market will depend on various factors,
including:
    
 
          - its business concentration,
 
          - the national and local regulatory environment,
 
          - the technical difficulties of local network construction, and
 
          - the extent of existing competition.
 
                                        5
<PAGE>   9
 
   
     For a comprehensive discussion of our objectives and activities in Europe,
see "-- Recent Developments -- Net-Source Acquisition" and "-- Esprit Telecom
Acquisition", "Risk Factors -- Risks Specific to GTS -- Risks Relating to
European Services Strategy" and "Business -- Business Strategy -- European
Services Strategy."
    
 
   
     Emerging Markets. We pursue our goals in Russia and the other emerging
markets in which we operate through a three-stage approach of market entry,
market expansion and market integration.
    
 
   
                              RECENT DEVELOPMENTS
    
 
   
RESTRUCTURING
    
   
    
 
   
     In October 1998, we announced we would restructure our business operations
into five primary lines of business as follows:
    
 
   
     - GTS Carrier Services, which will include HER's cross-border transport
       carrier services in Europe, Ebone Internet transit services, transoceanic
       infrastructure and services, and Internet service units;
    
 
   
     - GTS Access Services, which will pursue our entry into the Western
       European market for competitive local exchange carriers. Such carriers
       constitute a category of telephone service providers that offer services
       similar to the former monopoly local telephone company and may also
       provide other types of telecommunications services such as long distance;
    
 
   
     - GTS Business Services -- Western Europe, which will offer voice, data,
       Internet and other telecommunications services to businesses in Western
       Europe, principally in locations not served by GTS Access Services;
    
 
   
     - GTS Business Services -- CIS, which will incorporate all of our CIS
       "wireline" assets, including Sovintel, Sovam, TeleRoss and TCM; and
    
 
   
     - GTS Mobile Services, which will operate all of our cellular businesses in
       Russia and the Ukraine.
    
 
NETSOURCE ACQUISITION
 
   
     On November 30, 1998, we completed the acquisition of NetSource Europe ASA,
a Norwegian company, for an initial purchase price consisting of up to 4,037,500
newly issued shares of Common Stock and $46.1 million in cash for an aggregate
initial purchase price of $145.4 million. We have agreed to make additional
payments of up to $35 million in either cash or shares of Common Stock
contingent on NetSource's achieving certain performance targets during the first
two quarters of 1999. NetSource is a pan-European provider of long distance
telecommunications services focusing primarily on small- to medium-sized
businesses, with operations in Norway, Sweden, Germany and Ireland, as well as
in The Netherlands, Belgium and Denmark.
    
 
ESPRIT TELECOM ACQUISITION
 
   
     On December 8, 1998 we announced that we had agreed on the terms of a
proposed offer to purchase all of the outstanding ordinary shares and ADSs of
Esprit Telecom Group plc
    
 
                                        6
<PAGE>   10
 
   
and that holders of 65% of the voting ordinary shares of Esprit Telecom Group
plc have agreed to accept the offer. On February 2, we mailed our offer to
purchase all issued and to be issued Esprit Telecom shares and ADSs on the
following basis:
    
 
   
     - for each Esprit Telecom ordinary share, 0.1271 of a share of our common
       stock; and
    
 
   
     - for each Esprit Telecom ADS, 0.89 of a share of our common stock.
    
 
   
     Based on the Nasdaq closing price of $41.75 per share of our common stock
on December 7, 1998, the offer values each Esprit Telecom ordinary share at
$5.31 (L3.21), each Esprit Telecom ADS, which represents seven Esprit Telecom
shares, at $37.16 (L22.48) and the entire issued share capital of Esprit
Telecom, on a fully diluted basis, at approximately $757.3 million (L458.2
million).
    
 
   
     Our obligation to complete the offer is also subject to the condition that
among other things:
    
 
   
     - we receive valid acceptances from not less than 90% (or such lesser
       percentage above 50% as we may decide prior to the offer being declared
       unconditional) of the Esprit Telecom shares and ADSs;
    
 
   
     - our shareholders authorize us to issue shares and ADSs and there has been
       no material adverse change in the business of Esprit Telecom.
    
 
     The transaction is expected to close in the first half of 1999. We expect
that the transaction will be accounted for as a pooling of interests.
 
   
     Esprit Telecom is a rapidly growing European telecommunications company,
providing high quality, competitively priced, international and national long
distance telecommunications services to retail customers and other
telecommunications service providers. Esprit Telecom has a network and sales
office infrastructure in 31 locations in eight countries in Europe generating a
run rate of over one billion minutes of traffic per annum. Esprit Telecom
Networks Limited, an independent operations subsidiary of Esprit Telecom, is
currently building a 9,500 route kilometer Synchronous Digital Hierarchy (SDH)
and Dense Wavelength Division Multiplexing (DWDM) fiber optic network. SDH is
the international standard for ultra-high-speed broadband fiber-optic, digital
transmission networks that use equipment from many different manufacturers and
carry a variety of services. DWDM is a fiber-optic transmission technique that
employs light wavelengths to transmit data parallel-by-bit or
serial-by-character. Esprit Telecom also has links to Washington and New York
via a transatlantic circuit owned by other carriers.
    
 
   
     We believe that Esprit Telecom's business is complementary with ours and
that benefits will result from combining the two companies.
    
 
   
     We are in the process of developing our business plan and strategy for
Esprit Telecom, including the manner in which Esprit Telecom will be integrated
into our overall business and corporate structure. We may also decide in the
future to effect a tender or exchange offer or consent solicitations with
respect to the Esprit Telecom 11.5% Senior Notes and 10.875% Senior Notes.
    
 
                                        7
<PAGE>   11
 
HER DEBT OFFERING
 
   
     On January 4, 1999, HER completed its private placement of $200 million
principal amount of 10 3/8% Senior Notes due 2009 and Euro 85,000,000 principal
amount of 10 3/8% Senior Notes due 2006. The proceeds of this offering will be
used to finance the cost of HER network assets and to expand the HER network
beyond the currently contemplated scope.
    
 
   
FLAG ATLANTIC LIMITED JOINT VENTURE
    
 
   
     On January 13, 1999, through our subsidiary GTS Transatlantic Holdings
Ltd., we agreed with FLAG Telecom to form a joint venture company in Bermuda, to
be known as FLAG Atlantic Limited, that will build and operate a transoceanic
high speed fiber optic link between Europe and the United States. By
interconnecting to FLAG Atlantic Limited, GTS Carrier Services and its
subsidiary HER will be able to provide their carrier and Internet service
provider customers with high-capacity cable access from major European cities to
New York City at speeds of 1.28 terabits per second, a 25-fold increase over
current transatlantic cable systems. The project is subject to financing, the
execution of related agreements and other conditions.
    
 
                                 FINANCING PLAN
 
     In general, our strategy is to finance general corporate cash needs, the
development of our start-up ventures and acquisitions through the parent
company. When possible and cost effective, we seek to finance ongoing operations
at the venture level.
 
   
     We believe that our existing cash balances and cash flow from operations
will be sufficient to fund our expected capital needs under our current business
plan, excluding any funds that we spend to implement our European services
strategy. We contemplate that we will raise additional financing to implement
our European services strategy. We have not yet decided on how much additional
financing we will raise or when we will raise it. The actual amount and timing
of our future capital requirements, however, may be different from our
management's estimate. Thus, we may require additional capital to execute our
current business plan and fund any operating losses, as well as to expand and
develop our businesses. We expect our ventures will spend over $1.2 billion in
cash related to capital expenditures and investments in ventures during the next
three years, including an additional $654 million through 2000 in order to
complete the buildout of the HER network.
    
 
     In addition, as part of our business strategy, we regularly evaluate
potential acquisitions and joint ventures. We believe that attractive
acquisition opportunities currently exist in our markets in Western and Central
Europe and the CIS. We continuously consider a number of potential transactions.
Some of these transactions may involve our contributing some of our Russian
businesses in exchange for an interest of equivalent or greater value in the
surviving entity. We do not have a definitive agreement with respect to any
acquisition or joint venture, although we periodically have discussions with
other companies and opportunities on an on-going basis.
 
                                        8
<PAGE>   12
 
                           *            *            *
 
     We were founded in 1983 as a not-for-profit company under the name San
Francisco/ Moscow Teleport, Inc. We were 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. We were renamed Global TeleSystems Group, Inc., on
February 22, 1995. Our principal business office is located at 1751 Pinnacle
Drive, North Tower-12th Floor, McLean, Virginia 22102, United States, and our
telephone number is (703) 918-4500.
 
                            ------------------------
 
                                  THE OFFERING
 
   
<TABLE>
<S>                                                    <C>
Common stock offered by the selling shareholders.....  13,909,753 shares
Common stock to be outstanding after this shelf
  offering(1)........................................  68,781,721 shares
Trading..............................................  GTS common stock is traded on the
                                                       Nasdaq National Market and EASDAQ
                                                       under the symbol "GTSG."
</TABLE>
    
 
- -------------------------
 
   
(1) This amount represents GTS common stock outstanding at December 31, 1998 of
    64,744,221, which includes 3,873,705 shares of GTS common stock issued to
    former NetSource shareholders who had tendered their shares by December 31,
    1998, and 163,795 of additional shares to be issued resulting from the
    NetSource acquisition. Excluded from the calculation are: 4,444,443 shares
    of GTS common stock that is subject to the exercise of warrants in GTS
    common stock; and 8,127,380 shares of GTS common stock underlying options
    issued under our option plans. Subject to NetSource meeting certain
    performance targets during the first two quarters of 1999, an additional 1.4
    million shares of GTS common stock may be issued.
    
 
                                  RISK FACTORS
 
   
     Investing in shares of our common stock involves risks which are described
in the "Risk Factors" section beginning on page 15 of this prospectus.
    
 
                                        9
<PAGE>   13
 
                        SUMMARY SELECTED FINANCIAL DATA
 
   
     The summary below sets forth selected historical financial data. You should
read this together with the historical financial statements and notes of GTS and
Esprit Telecom contained elsewhere in this prospectus. To learn more about how
to obtain GTS and Esprit Telecom information, see "Where You Can Find More
Information."
    
 
SELECTED HISTORICAL FINANCIAL DATA OF GTS
 
     The following summary historical consolidated financial data as of and for
the years ended December 31, 1995, 1996 and 1997 are derived from our audited
Consolidated Financial Statements. The following unaudited summary historical
consolidated financial data as of June 30, 1998 and for the three and nine
months ended September 30, 1997 and 1998 are derived from our unaudited
Consolidated Financial Statements. The summary historical consolidated financial
data presented below should be read together with "GTS Management's Discussion
and Analysis of Financial Condition and Results of Operations," and the audited
Consolidated Financial Statements and their related notes appearing in this
prospectus.
 
     Under generally accepted accounting principles, a majority of our ventures
are accounted for by the equity method of accounting. Under this method, the
operating results of the ventures are included in our Consolidated Statement of
Operations as a single line item, "Equity in earnings (losses) of ventures." We
recognize 100% of the losses in ventures where we bear all of the financial risk
(which includes all of our significant ventures except for Sovintel and,
historically, HER). Also, the assets, liabilities and equity of our ventures are
included in our Consolidated Balance Sheets as a single line item, "Investments
in and advances to ventures." See Note 3 to our audited Consolidated Financial
Statements and "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview." Financial information about our equity
ventures is included below under "-- Supplemental Information -- Summary
Historical Financial Data of GTS -- Combined Equity Investments."
 
   
<TABLE>
<CAPTION>
                                                                   THREE MONTHS
                                                                       ENDED           NINE MONTHS ENDED
                                  YEAR ENDED DECEMBER 31,          SEPTEMBER 30,         SEPTEMBER 30,
                              -------------------------------   -------------------   --------------------
                                1995       1996      1997(1)      1997       1998       1997       1998
                              --------   --------   ---------   --------   --------   --------   ---------
                                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>        <C>        <C>         <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS
  DATA:
Revenues, net...............  $  8,412   $ 24,117   $  47,098   $ 12,921   $ 63,834   $ 30,216   $ 117,299
Gross margin................        16      5,176       4,379     (2,468)    24,985      1,864      35,232
Operating expenses..........    41,016     52,955      78,410     24,971     42,833     53,732      94,243
Equity in earnings (losses)
  of ventures...............    (7,871)   (10,150)    (14,599)    (8,067)    (3,485)   (18,234)      4,142
Other income (expense)......    11,034     (8,729)    (29,551)   (10,942)   (15,484)   (16,902)    (34,857)
Loss before extraordinary
  loss......................   (40,400)   (67,991)   (116,986)   (48,185)   (37,478)   (87,872)    (88,131)
Extraordinary loss(2).......        --         --          --         --         --         --     (12,704)
Net loss....................   (40,400)   (67,991)   (116,986)   (48,185)   (37,478)   (87,872)   (100,835)
Loss per share before
  extraordinary loss........     (1.70)     (2.33)      (3.26)     (1.34)     (0.62)     (2.49)      (1.65)
Extraordinary loss per
  share.....................        --         --          --         --         --         --       (0.24)
Net loss per share..........     (1.70)     (2.33)      (3.26)     (1.34)     (0.62)     (2.49)      (1.89)
</TABLE>
    
 
                                       10
<PAGE>   14
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,     SEPTEMBER 30,
                                                                  1997             1998
                                                              ------------     -------------
                                                                      (IN THOUSANDS)
<S>                                                           <C>              <C>
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents...................................    $318,766        $  993,928
Property and equipment, net.................................     236,897           436,019
Investments in and advances to ventures.....................      76,730            61,705
Total assets................................................     780,461         1,814,893
Total debt..................................................     639,359         1,208,533
Minority interest and stock subject to repurchase...........      31,255            59,600
Shareholders' equity........................................      26,967           351,409
</TABLE>
 
- -------------------------
 
(1) As a result of our increased ownership interest in HER and an amendment to
    the HER Shareholders Agreement that was completed on July 16, 1997, we
    account for our ownership interest in HER under the consolidation method of
    accounting. Prior to this date, we accounted for HER under the equity method
    of accounting.
 
(2) We recognized a $12.7 million extraordinary charge to earnings in the first
    quarter of 1998, as a result of our early payment of certain related party
    debt obligations. The extraordinary charge is comprised of the write-off of
    $11.6 million of unamortized debt discount and $1.1 million of unamortized
    debt issuance costs. We deferred the debt issuance costs as financing costs
    and were amortizing them over the original maturity of the debt.
 
                                       11
<PAGE>   15
 
SUPPLEMENTAL INFORMATION -- SUMMARY HISTORICAL
FINANCIAL DATA OF GTS -- COMBINED EQUITY INVESTMENTS
 
     The following unaudited summary historical financial data -- equity
investments for the years ended December 31, 1995, 1996 and 1997, and for the
three and nine months ended September 30, 1997 and 1998, are derived from our
financial records. This financial data is intended to supplement the summary
historical consolidated financial data, which were derived from our audited
Consolidated Financial Statements.
 
   
     We believe that this information will provide you with additional insight
into our unconsolidated equity method investments. U.S. generally accepted
accounting principles prescribe the inclusion of revenues and expenses for
consolidated interests (generally interests of more than 50%, absent some other
factors), but not for equity interests (generally interests of 20% to 50%) and
cost interests (generally interests of less than 20%). Further, equity
accounting ordinarily results in the same net income as consolidation; however,
the net operating results are reflected on one line within the income statement.
More detailed financial information about our equity investments is included
under "Supplemental Information -- Selected Historical Financial Data of
GTS -- Combined Equity Investments."
    
 
<TABLE>
<CAPTION>
                                                                     THREE MONTHS
                                                                         ENDED          NINE MONTHS ENDED
                                      YEAR ENDED DECEMBER 31,        SEPTEMBER 30,        SEPTEMBER 30,
                                   -----------------------------   -----------------   -------------------
                                    1995       1996       1997      1997      1998       1997       1998
                                   -------   --------   --------   -------   -------   --------   --------
                                                               (IN THOUSANDS)
<S>                                <C>       <C>        <C>        <C>       <C>       <C>        <C>
STATEMENT OF OPERATIONS DATA:
  Revenues, net..................  $54,051   $143,472   $226,160   $57,266   $50,477   $159,006   $187,544
  Cost of revenues...............   33,011     80,426    127,732    29,324    33,417     87,694    110,475
  Operating expenses.............   22,958     55,018     74,845    27,492    12,806     60,447     40,870
  Net (loss) income..............   (6,380)    (5,220)     4,330    (2,859)   (6,700)    (3,680)    13,480
  Income (loss) recognized by
    GTS..........................   (7,871)   (10,150)   (14,599)   (8,067)   (3,485)   (18,234)     4,142
ADJUSTMENTS FOR INTER-AFFILIATE
  TRANSACTIONS(1):
  Revenues, net..................   (2,270)   (15,385)   (24,927)   (7,192)   (7,358)   (17,049)   (25,001)
  Cost of revenues...............   (2,215)   (13,562)   (23,250)   (6,195)   (7,958)   (15,853)   (23,960)
  Operating expenses.............   (6,967)    (8,083)    (8,357)   (2,523)   (8,194)   (11,105)     1,493
</TABLE>
 
- -------------------------
 
(1) The adjustment amounts represent the effect of inter-affiliate transactions
    between our consolidated and equity method ventures. More detailed
    information about inter-affiliate transactions is included under "GTS
    Management's Discussion and Analysis of Financial Condition and Results of
    Operations -- Accounting Methodology."
 
                                       12
<PAGE>   16
 
SELECTED HISTORICAL FINANCIAL INFORMATION OF ESPRIT TELECOM
 
   
     The selected historical financial data of Esprit Telecom set forth below
are derived from the financial statements of Esprit Telecom as they appeared in
Esprit Telecom's Annual Report on Form 20-F filed with the SEC for the fiscal
year ended September 30, 1998, which appear elsewhere in this prospectus. See
"Esprit Telecom Added Historical Consolidated Financial Statements." The Esprit
Telecom Consolidated Financial Statements were prepared in accordance with UK
generally accepted accounting principles, which differs in certain respects with
U.S. generally accepted accounting principles. See Note 30 to the Esprit Telecom
Consolidated Financial Statements.
    
 
   
<TABLE>
<CAPTION>
                                                                    YEAR ENDED SEPTEMBER 30,
                                                        -------------------------------------------------
                                                         1995      1996      1997       1998       1998
                                                        -------   -------   -------   --------   --------
                                                           L         L         L         L         $(1)
                                                          (IN THOUSANDS, EXCEPT PER ORDINARY SHARE AND
                                                                        PER ADS AMOUNTS)
<S>                                                     <C>       <C>       <C>       <C>        <C>
STATEMENT OF OPERATIONS DATA(2)
UK GAAP
Revenue, net..........................................   13,950    24,880    45,466     82,588    140,350
Gross margin..........................................    3,310     6,124     7,517     16,759     28,480
Operating expenses....................................    5,490    11,015    19,070     47,191     80,196
Operating loss before interest........................   (2,180)   (4,891)  (11,553)   (30,432)   (51,716)
Profit on sale of investment..........................       --        --        --        200        340
Net interest (expense)/income.........................     (222)     (203)      695    (12,213)   (20,755)
Loss on ordinary activities before taxation...........   (2,402)   (5,094)  (10,858)   (42,445)   (72,131)
Taxation on loss on ordinary activities...............       --        --        (2)        (2)        (3)
Loss for the financial year...........................   (2,402)   (5,094)  (10,860)   (42,447)   (72,134)
Loss per Ordinary Share...............................    (0.05)    (0.07)    (0.10)     (0.34)     (0.58)
Loss per ADS(3).......................................    (0.35)    (0.49)    (0.70)     (2.38)     (4.04)
US GAAP
Net loss..............................................   (2,423)   (5,325)  (10,852)   (42,447)   (72,134)
Net loss per Ordinary Share...........................    (0.05)    (0.08)    (0.10)     (0.34)     (0.58)
Net loss per ADS(3)...................................    (0.35)    (0.56)    (0.70)     (2.38)     (4.04)
</TABLE>
    
 
<TABLE>
<CAPTION>
                                                                       AS OF SEPTEMBER 30,
                                                         ------------------------------------------------
                                                          1995     1996      1997       1998       1998
                                                         ------   -------   -------   --------   --------
                                                           L         L         L         L          $
                                                                          (IN THOUSANDS)
<S>                                                      <C>      <C>       <C>       <C>        <C>
BALANCE SHEET DATA
 
UK GAAP
Bank balances, cash, restricted securities and short
  term deposits and investments........................   5,615     6,430    24,525    184,749    313,962
Fixed assets, net......................................   3,514     8,005    17,727    154,100    261,878
Total assets...........................................  13,178    24,101    59,543    394,537    670,476
Creditors: amounts falling due within one year.........  (7,045)  (12,122)  (25,295)   (72,930)  (123,937)
Creditors: amounts falling due in more than one year...    (631)   (1,968)   (2,874)  (328,806)  (558,773)
Total shareholders' funds..............................   5,502    10,011    31,374     (7,199)   (12,234)
US GAAP
Total assets...........................................  13,178    24,101    59,543    394,537    670,476
Long term debt.........................................    (631)   (1,968)   (2,874)  (328,806)  (558,773)
Redeemable preference shares...........................     673       673        --         --         --
Shareholders' equity...................................   4,829     9,338    31,374     (7,199)   (12,234)
</TABLE>
 
- ---------------
 
   
(1) Solely for the convenience of the reader, pounds sterling amounts have been
    translated into U.S. dollars at the noon buying rate on September 30, 1998
    of $1.6994 per L1.00.
    
 
   
(2) Esprit Telecom's financial information has been restated from that published
    prior to December 1997 in order to give effect to a change in UK generally
    accepted accounting principles relating to the granting of employee stock
    options at a discount to the market price. The financial value of such
    discounts are now recognized as employee compensation and charged against
    net income. As required by UK generally accepted accounting principles, this
    accounting change has been effected by restating the results of previous
    periods. This change in accounting has no impact on the U.S. generally
    accepted accounting principles financials.
    
 
   
(3) Loss per Esprit Telecom ADS and net loss per Esprit Telecom ADS are
    calculated by adjusting loss per Esprit Telecom ordinary share and net loss
    per Esprit Telecom ordinary share, respectively, for the ratio of Esprit
    Telecom ordinary shares per Esprit Telecom ADS.
    
 
                                       13
<PAGE>   17
 
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
 
   
     The following selected unaudited pro forma financial information presents
financial information of GTS and Esprit Telecom as if the GTS/Esprit Telecom
merger had occurred at the beginning of the periods indicated. The GTS/Esprit
Telecom merger will be treated as a pooling of interests for financial
accounting purposes. You should read this together with the consolidated
financial statements and accompanying notes of GTS and Esprit Telecom included
in the documents appearing elsewhere in this prospectus and the unaudited pro
forma combined financial statements and accompanying discussion and notes set
forth under "Unaudited Pro Forma Combined Financial Statements" included herein.
The pro forma amounts in the table below are presented for your information and
do not necessarily indicate what the financial position or the results of
operations of the combined company would have been had the merger date occurred
as of the dates or for the periods presented. The pro forma amounts also do not
necessarily indicate what the financial position or future results of operations
of the combined company will be. No adjustment has been included in the pro
forma amounts for any anticipated cost savings or other synergies.
    
 
<TABLE>
<CAPTION>
                                                                            NINE MONTHS
                                                          YEAR ENDED           ENDED
                                                         DECEMBER 31,      SEPTEMBER 30,
                                                             1997              1998
                                                         ------------      -------------
                                                         (IN THOUSANDS, EXCEPT PER SHARE
                                                                      DATA)
<S>                                                      <C>               <C>
GTS/ESPRIT TELECOM PRO FORMA COMBINED
Revenues...............................................   $  162,248        $  272,193
Loss from operations...................................     (161,344)         (142,610)
Net loss before extraordinary items:
          Total........................................     (215,969)         (204,919)
          Per share....................................        (3.87)            (2.80)
 
Total assets.........................................................        2,636,167
Long-term debt.......................................................        1,680,032
Shareholders' equity.................................................          437,909
</TABLE>
 
                                       14
<PAGE>   18
 
                                  RISK FACTORS
 
   
     Investing in our common stock will provide you with an equity ownership
interest in GTS. As a GTS shareholder, you may be subject to risks inherent in
our business. The value of your investment may increase or decline and could
result in a loss. In the event that we complete our proposed offer for all of
the issued share capital of Esprit Telecom, you may also be subject to risks
inherent in Esprit Telecom's business. You should carefully consider the
following factors relating to both GTS and Esprit Telecom as well as other
information contained in this prospectus before deciding to invest in shares of
our common stock.
    
 
   
RISKS RELATING TO OUR EXCHANGE OFFER FOR ESPRIT TELECOM'S SHARES AND THE
COMBINED OPERATIONS OF GTS AND ESPRIT TELECOM
    
 
   
  WE MAY NOT REALIZE THE INTENDED SYNERGIES
    
 
   
     Our combination with Esprit Telecom will require us to integrate companies
that have previously operated independently. The process of combining the
companies may disrupt our respective businesses and may cause an interruption
of, or a loss of momentum in, our respective businesses as a result of a number
of obstacles such as:
    
 
     - loss of key employees or customers;
 
     - possible inconsistencies in standards, controls, procedures and policies
       among the companies being combined and the need to implement common
       company-wide financial, accounting, information, billing and other
       systems;
 
     - failure to maintain the quality of customer service that such companies
       have historically provided;
 
     - the need to coordinate geographically diverse organizations;
 
     - incompatible equipment;
 
     - limitations under existing Esprit Telecom debt covenants; and
 
     - the resulting diversion of management's attention from our day-to-day
       business and the need to hire management personnel to address such
       obstacles.
 
   
     If we are unable to integrate our companies, we may fail to realize the
expected cost savings, synergies and increases in revenue from such integration
and may suffer material adverse short and long-term effects on our operating
results and financial condition.
    
 
   
     Even if we are able to integrate the operations of the companies
successfully, we cannot assure you that we will realize the expected cost
savings, synergies or increases in revenue from such integration or that we will
realize these benefits within the time frame that we currently expect.
    
 
   
     Whether we achieve expected economies of scale depends, in part, on
negotiations with third party providers of goods and services, the results of
which are difficult to predict. Accordingly, the amount and timing of the
resulting cost savings are inherently difficult to estimate.
    
 
                                       15
<PAGE>   19
 
   
     Any cost savings and other synergies from the transaction will be offset by
costs incurred in integrating the companies. The cost savings and other
synergies may also be offset by increases in other expenses, by operating losses
or by problems unrelated to the transaction.
    
 
   
     See "-- Integration of Recent Acquisitions" for a discussion of specific
risks associated with integrating Esprit Telecom and other recent acquisitions
by GTS.
    
 
RISKS SPECIFIC TO GTS
 
   
  WE MAY NEED TO RAISE ADDITIONAL CAPITAL; FINANCING MAY NOT BE AVAILABLE
    
 
     We will need substantial capital to:
 
   
     - implement our European services strategy,
    
 
     - develop and expand the Esprit Telecom and HER networks,
 
     - open new sales offices,
 
     - introduce new telecommunications services,
 
     - fund operating losses and net cash outflows, and
 
     - make future acquisitions and investments in joint ventures.
 
   
     We believe that our existing cash balances and cash flows from operations
will be sufficient to fund our expected capital needs under our current business
plan excluding any funds that we spend to implement our European services
strategy. However, the actual amount and timing of our future capital needs may
differ materially from our estimates as a result of the following factors:
    
 
   
     - Actual cash flow may vary materially from expected amounts and depend on:
    
 
      - Esprit Telecom's and HER's ability to effectively and efficiently manage
        the expansion of their networks and operations;
 
      - HER's ability to obtain infrastructure contracts, rights-of-way,
        licenses and other regulatory approvals that it needs to complete and
        operate its network;
 
   
      - our ability to negotiate favorable contracts with suppliers, including
        large volume discounts on our purchases of capital equipment;
    
 
      - our ability to access targeted customers and markets, attract sufficient
        numbers of customers and provide and develop services for which
        customers will subscribe; and
 
   
      - political and economic developments and trends, regulatory changes,
        changes in technology, increased competition, strikes, weather,
        performance by third parties and other factors outside our control.
    
 
     - If we expand our operations at an accelerated rate or acquire any
       businesses, our funding needs may increase, possibly to a significant
       degree, and we may spend our cash balances sooner than currently
       expected.
 
   
     - As a result of acquiring a majority interest in Ebone A/S, or Ebone, a
       Tier 1 internet backbone provider in Europe, on June 24, 1998, HER may
       need to fund Ebone if Ebone is not able to fund itself in accordance with
       its business plan.
    
 
                                       16
<PAGE>   20
 
   
     - As a result of acquiring a majority interest in NetSource on November 30,
       1998, we may need to fund NetSource if NetSource is not able to fund
       itself in accordance with its business plan.
    
 
   
     If our plans or assumptions change or our capital resources are
insufficient to fund growth and operations in the manner and at the rate we
currently anticipate, we may need to raise additional capital. If we raise
additional funds by incurring debt, we may become subject to additional, more
restrictive financial covenants (as a result of our assumption of Esprit
Telecom's outstanding debt securities). Our cash interest expense obligations
would also increase. If we raise additional funds by issuing equity, your
ownership of our stock may be diluted.
    
 
   
     We cannot assure you that additional financing will be available to us on
favorable terms or at all. If we fail to generate sufficient funds in the
future, whether from operations or by raising additional debt or equity capital,
we may have to delay or abandon some or all of our development, expansion and
acquisition plans, or we may have to sell assets. This could have a material
adverse effect on our operations and on the market price of our common stock.
For a comprehensive discussion of our liquidity and financing positions and
concerns, see "-- HER Network Roll-out," "-- Risks Specific to Esprit
Telecom -- Need for Additional Financing," "GTS Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Business -- Western Europe -- HER."
    
 
   
WE HAVE SIGNIFICANT INDEBTEDNESS AND INTEREST PAYMENT OBLIGATIONS
    
 
   
     We are, and will continue to be, highly leveraged as a result of the
substantial indebtedness we have incurred and intend to incur to implement our
business plans. Our high level of debt could have important consequences for our
operations.
    
 
   
     We had approximately $1.2 billion of debt outstanding at September 30,
1998. On January 4, 1999, HER issued in a private placement U.S.$200 million
aggregate principal amount of 10 3/8% Senior Notes due 2009 and Euro 85 million
aggregate principal amount of 10 3/8% Senior Notes due 2006. When we close our
acquisition of Esprit Telecom, we will assume Esprit Telecom's debt, which was
$554.9 million at September 30, 1998. Our debt agreements permit us and our
subsidiaries to incur additional debt to fund expansion of our businesses and
for other permitted purposes. In addition, we expect to raise additional debt
financing to implement our European services strategy. However, we have not yet
decided on the size and timing of any additional financing. Esprit Telecom's
debt agreements permit Esprit Telecom, and when we close our acquisition of that
company, will permit us, to incur additional indebtedness, including
indebtedness incurred to finance the expansion of the Esprit network.
    
 
   
     As a result of our high level of debt, we:
    
 
   
     - will need significant cash to service our debt, which will reduce funds
       available for operations, future business opportunities and investments
       in new or developing technologies and make us more vulnerable to adverse
       economic conditions;
    
 
   
     - may not be able to refinance our existing debt or raise additional
       financing to fund future working capital, capital expenditures, debt
       service requirements, acquisitions or other general corporate
       requirements;
    
 
                                       17
<PAGE>   21
 
   
     - may be less flexible in planning for, or reacting to, changes in our
       business and in the telecommunications industry that affect how we
       implement our financing, construction or operating plans;
    
 
     - will be more highly leveraged than some of our competitors, which may
       place us at a competitive disadvantage with respect to such competitors;
       and
 
     - will limit our ability to withstand adverse economic conditions or take
       advantage of significant business opportunities that may arise.
 
   
     We will need to substantially increase our net cash flow in order to pay
the principal of and interest on our debt, including debt assumed as a result of
our acquiring the Esprit Telecom. If we fail to make the required payments or to
comply with the various covenants under the debt, we would be in default under
the terms of that debt. Our default may permit the debtholders to accelerate the
maturity of the debt, which in turn could cause defaults under our other
indebtedness. A default or acceleration under our debt would be likely to
adversely affect the market price of our common stock.
    
 
   
 COVENANTS IN OUR DEBT AGREEMENTS RESTRICT OUR OPERATIONS
    
 
   
     We will be required to comply with financial covenants and other
restrictions contained in our existing debt agreements. Among other things, our
financial covenants limit our ability to:
    
 
   
     - incur additional indebtedness,
    
 
   
     - pay dividends, make distributions on our common stock or make certain
       other restricted payments,
    
 
   
     - create liens upon assets,
    
 
   
     - dispose of our assets, or
    
 
   
     - enter into transactions with affiliates.
    
 
   
     Some of the covenants included in Esprit Telecom's debt agreements are more
restrictive than those in our existing debt agreements. When we close our
acquisition of Esprit Telecom, we will assume Esprit Telecom's debt, and any of
our businesses that we contribute to Esprit Telecom will become subject to these
more restrictive covenants.
    
 
   
     We cannot assure you that these covenants will not materially and adversely
affect our ability to finance our future operations or capital needs or to
engage in other business activities.
    
 
   
 WE HAVE A HISTORY OF OPERATING LOSSES
    
 
     We have historically sustained substantial operating and net losses. For
the following periods, we reported net losses of:
 
<TABLE>
<CAPTION>
                     PERIOD                          NET LOSS
                     ------                          --------
<S>                                               <C>
Year ended December 31, 1995....................  $ 40.4 million
Year ended December 31, 1996....................  $ 68.0 million
Year ended December 31, 1997....................  $117.0 million
Nine months ended September 30, 1998............  $100.8 million
Inception through September 30, 1998............  $343.7 million
</TABLE>
 
                                       18
<PAGE>   22
 
   
     Our net losses in the first three quarters of 1998 exceeded those in the
comparable prior period in 1997, and we expect to suffer losses in the fourth
quarter of 1998. On a pro forma basis giving effect to the closing of our offer
for the shares of Esprit Telecom as if we had closed on January 1, 1997 and
January 1, 1998, respectively, our net losses would have been $216.0 million for
the year ended December 31, 1997 and $204.9 million for the nine months ended
September 30, 1998.
    
 
   
     Further development of our business, including our European end-user
services business, will require significant additional expenditures and we
expect that we will have significant operating and net losses and will record
significant net cash outflow, before financing, in coming years. We cannot
assure you that our operations, including our European end-user services
business, will achieve or sustain profitability or positive cash flow in the
future. If we cannot achieve and sustain operating profitability or positive
cash flow from operations, we may not be able to meet our debt service
obligations or working capital requirements, which would have a material adverse
effect on our operations and would adversely affect the market price of our
common stock. For a thorough discussion of our operating losses, see "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
    
 
   
 HER NETWORK ROLL-OUT
    
 
   
  HER may encounter delays in completing HER network
    
 
   
     HER's ability to achieve its strategic objective will depend in large part
on the successful, timely and cost-effective completion of its network. See
"Business -- Western Europe -- HER" for a discussion of the cities linked by the
HER network to date. However, various factors, uncertainties and contingencies
may delay or adversely affect the development of the remainder of the network.
Many of these factors, such as strikes, natural disasters and other casualties,
are beyond HER's control. In addition, HER 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. We cannot assure you that HER will conclude necessary agreements. Any
delays in concluding such agreements would 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) third
parties performing their contractual obligations to engineer, design and
construct portions of the network on a timely basis and (ii) HER's ability to
obtain and maintain applicable governmental approvals.
    
 
   
     HER believes that its cost estimates and the build-out schedule are
reasonable. However, the actual construction costs or time required to complete
the network build-out could substantially exceed current estimates. Any
significant delay or increase in the costs to develop the HER network could have
a material adverse effect on HER and our operations.
    
 
   
  HER may need additional capital to complete its network
    
 
   
     Development of the HER network is capital intensive. HER expects that
approximately $835 million in additional capital expenditures, including capital
lease obligations, will be incurred through the end of the year 2000 to build
out the HER network. HER believes that the net proceeds from the January 4, 1999
issuance of 10 3/8% Senior Notes and its current indebtedness, combined with
HER's projected internally generated funds, should be sufficient to fund HER's
expected capital expenditures.
    
 
                                       19
<PAGE>   23
 
   
     The actual amount and timing of HER's future capital requirements may,
however, differ materially from management's estimates. HER may need additional
financing to construct the HER network. We cannot assure you that additional
financing will be available to HER on favorable terms or at all. If HER fails to
obtain necessary financing, HER might have to delay or abandon its plans for
deploying the remainder of the network, which would adversely affect the
viability of HER. HER's failure to obtain financing might also require us to
make additional capital contributions to HER at the expense of our other
operations. Either of these two outcomes could have a material adverse effect on
our operations and would adversely affect the value of our common stock.
    
 
   
  HER's operations may not generate projected revenues
    
 
     HER's revenues and the cost of deploying its network and operating its
business will depend upon a variety of factors including:
 
     - HER's ability to effectively and efficiently manage the expansion of its
       network and operations;
 
     - HER's ability to negotiate favorable contracts with suppliers;
 
     - HER's ability to obtain additional licenses, regulatory approvals,
       rights-of-way and infrastructure contracts to complete and operate the
       network;
 
     - HER's ability to access markets and attract sufficient customers;
 
     - HER's ability to provide and develop services for which customers will
       subscribe; and
 
     - strikes, weather, performance by third parties and other factors that are
       outside of HER's control.
 
   
     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 HER's future capital requirements. These requirements are
discussed in "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
    
 
   
  HER may not obtain or maintain needed rights
    
 
   
     HER must obtain additional 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 (known as infrastructure
providers) to build out the network. We cannot assure you that HER will be able
to maintain all of its existing agreements, rights and permits. Nor can we
assure you that HER will be able to obtain and maintain the additional
agreements, rights and permits it needs to implement its business plan on
acceptable terms. If HER lost substantial agreements, rights and permits or
failed to enter into and maintain required arrangements for the HER networks,
such events would have a material adverse effect on HER's business. In addition,
HER depends on third parties for leases of dark fiber for substantial portions
of its network. If HER is unable to enter into or maintain such leases, this
could have a material adverse effect on HER's business, as well as on our
operations and the market price of our common stock.
    
 
                                       20
<PAGE>   24
 
     We cannot assure you that the HER network will achieve the technical
specifications for which it was designed. HER also may be unable to upgrade the
network as technological improvements are introduced.
 
   
  Falling prices/depressed gross margins
    
 
   
     Prices in the European long distance industry have declined over the past
few years. We expect that prices will continue to decline as competition
increases and that continuing price cuts in certain retail markets will affect
the gross margins of some of HER's customers. This, in turn, could affect HER's
gross margins, if not offset by increases in volume and reductions in costs.
    
 
   
  HER may not obtain needed regulatory approvals
    
 
   
     To construct and operate the network in accordance with current plans, HER
must obtain the necessary regulatory approvals. Licenses, authorizations or
registrations have been obtained in Belgium, Denmark, France, Germany, Italy,
The Netherlands, Spain, Sweden, Switzerland, the UK and the United States. HER
intends to file applications in other countries (including Austria, Croatia,
Czech Republic, Hungary, Poland, Portugal, Slovakia and Russia) in anticipation
of service launch in accordance with the roll-out plan. With the exception of
Austria and Portugal, which are members of the EU and whose laws must comply
with European Commission directives, these other countries have not generally
liberalized their telecommunications sectors. We cannot assure you that they
will do so in a timely manner or at all.
    
 
   
     In addition, the terms and conditions of the licenses, authorizations or
registrations granted to HER may limit or otherwise affect HER's scope of
operations. We cannot assure you that HER 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 HER. 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 HER and could adversely affect the
market price of our common stock. See "Business -- Western Europe -- HER --
Licenses and Regulatory Issues" for a discussion of the countries in which HER
has obtained or applied for licenses.
    
 
   
 WE MUST INTEGRATE OUR RECENT ACQUISITIONS
    
 
   
     We acquired NetSource in November 1998 and, upon the consummation of the
offer, will acquire Esprit Telecom, which in turn acquired the Plusnet business
in May 1998 and three other telecommunications businesses in 1997. In order to
integrate these businesses, we must continue to develop our financial and
management controls and information systems. The integration of these
acquisitions has required and will continue to require additional expenditures.
Although we expect these acquisitions to result in operating synergies, we
cannot assure you that these acquisitions will achieve the expected benefits or
that such benefits will be realized within the time frames that we contemplate.
For a discussion of the rules relating to combining GTS and Esprit Telecom, see
"-- Risks relating to our
    
 
                                       21
<PAGE>   25
 
   
exchange offer for Esprit Telecom's shares and the combined operations of GTS
and Esprit Telecom -- We may not realize intended synergies."
    
 
   
OUR EUROPEAN SERVICES STRATEGY IS NEW AND INVOLVES REGULATORY, COMPETITIVE,
ACQUISITION - RELATED AND OTHER RISKS
    
 
   
     Our European Services Strategy is at an Early Stage. We have recently
completed our acquisition of NetSource, hired key personnel and filed licensing
applications in two countries. However, we are still in the early stages of
implementing our European services strategy. Before we proceed with our European
services strategy, we will need to assess potential markets and obtain required
governmental authorizations, franchises and permits. We will also need to raise
required capital, identify appropriate additional acquisition candidates,
implement efficient information processing systems for billing and customer
service and develop a sufficient customer base. If we fail to complete any of
these steps, we may need to modify, delay or abandon some or all of our European
services strategy. We cannot be sure about the amount and timing of our future
capital requirements to implement this strategy. We anticipate that the amount
of capital we need to continue to implement our European services strategy will
depend on several factors. These factors include, among others, the demand for
our services, the markets in which we build or buy networks and regulatory,
technological and competitive developments. For further discussion of our
European services strategy and the related capital requirements, see "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- European Services Strategy" and
"Business -- Business Strategy -- European Services Strategy."
    
 
   
     We Will Face Additional Regulation. Because we plan to provide, through GTS
Business Services -- Western Europe and GTS Access Services, an expanded array
of telecommunications services in Europe, we will become subject to significant
additional regulation at the EU, national and local levels. We have applied for
licenses to operate as a competitive local exchange carrier in seven cities in
Germany. We have also submitted a draft application to the French regulatory
authorities, pursuant to which informal discussions have been conducted with
respect to the greater Paris metropolitan area. Delays in receiving regulatory
approvals, or the enactment of adverse regulations or regulatory requirements,
may:
    
 
     - delay or prevent us from offering our end-user services in certain
       European markets;
 
     - restrict the types of end-user services we can offer;
 
     - restrict us from deploying our local networks; and
 
   
     - adversely affect our operations.
    
 
   
     We cannot assure you that we will be able to obtain the necessary
regulatory approvals on a timely basis or that we will not be affected by
regulatory developments, which may have a material adverse effect on our
operations.
    
 
   
     Our Competitors May Force Us To Lower Our Prices and We May Not Keep Our
Customers. Our competitors will include large established national carriers,
alliances among telecommunications companies, facilities-based competitors,
resellers, data providers, Internet service providers and other providers of
bundled services. We may also face competition from cable television companies,
wireless telephone companies, microwave carriers and
    
 
                                       22
<PAGE>   26
 
satellite companies. Many competitors will have established customer bases and
extensive brand name recognition. Many competitors will have greater financial,
management and other resources.
 
   
     We will compete primarily on the basis of price and, to a lesser extent, on
the type and quality of services offered. Potential competitors with substantial
financial resources may force us to lower our prices to remain competitive. We
also expect to lose a significant number of customers as a result of the highly
competitive nature of the markets. It may be difficult for us to attract and
retain a sufficient number of customers to sustain our business. We cannot
assure you that we will be able to effectively market our expanded service
offerings, keep prices at a profitable level or retain customers. For more
information on who our competitors are in the European end-user services
business, see "Business -- European Services Strategy -- Competition."
    
 
   
     We Are Entering New Markets. The European end-user services market is new
for us. We have to make additional significant operating and capital investments
to implement our European services strategy. We will need to develop new
products and services and to establish direct and/or indirect sales channels to
market our offerings. Sophisticated information and processing systems will be
vital to our success, and we will need to implement integrated provisioning,
billing and collection systems for our services. Before we acquired NetSource,
we did not have any experience in offering expanded services in Europe or in
targeting European business and government customers. We may also rely on third
party vendors and contractors for network buildouts and information systems
upgrades and will need to obtain rights-of-way and other consents to develop our
networks. We cannot assure you that we will be able to implement the European
services strategy within our expected timetable or at all. Any delays in
establishing our business in one or more of our targeted markets may have a
material adverse effect on our operations and on the value of our common stock.
    
 
   
     We Will Be Relying on Other Telecommunications Service Providers For
Interconnection and Other Services. To implement our European services strategy,
we will need to enter into interconnection agreements with large established
national carriers and other local service providers operating in our target
markets. We may also need to enter into collocation agreements with, and lease
trunking capacity from, these third parties. We cannot assure you that we will
be able to enter into these interconnection and other agreements on terms that
are satisfactory to us.
    
 
   
     We will also need to enter into resale agreements with long distance and
international carriers. These agreements often contain minimum volume
commitments. We may be obligated to pay underutilization charges if we
overestimate our need for transmission capacity. If we underestimate our need
for transmission capacity, we may need to pay more for the extra capacity
needed.
    
 
   
     We May Face Acquisition-Related Risks. We may enter our targeted markets
through additional acquisitions following the NetSource and Esprit Telecom
acquisitions. Buying businesses will subject us to certain risks, including,
among others:
    
 
     - acquired operations and personnel may be difficult to integrate into our
       operations;
 
     - our ongoing operations may be disrupted;
 
                                       23
<PAGE>   27
 
     - integrating the acquired businesses may divert resources and management
       time from running our ongoing business; and
 
     - changes in management may impair relationships with employees and
       customers.
 
   
     In addition, our high level of debt (which, when we close our offer for all
of the shares of Esprit Telecom, will include the assumed debt of Esprit
Telecom) and the terms of our outstanding debt agreements may limit our ability
to do additional acquisitions. We cannot assure you that we will complete any of
these acquisitions or that we will be able to obtain any additional financing
needed to finance such acquisitions. Nor can we assure you that if we complete
any acquisitions, the acquired business will be successfully integrated into our
operations or will perform as expected.
    
 
   
     Our End-User Services Business May Hurt HER. Many of the services we plan
to offer in our European end-user services business will compete with the
services that HER's customers offer. If GTS Business Services -- Western Europe
and GTS Access Services contract with HER for capacity, we expect that they will
buy from HER on an arms-length basis. However, our European services strategy
could affect whether HER's customers perceive it as an independent operator and
could impair HER's ability to attract and retain customers, which could, in
turn, hurt HER's operations.
    
 
   
THE REORGANIZATION OF THE RUSSIAN TELECOMMUNICATIONS INDUSTRY MAY HURT OUR
RELATIONS WITH OUR RUSSIAN PARTNERS
    
 
   
     As a result of the Russian government's reorganization of the Russian
telecommunications industry, a single entity, Svyazinvest, now owns a majority
interest in most of our principal venture partners and other telecommunications
service providers in Russia. For further discussion of Svyazinvest, see
"Business -- Russia and the CIS -- Overview." These companies together provide a
range of international and domestic long distance and local telecommunications
services throughout Russia. The consolidation of many of our venture partners
under Svyazinvest and the possible sale of a significant interest in Svyazinvest
to foreign and/or Russian investors (scheduled to take place by July 1999) is
likely to make Svyazinvest a stronger competitor, and may lead to material
adverse changes in the business relationships between us and our Russian
partners. The continuing privatization of Svyazinvest and the evolution of
Russia's government policy regarding Svyazinvest and Rostelecom (the Russian
government -- controlled international and long-distance operator) may have a
material adverse effect on us and our Russian ventures.
    
 
   
 OUR INFRASTRUCTURE MAY NOT KEEP PACE WITH OUR RAPID GROWTH
    
 
   
     As a result of past and expected future growth and expansion and our
acquisitions of NetSource of Esprit Telecom, significant demands have been and
will be placed on our management, operational and financial resources and on our
systems and controls. In order to manage our growth effectively, including
growth resulting from acquisitions, we must continue to improve our operational
and financial systems and controls. We must also purchase additional
telecommunications facilities and expand, train and manage the employee base.
Inaccuracies in our forecasts of market demand could result in insufficient or
excessive telecommunications facilities and fixed expenses that are not in line
with our operations. As we proceed with our development and expansion, there
will be additional
    
 
                                       24
<PAGE>   28
 
demands on our customer support, sales and marketing and administrative
resources and network infrastructure.
 
   
     We cannot assure you that we and our ventures' operating and financial
control systems and infrastructure will be adequate to maintain and effectively
manage future growth. If we fail to continue to upgrade our administrative,
operating and financial control systems or unexpected expansion difficulties
arise, there could be a material adverse effect on our business, results of
operations and financial condition.
    
 
   
OUR OPERATIONS IN RUSSIA AND THE CIS FACE SIGNIFICANT POLITICAL, ECONOMIC,
REGULATORY, LEGAL AND TAX RISKS
    
 
   
     To date, we have earned substantially all of our revenue from operations in
Russia and the other independent countries of the CIS. Foreign companies
conducting operations in the former Soviet Union face significant political,
economic, regulatory, legal and tax risks. We continuously evaluate a number of
potential transactions, some of which may involve the contribution of certain of
our Russian businesses in exchange for an interest of equal or greater value in
the surviving entity. The completion of any such transaction could be material
to our operations and financial condition and could increase our exposure to
such risks.
    
 
   
     Political Risks
    
 
   
     Instability in the political systems of Russia and the other independent
countries of the CIS could lead to events that might have a material adverse
effect on our operations in these countries. These systems have been and may
become more unstable due to political gridlock, as well as the populace's
dissatisfaction with reform, social and ethnic unrest, economic difficulties and
changes in government policies. Although the Russian parliament has enacted
legislation to protect private property against expropriation and
nationalization, we cannot assure you that such protections would be enforced.
For a more comprehensive discussion of the political instability in Russia and
the other independent countries of the CIS in which we do business, see
"Business -- Russia and the CIS -- Background on the Political, Economic and Tax
Environment -- Political."
    
 
   
     Economic Risks
    
 
   
     Russia's serious economic crisis may have a material adverse effect on the
demand for our services offered in Russia. The Russian government has suffered
serious setbacks in reducing inflation and stabilizing the currency, leading to
further attempts to reform the economy. For some time, Russia has experienced
generally rising unemployment and underemployment, increasing government debt
relative to falling gross domestic product and high levels of corporate
insolvency. Russia continues to experience chronic problems in its tax
collection policies. Low tax receipts, coupled with the recent downturn in
commodity prices on world markets, in particular, oil and gas exports, have
created a serious liquidity problem. According to the International Finance
Corporation, the Russian stock market lost approximately 85% of its value during
the first ten months of 1998 over concerns about Russia's economy and political
instability. Under these circumstances, we cannot assure you that (i) reform
policies will continue to be implemented and, if implemented, will be
successful, (ii) Russia will remain receptive to foreign trade and investment or
(iii) the economy will not suffer additional substantial setbacks. If the
Russian economy does not improve, it is likely this will have a material adverse
effect on the demand for our services offered in Russia.
    
 
                                       25
<PAGE>   29
 
   
     Since August 17, 1998, the ruble's value has declined substantially. As a
result, our financial performance has been negatively affected. We recorded a
$13.1 million pre-tax charge for the quarter ended September 30, 1998, which
consisted primarily of foreign currency exchange losses for ruble-denominated
net monetary assets. The remainder of the charge consists of estimates for
uncollectible accounts receivable and unrecoverable cash deposits in certain
Russian banks.
    
 
   
     There is a risk that there could be a further significant and sudden
decline in the value of the ruble resulting in additional exchange-related
losses and increased loss of investor confidence in the Russian economy. Such
consequences could have a material adverse effect on us and our financial
condition and results of operations. In addition, a general Russian banking
crisis could have a material adverse effect on our financial performance and the
viability of our receivables, our ability to recover funds deposited in Russian
banks and on our operations. The banking crisis could also adversely affect the
value of our common stock. For a more comprehensive discussion of the economic
crisis in Russia and the other independent countries of the CIS, see
"Business -- Russia and the CIS -- Background on the Political, Economic and Tax
Environment -- Economic."
    
 
   
     Risks of Regulation of the Telecommunications Industry
    
 
   
     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, government authorities have a fairly high degree of discretion to
regulate the industry.
    
 
   
     Current Russian legislation governing foreign investment activities does
not prohibit or restrict foreign investment in the telecommunications industry.
However, because the telecommunications industry is widely viewed as
strategically important to Russia, we cannot assure you that 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 our operations and on the market price of our common stock.
For a more comprehensive discussion of regulatory issues in Russia and the other
independent countries of the CIS, see "Business -- Russia and the
CIS -- Licenses and Regulatory Issues."
    
 
   
     Legal Risks
    
 
   
  Risks associated with the legal systems of Russia and the other independent
republics of the CIS include:
    
 
   
     - the untested nature of the independence of the judiciary and its immunity
       from economic, political or nationalistic influence;
    
 
   
     - the relative inexperience of judges and courts in commercial dispute
       resolution and legal interpretation;
    
 
   
     - inconsistencies among laws, presidential edicts, government decrees and
       ministerial orders;
    
 
   
     - the lack of legislative, judicial or administrative guidance on
       interpreting the applicable rules;
    
 
                                       26
<PAGE>   30
 
   
     - 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; and
    
 
   
     - problems in enforcing judicial and administrative decisions.
    
 
   
     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, we cannot assure you
that we will be able to enforce our rights in any disputes with our joint
venture partners or other parties in Russia or the other independent countries
of the CIS. In addition, we cannot assure you that our 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 we will be
found to be in compliance with all applicable laws, rules and regulations.
    
 
   
     Tax Risks
    
 
   
     Due to 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, our Russian taxes may
be in excess of the estimated amount expensed to date and accrued on our balance
sheets. It is our opinion that the ultimate resolution of our Russian tax
liability, to the extent not previously provided for, will not have a material
adverse effect on our Russian shareholding and financial condition. However,
depending on the amount and timing of an unfavorable resolution of this
contingency, it is possible that our future results of operations or cash flows
could be materially affected in a particular period.
    
 
   
     Inadequacy of Management, Legal and Financial Controls
    
 
   
     Russia and the other independent countries of the CIS in which we operate
have historically been lacking in management and financial reporting concepts
and practices, and have underdeveloped banking, computer and other control
systems. We have also historically had difficulty hiring and retaining a
sufficient number of qualified employees to work in these markets. As a result,
we have had difficulty:
    
 
   
     - establishing management, legal and financial controls;
    
 
   
     - collecting financial data;
    
 
   
     - preparing financial statements, books of account and corporate records;
       and
    
 
   
     - instituting business practices that meet Western standards.
    
 
   
     Our worldwide policy is to comply with all applicable laws and ensure that
all of our employees understand and comply with the law. The application of the
laws of any particular country, however, is not always clear or consistent. As a
result of the difficulty we have experienced in instituting business practices
that meet Western reporting and control standards, we have been unable to
ascertain whether certain practices by our ventures, which were not in
compliance with our policy, were in compliance with applicable U.S. and foreign
laws. If we or any of our ventures were found to be involved in unlawful
practices and the factual and legal issues relating to those practices were to
be resolved adversely to us, we or our ventures could be exposed, among other
things, to significant fines, the risk of prosecution and the loss of our
licenses. For a more comprehensive discussion of government regulatory risks,
see "-- Government Regulation."
    
 
                                       27
<PAGE>   31
 
   
     Other Risks
    
 
   
     Our operations in Russia and the other independent countries of the CIS
also subject us to the following risks:
    
 
   
     - corruption;
    
 
   
     - unexpected changes in regulatory requirements, import taxes, customs,
       duties and other trade barriers;
    
 
   
     - potential adverse tax consequences from operating in multiple
       jurisdictions with different tax laws;
    
 
   
     - problems in collecting accounts receivable and devaluation of accounts
       receivable in an inflationary economy;
    
 
   
     - technology export and import restrictions and prohibitions;
    
 
   
     - delays from customs brokers or government agencies; and
    
 
   
     - seasonal reductions in business activity.
    
 
   
     All of the above risks could have a material adverse effect on our
business, results of operations and financial condition.
    
 
   
 JOINT VENTURES; DEPENDENCE ON LOCAL PARTNERS; CONFLICTS OF INTEREST WITH LOCAL
PARTNERS
    
 
   
     We developed many of our operations, including joint ventures under GTS
Business Services -- CIS, such as Sovintel and TeleRoss, and GTS Mobile Services
such as the Unicel ventures, largely owned by Vostok Mobile in the regions west
of the Urals, Prim Telefone and Golden Telecom, in cooperation or partnership
with key local parties, such as regional telephone companies. We are
substantially dependent on our local partners to provide us with marketing
expertise and knowledge of the local regulatory environment. This local
knowledge helps facilitate the acquisition of necessary licenses and permits.
For a discussion of these joint ventures, see "Business -- Russia and the
CIS -- Sovintel," "-- TeleRoss" and "-- GTS Cellular."
    
 
     Under the terms of various joint venture agreements we have the right to
nominate key employees, direct the operations and determine the strategies of
such joint ventures' governance. However, our partners in some ventures have the
ability to frustrate the exercise of such rights. Significant actions by most
ventures, such as approving budgets and business plans, declaring and paying
dividends, and entering into significant corporate transactions effectively
require the approval of our local partners. Further, we would be unlikely as a
practical matter to want to take significant actions without the approval of our
joint venture partners. Accordingly, our inability to unilaterally control the
operations of our joint ventures could have a material adverse effect on our
operations and on the market price of Common Stock.
 
     In addition, we frequently compete with venture partners in the same
markets. For example, Rostelecom, our partner in Sovintel, is the dominant
international and domestic long distance carrier in Russia. Similarly, many of
our regional telephone company partners in the TeleRoss Ventures offer cellular
services in direct competition with certain of the operations of GTS Cellular.
Such competition may lead to conflicts of interest for us or our partners in
 
                                       28
<PAGE>   32
 
   
the operations of these ventures. We cannot assure you that any such conflicts
will be resolved in our favor. See "-- The Reorganization of the Russian
Telecommunications Industry May Hurt Our Relations with Our Russian Partners."
    
 
   
 DELAYS IN OBTAINING REGULATORY LICENSES COULD ADVERSELY AFFECT HER'S STRATEGY
    
 
   
     As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which our ventures provide
services. Many of our ventures require telecommunications licenses, most of
which were granted for periods of 1 1/2 to 10 years. The terms and conditions of
these licenses may limit or otherwise affect the ventures' scope of operations.
We have had favorable experience obtaining, maintaining and renewing licenses in
the past. However, we cannot assure you that we will be able to obtain, maintain
or renew licenses to provide the services we currently provide and plan to
provide or that such licenses will be issued or renewed on terms or with fees
that are commercially viable. In addition, we cannot assure you that we can
obtain licenses required by future ventures. The loss of or a substantial
limitation upon the terms of these telecommunications licenses could have a
material adverse effect. See each section under "Business" entitled "Licenses
and Regulatory Issues."
    
 
   
     A substantial portion of HER's strategy is based upon the timely
implementation of regulatory liberalization of the EU telecommunications market.
This liberalization is occurring in accordance with existing EC directives.
Although EU member states had a legal obligation to liberalize their markets in
accordance with these directives by January 1, 1998, further measures may be
required to make markets fully competitive. In addition, the EC granted Ireland,
Portugal, Spain, Luxembourg and Greece extensions from the January 1, 1998
deadline. Ireland and Spain subsequently liberalized on December 1, 1998. This
and similar delays could limit, constrain or otherwise adversely affect HER's
ability to provide certain services. Even if an EU member state adopts
liberalization measures in a timely way, there may be significant resistance to
the implementation of such measures from established national or regional
telecommunications operators, regulators, trade unions and other sources.
Further, HER's provision of services in Europe and the implementation of its
business plan may be materially adversely affected if any EU member state
imposes greater restrictions on international services between the EU and other
countries than on international services within the EU. Accordingly, HER faces
the risk that it will establish the HER network and make capital expenditures in
a given country in anticipation of regulatory liberalization which may not
occur.
    
 
   
 COMPETITION IN THE RUSSIAN AND EUROPEAN TELECOMMUNICATIONS INDUSTRY
    
 
     We face significant competition in all of our existing telecommunications
businesses and for acquisition and development opportunities in both emerging
and Western European markets.
 
   
     Our competitors in these markets include the following, many of which have
substantially greater technical, financial, marketing and other resources:
    
 
     - established national or regional telecommunications operators,
 
     - multinational telecommunications carriers,
 
     - other telecommunications developers,
 
     - certain niche telecommunications providers and
 
     - joint venture partners.
 
                                       29
<PAGE>   33
 
   
     In addition, as a result of the recent combination under Svyazinvest of the
Russian government's majority interest in Rostelecom and 85 of the regional
telephone companies, we may be subject to more coordinated competition from our
partners in the Russian telecommunications market in the future. Although we
believe we have a favorable and cooperative relationship with our joint venture
partners, we cannot assure you that these partners will continue to cooperate
with us in the future or that they will not increase competitive pressures. Any
measures taken by the partners that reduce their level of cooperation with us
could jeopardize our ability to participate in the management and operation of
our joint ventures and could have a material adverse effect on our operations
and on the market price of our common stock.
    
 
   
     In addition, various telecommunications companies, including MCI WorldCom,
Inc., Viatel, Inc., KPN N.V., Qwest Communications International, Inc., Deutsche
Telekom AG and France Telecom S.A., Global Crossing Ltd. and British
Telecommunications plc, have announced plans to construct, have begun to
construct or are operating fiber optic networks across various European
countries.
    
 
   
     HER's "point-to-point" transborder service offering also competes with
circuits currently provided by large established national carriers through
international private leased circuits. The liberalization of the European
telecommunications market is likely to attract additional entrants to both the
"point-to-point" and other telecommunications markets. We cannot assure you that
HER will compete effectively against its current or future competitors.
    
 
   
     Many of our current and potential competitors are not subject to, or
constrained by the prohibitions of, the Foreign Corrupt Practices Act, including
the prohibition against making payments to government officials in order to
obtain commercial benefits. We are subject to, and seek to comply with, the
limitations and prohibitions of such law, and accordingly may be subject to
competitive disadvantages to the extent that our competitors are able to secure
business, licenses or other preferential treatment through the making of such
payments. Accordingly, we cannot assure you that we will be able to compete
effectively against companies free from such limitations in the emerging markets
where such commercial practices are commonplace.
    
 
   
 CERTAIN STOCKHOLDERS MAY INFLUENCE MAJOR DECISIONS IN OUR BUSINESS
    
 
   
     At December 31, 1998, the Open Society Institute, Soros Foundation Hungary,
Soros Charitable Foundation and Soros Humanitarian Foundation, which we
collectively refer to as the Soros associates, beneficially owned approximately
11.7% of our common stock and Alan B. Slifka and affiliates beneficially owned
5.4% of our common stock. In addition, two persons who are affiliated with the
Soros associates serve on the GTS Board. As a result, either of these two
stockholder groups may significantly influence decisions which stockholders must
approve, such as the election of directors and other decisions relating to the
management of business.
    
 
   
 RISKS OF CONDUCTING BUSINESS IN RUSSIAN RUBLES AND OTHER FOREIGN CURRENCIES
    
 
   
     We conduct all of our operations outside the United States. As a result, a
substantial portion of our revenues (as well as the majority of our operating
expenses) are in foreign currencies, which will subject us to significant
foreign exchange risks. In particular, because we do business in certain
countries that have "soft currencies", we may accumulate cash in
    
 
                                       30
<PAGE>   34
 
   
currencies that are not readily convertible into hard currency, significantly
limiting our ability to repatriate our profits from those countries.
    
 
   
     We have earned most of our revenue to date in Russia. The value of the
ruble against the U.S. Dollar has steadily declined. As a result of the August
17, 1998 decision by the Russian Government and the Central Bank of Russia to
devalue the ruble and its aftermath, the value of the ruble against the U.S.
Dollar has fallen even more significantly, negatively affecting our financial
performance. During the quarter ended September 30, 1998, we recorded a $13.1
million pre-tax charge, the largest portion of which consisted of foreign
currency exchange losses on our net monetary assets that are denominated in
rubles. The remainder of the charge reflects our estimate on our ability to
collect accounts receivable and the potential loss of cash deposits in Russian
banks.
    
 
   
     The ruble is generally non-convertible outside Russia, although, in late
April 1998, the Chicago Mercantile Exchange announced that the ruble is a
currency that will be available for futures and options trading. Within Russia,
the market for converting rubles into other currencies is limited and is subject
to rules that restrict the purposes for which conversion and payment are
allowed. This market may become even more restricted as a result of policies the
new Russian government may implement. The limited availability of other
currencies may tend to inflate their values relative to the ruble. It is
uncertain whether such a market in Russia will continue to exist.
    
 
   
     The banking system in Russia is in crisis as a result of the August 17th
decision and its aftermath. Considerable delays may occur in the transfer of
funds within, and the remittance of funds out of, Russia. The 90-day moratorium
that the August 17th decision imposed on certain foreign exchange payments
delayed transfers of funds. Although the 90-day moratorium has expired, it could
be renewed or established in another form if the Russian government and Central
Bank anticipate further liquidity crises. Any delay in converting rubles into
foreign currency to make a payment or delay in the transfer of such foreign
currency could have a material adverse effect on our operations and on the
market price of Common Stock.
    
 
   
     When the Russian government announced the August 17th decision, it
abandoned its policy since November 1997 of pegging the ruble/U.S. Dollar
exchange rate to fluctuate within a certain narrow range. Since the August 17th
decision, the Russian authorities have been unable to maintain a stable exchange
rate. Thus, an additional significant and sudden decline in the value of the
ruble might occur. A significant and sudden devaluation of the ruble could have
a material adverse effect on us and our results of operations.
    
 
     We historically have not used hedging transactions to limit our exposure to
risks from doing business in foreign currencies. We have developed risk
management policies that establish guidelines for managing foreign exchange
risk. As part of these policies, we have designed a reporting process to monitor
the potential exposure on an ongoing basis. We use the output of this process to
determine the materiality of foreign currency exposure and determine whether it
is practical and/or economically justified to execute financial hedges.
 
     For those operating companies that transact their business in currencies
that are not readily convertible, our ability to hedge exposure is limited
because financial hedge instruments for these countries are nonexistent or
limited and also pricing of these instruments is often volatile and not always
efficient. We attempt to minimize our exposure by indexing our invoices and
collections to the applicable dollar/foreign currency exchange rate to the
extent
 
                                       31
<PAGE>   35
 
   
its costs (including interest expense, capital expenditures and equity) are
incurred in U.S. dollars. Although we are attempting to match revenues, costs,
borrowing and repayments in terms of their respective currencies, we have
experienced, and may continue to experience, losses and a resulting negative
impact on earnings with respect to holdings solely as a result of foreign
currency exchange rate fluctuations, which include foreign currency devaluations
against the U.S. dollar. In April 1998, HER entered into a currency swap
contract to limit its exposure to currency risks from the $265 million of 11.5%
senior notes that HER issued in August 1997.
    
 
   
EXCHANGE CONTROLS AND RISKS OF NOT BEING ABLE TO REPATRIATE PROCEEDS FROM
RUSSIAN INVESTMENTS
    
 
   
     Russia has recently tightened currency and capital transfer regulations to
prevent the flight of capital from its borders. These regulations require
certain licenses for the movement of capital from both the Russian Central Bank
and the Russian government. The incurrence and repayment of debt financing from
non-resident parties for the purchase of imported equipment and hardware with
repayment term of 90 days or more, and for other costs and expenditures with
repayment term of 180 days or more, and for the payment of capital contributions
in foreign currency to Russian entities are subject to these regulations. We are
resolving licensing issues with respect to certain intercompany loans and
capital contributions with the applicable government agencies. We do not believe
that the issues raised by these agencies concerning our license will have a
material adverse effect on our financial condition or results of operations. It
is possible, however, that the Russian government authorities could take an
unexpected adverse position on these issues that could materially affect our
business.
    
 
   
     We cannot assure you that Russian foreign investment and currency
legislation will continue to permit us to repatriate the proceeds from our
investments. We also cannot be sure whether Russian authorities will impose more
restrictions on the conversion of ruble earnings into foreign currency to pay
dividends or repatriate profits. If further restrictions were imposed, they
would have a material adverse effect on our interests in Russia.
    
 
   
 DEPENDENCE ON KEY PERSONNEL
    
 
   
     We believe that our growth and future success will depend in large part
upon a small number of key executive officers, as well as on our ability to
attract and retain highly skilled personnel to work in the emerging markets in
which we operate. The competition for qualified personnel in the
telecommunications industry is intense, particularly in the emerging markets
where we operate. We cannot assure you that we will be able to hire and retain
qualified personnel. Despite changes of personnel in Russia and the other
independent countries of the CIS, we believe we have maintained a strong
management team. However, we cannot assure you as to what effect such personnel
changes will have on our operations in Russia and the other independent
countries of the CIS.
    
 
   
 DEPENDENCE ON EFFECTIVE INTERNAL DATA PROCESSING SYSTEMS
    
 
     We must record and process massive amounts of data quickly and accurately.
While we believe our ventures' management information systems are currently
adequate, these systems will have to grow as the businesses expand. We believe
that the successful expansion of our information systems and administrative
support will be important to our continued growth, as well as to our ability to
monitor and control costs, to bill customers accurately and on time and to
achieve operating efficiencies. We may, however, encounter delays or
cost-overruns
 
                                       32
<PAGE>   36
 
or suffer adverse consequences in implementing these systems. Any such delay or
other malfunction of our management information systems could have a material
adverse effect on our business, financial condition and results of operations.
 
   
 TAXES; NET OPERATING LOSS CARRYFORWARDS MAY NOT BE USABLE
    
 
     The tax rules and regimes which exist in certain emerging markets in which
we operate or plan to operate are, in many cases, new and rapidly changing. If
we repatriate profits from those countries, we may incur additional taxes. Also,
other taxes, such as value added tax, excise taxes and import duties are
changing at an unpredictable pace and could have an adverse effect on our
operations.
 
     We rely on certain tax benefits in the countries in which we operate as
well as in the United States. Our ability to use these tax benefits is subject
to changes in the rules relating to tax holidays and in the provisions of tax
treaties with the United States. Some of our ventures in the CIS and Hungary
benefit from tax holidays granted by local governments. These tax holidays range
from five to several years, and go into effect once our operations achieve
profitability under local tax regulations. In addition to those tax holidays,
certain of our foreign ventures have accumulated foreign tax loss carryforwards
in excess of $60.0 million.
 
   
     As of December 31, 1997, we had net operating loss carryforwards for U.S.
federal tax purposes of approximately $110 million expiring in 2003 through
2012. Because of the "change in ownership" provisions of the Tax Reform Act of
1986, our ability to use the tax benefits from our net operating loss
carryforwards is subject to an annual limit as a result of the initial public
offering and the follow on stock offering and convertible senior subordinated
debenture due 2010 offering carried out in July 1998.
    
 
   
     Our financial statements do not reflect any provision for the tax benefits
from the U.S. and non-U.S. loss carryforwards. We cannot assure you that local
tax authorities will allow us to apply these loss carryforwards, in part or
full, to reduce taxes on our future income.
    
 
   
 RISKS ASSOCIATED WITH PROVIDING COMPATIBLE TECHNOLOGY
    
 
     The telecommunications industry has experienced rapid changes in
technology. These technological advances may reduce the effectiveness of
existing technology and equipment. The cost to implement emerging and future
technologies could be significant. Also, we buy or use telecommunications
equipment from a number of vendors. We depend on these vendors to adapt this
equipment to meet varying local telecommunications standards. We may be unable
to maintain competitive services or obtain new technology on a timely basis or
on satisfactory terms. If we fail to maintain competitive services, or obtain
new technologies, that could have a material adverse effect on business,
financial condition and results of operations.
 
   
     Developing and operating the HER network also poses certain technological
risks. The network is designed to use SDH technology. While SDH technology is an
advanced new transmission technology, HER may need to upgrade its technology
from the SDH platform to be able to offer its services at a cheaper price than
its competitors. We cannot assure you that the HER network will achieve the
technical specifications for which it was designed. HER also may be unable to
upgrade the network as technological improvements are introduced. These factors
could materially and adversely affect the viability of the HER network, our
prospects, operations and the market price of our common stock.
    
 
                                       34
<PAGE>   37
 
   
  RISKS ASSOCIATED WITH POTENTIAL FAILURE OF OUR SYSTEMS TO RECOGNIZE YEAR 2000
    
 
     The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including among others, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
 
     We are undertaking a comprehensive program to address the Year 2000 issue
with respect to the following:
 
- - Our information technology systems;
 
- - Our non-information technology systems;
 
- - Our business partners;
 
- - The systems of our telecommunications, hardware and software vendors; and
 
- - Our customers.
 
     Our Year 2000 program involves four phases: (1) a wide ranging assessment
of Year 2000 problems that might affect us; (2) the development and
implementation of remedies to address discovered problems; (3) preventing future
Year 2000 problems from arising; and (4) the testing of our system. We completed
phase 1 at the end of the fourth quarter of 1998. We began phases 2, 3 and 4 of
this program during the first quarter of 1999. These phases are expected to be
completed during the second quarter of 1999. Both we and Esprit Telecom have
identified to each other individuals at each respective company who will work
together to assess and remedy Year 2000 problems that might affect the combined
business.
 
   
     In addition we are taking steps to determine whether third parties
significant to our business will be Year 2000 compliant are doing the same. We
cannot assure you that our Year 2000 program or the programs of third parties
who do business with us will be effective or that our estimates about the timing
and cost of completing our program will be accurate. See "GTS Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
    
 
   
  RELIABLE MARKET AND CONSUMER INFORMATION IS DIFFICULT FOR US TO OBTAIN
    
 
     We operate in markets in which it is difficult to obtain reliable market
information. We have based our business planning on certain assumptions
concerning total revenue, business and consumer breakdown revenue, revenue from
various products and services, pricing, competition, operating expenses and
capital expenditures and our own investigation of market size and conditions and
our experience in other markets. We cannot assure you that either our
assumptions or data provided by outside sources are accurate or that they are
indicative of actual market conditions.
 
   
  A SIGNIFICANT AMOUNT OF OUR COMMON STOCK MAY BE RESOLD IN THE FUTURE
    
 
   
     As of December 31, 1998, 64,744,221 shares of our common stock were
outstanding excluding (v) 12,571,823 shares for which outstanding warrants and
options are exercisable, (w) 5,880,050 shares into which the 8.75% Senior
Subordinated Convertible Bonds due 2000 are convertible, (x) the 8,481,417
shares into which the 5 3/4% Convertible Senior Subordi-
    
 
                                       35
<PAGE>   38
 
   
nated Debentures due 2010 are convertible, and (y) 163,795 of additional shares
to be issued resulting from the NetSource acquisition. Further, subject to
NetSource meeting certain performance targets during the first two quarters of
1999, an additional 1.4 million shares of unregistered Common Stock may be
issued.
    
 
   
     Of the 64,744,221 outstanding shares of our common stock, the 12,765,000
shares registered in the IPO and the 14,506,900 shares registered in the public
offering of our common stock in July 1998 are freely tradable without
restriction under the Securities Act. However such shares held by "affiliates"
may generally be resold only in compliance with applicable provisions of Rule
144 under the Securities Act, as described below. Of the remainder,
approximately 20,000,000 additional shares have been resold or may be resold
under Rule 144 without restriction under the Securities Act. An additional
approximately 12,762,000 shares have been resold or may be resold under Rule 144
subject to volume and manner limitations. In addition, the 8,481,417 shares into
which the above-referenced Debentures are convertible will be freely tradable
without restriction under the Securities Act.
    
 
   
 A SIGNIFICANT AMOUNT OF OUR COMMON STOCK MAY BE RESOLD UNDER SHELF REGISTRATION
 STATEMENTS
    
 
   
     We filed and the SEC declared effective three registration statements. One
registration statement covers the resale of the above-referenced Convertible
Bonds and the shares of common stock into which they are convertible. Two
registration statements on Form S-8 cover the resale of shares of Common Stock
issued to employees, officers and directors under our employee benefit plans.
    
 
   
     Furthermore, on January 20, 1999 we filed with the SEC a shelf registration
statement, of which this prospectus is a part, covering all of the shares of
common stock (and securities convertible into or exercisable for shares of
common stock) owned by Alan B. Slifka and his affiliates and the Soros
associates that were not sold in the offering in July 1998. As of the date of
this prospectus, the SEC has not declared this registration statement effective.
We agreed to file the shelf registration statement in exchange for these
shareholders agreeing to certain restrictions on their ability to resell their
shares. These restrictions apply for specified periods after closing of the
offering in July 1998. Under these restrictions, our affiliates holding our
shares cannot, subject to certain exceptions, sell any such shares during the
first six months after the closing date of the offering in July 1998. They may,
however, sell 50% of such shares six months after the closing date offering in
July 1998; 75% of such shares nine months after the closing date offering in
July 1998; and 100% of such shares twelve months after the closing date of the
offering in July 1998. The Soros associates have expressed to us that because
the shelf registration statement is not yet effective, the above contractual
restrictions may no longer apply and that they are free to enter into
transactions in respect of their shares subject to applicable provisions of U.S.
securities law. We have expressed to them our view that such restrictions
continue to apply.
    
 
   
     Some of the limited partners of partnerships affiliated with Alan B. Slifka
and currently in dissolution may, upon giving advance notice, withdraw some or
all of their shares of common stock from registration under the shelf
registration statement. By withdrawing their shares, those persons would no
longer be bound by the restrictions on sale. The number of shares of common
stock that such persons may withdraw is capped at 726,953 shares of common stock
minus the number of shares such persons sold in July 1998.
    
 
                                       35
<PAGE>   39
 
   
     We also filed with the SEC on January 21, 1999 a shelf registration
statement covering all of the shares of common stock that may be issued to
holders of NetSource stock in connection with the acquisition of NetSource. We
may issue up to a total of 5,437,500 shares in connection with this acquisition
(including up to 1.4 million shares that may at our option, be issued contingent
on NetSource achieving certain performance targets in its first two quarters of
1999).
    
 
   
     In addition, we have agreed to file a shelf registration statement of
common stock that may be issued to Apax Funds Limited and Warburg, Pincus
Ventures, L.P., two institutional shareholders of Esprit Telecom Group plc, upon
the closing of our offer for Esprit Telecom. We will issue approximately 6.2
million shares of common stock to these two Esprit Telecom shareholders if the
offer is closed.
    
 
   
  SALES OF OUR COMMON STOCK COULD DEPRESS THE MARKET PRICE OF OUR SHARES
    
 
   
     We cannot predict what effect, if any, that future sales of our common
stock or the availability of our common stock for sale would have on the market
price for our common stock. Sales of large numbers of shares of our common stock
in the public market pursuant to Rule 144 or pursuant to an effective
registration statement under the Securities Act, or the perception that sales
could occur, may have an adverse effect on the market price for our common
stock. See "Description of Capital Stock -- Prior Purchase
Agreements -- Registration Rights."
    
 
   
  NO DIVIDEND PAYMENTS ARE EXPECTED
    
 
   
     We do not intend to pay any cash dividends in the foreseeable future. Also,
our ability to pay dividends is prohibited under the terms of an existing debt
agreement. If we raise any capital in the future, we may be restricted from
paying dividends under the terms of such financings. In addition, the decision
on August 17, 1998 by the Russian government and the Central Bank of Russia to
devalue the ruble and other actions that the Russian government may take in the
future may restrict the ability of the ventures in Russia to declare and pay
dividends.
    
 
   
  WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN
CONTROL
    
 
   
     Certain anti-takeover provisions could delay or prevent a third party from
gaining control of us in a transaction that our board of directors had not
negotiated and approved, even if such change in control would be beneficial to
stockholders. These anti-takeover provisions include:
    
 
     - Section 203 of the Delaware General Corporations Law, which prohibits a
       "business combination" between a corporation and an "interested
       stockholder" within three years of the stockholder becoming an
       "interested stockholder" except in certain limited circumstances.
 
     - Certain provisions of our charter and by-laws, including:
 
   
      - a classified board of directors serving staggered three-year terms;
    
 
      - restrictions on who may call a special meeting of stockholders;
 
                                       36
<PAGE>   40
 
      - a prohibition on stockholder action by written consent;
 
      - restrictions on the removal of directors;
 
   
      - supermajority voting requirements with respect to certain amendments to
        our charter; and
    
 
      - the authority to issue shares of preferred stock and to determine the
        rights without stockholder approval.
 
     - A shareholders' rights plan.
 
   
     For a more comprehensive discussion of the provisions of our Charter and
By-laws affecting our capital stock, see "Description of Capital
Stock -- Certain Charter and By-law Provisions."
    
 
   
 U.S. JUDGMENTS MAY NOT BE ENFORCEABLE ABROAD
    
 
   
     Substantially all of our assets (including all of the assets of our
operating ventures) are located outside the U.S. As a result, it will be
necessary for you to comply with foreign laws in order to enforce judgments
obtained in a U.S. court (including those with respect to federal securities law
claims) against the assets of our operating ventures. We cannot assure you that
any U.S. judgments would be enforced under any such foreign laws.
    
 
   
 STOCK PRICE MAY BE VOLATILE
    
 
   
     The market price for our common stock could fluctuate due to various
factors. These factors include:
    
 
   
     - political and economic development in emerging markets (including Russia
       and the other independent countries of the CIS);
    
 
     - announcements by us or our competitors of new contracts, technological
       innovations or new products;
 
     - other announcements concerning us or our competitors;
 
     - changes in government regulations;
 
     - fluctuations in our quarterly and annual operating results; and
 
     - general market conditions.
 
   
     In addition, the stock markets have, in recent years, experienced
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded.
Market fluctuations, as well as economic conditions, have adversely affected,
and may continue to adversely affect, the market price of our common stock.
    
 
RISKS SPECIFIC TO ESPRIT TELECOM
 
   
     Set out below are risk factors that may affect Esprit Telecom's business
and results of operations from time to time as an independent company. If we
close our proposed
    
                                       37
<PAGE>   41
 
   
acquisition of Esprit Telecom, these risk factors could change in ways that
could be important to you. In addition, our announcement and mailing of the
offer could have negative effects on the business of Esprit Telecom which are
not yet known to Esprit Telecom or to us. Moreover, if the proposed offer is not
completed, the business of Esprit Telecom may be materially harmed.
    
 
   
ESPRIT TELECOM HAS A LIMITED OPERATING HISTORY
    
 
   
     Esprit Telecom began operations in June 1992 with limited business in Spain
and has since further expanded its operations to cover the United Kingdom,
Germany, The Netherlands, France, Belgium, Ireland and Italy. As a result of its
recent development, Esprit Telecom has generated limited revenue in markets
other than the United Kingdom, Germany and The Netherlands. Esprit Telecom, its
customer base and the Esprit communications network have grown significantly in
the last three years as investments from its principal shareholders and proceeds
from financings have allowed Esprit Telecom to expand into key European markets.
In addition, Esprit Telecom intends to enter new European markets and offer new
telecommunications services. We cannot assure you that Esprit Telecom's future
operations will generate operating or net income. You should evaluate Esprit
Telecom's prospects in light of the risks, costs and time constraints Esprit
Telecom will face in establishing operations and introducing new
telecommunications services in newly liberalizing markets.
    
 
   
ESPRIT TELECOM HAS HAD AND ANTICIPATES CONTINUING TO INCUR OPERATING AND NET
LOSSES AND NEGATIVE EBITDA
    
 
   
     For the years ended September 30, 1997 and September 30, 1998, Esprit
Telecom sustained, on a UK GAAP basis, net losses of approximately L10.9 million
and L42.3 million, respectively, and negative EBITDA of L8.7 million and L18.3
million, respectively. Esprit Telecom expects to continue to incur operating
losses, negative cash flow from operating activities and negative earnings
before interest, taxes, depreciation and amortization, or EBITDA, while it
develops and expands the Esprit communications network. Other important factors
contributing to this trend are the integration of the Plusnet business into
Esprit Telecom's current operations, the opening of new sales offices and
introduction of new telecommunications services. Esprit Telecom could continue
to generate net losses even after Esprit Telecom begins to generate positive
EBITDA. Although Esprit Telecom has experienced net revenue growth in each of
the last four years, such growth should not be considered to be indicative of
future net revenue growth, if any. Furthermore, Esprit Telecom expects that
operations in new markets will sustain negative cash flows until an adequate
customer base and the related revenue stream have been established. If Esprit
Telecom cannot achieve and sustain operating profitability or positive cash
flow, Esprit Telecom may not be able to meet its debt service obligations or
working capital requirements without additional financing.
    
 
   
 ESPRIT TELECOM'S GROSS MARGINS ARE UNDER PRESSURE
    
 
   
     Prices in the long distance industry in Europe have declined in recent
years and, as competition continues to increase, Esprit Telecom expects that
prices will continue to decline. As a result, Esprit Telecom expects that its
gross margins will be affected until it is able to offset these price cuts with
network cost savings arising from increased capacity on the
    
 
                                       38
<PAGE>   42
 
   
Esprit telecommunications network on some of its key routes and it derives the
benefits from expected reductions in interconnection charges. Price cuts from
government authorities or agencies that operate the public telecommunications
network and set standards and policies, or PTOs, have been and may continue to
be significant in nature and network cost reductions may take time to be brought
into effect. For example, in Germany, Deutsche Telekom has recently gained
regulatory approval to implement significant reductions in its national tariffs
from January 1999. Esprit Telecom expects these tariff reductions may have an
adverse impact upon its national long distance revenues and gross margins. In
addition, Esprit Telecom intends to substantially increase the capacity and
reach of the Esprit Telecom communications network. Esprit Telecom expects that
the resulting additional leased line operating and maintenance costs will
depress gross margins until additional traffic volume increases network
utilization.
    
 
   
ESPRIT TELECOM'S RESULTS MAY VARY QUARTER TO QUARTER
    
 
   
     As a result of its limited revenue and significant expenses associated with
the expansion and development of the Esprit Telecom communications network, the
opening of new sales offices and the introduction of new telecommunications
services, and the variations in international and national long distance traffic
during the year, Esprit Telecom anticipates that its operating results could
vary significantly from quarter to quarter.
    
 
   
ESPRIT TELECOM HAS SUBSTANTIAL INDEBTEDNESS AND MAY NOT HAVE ENOUGH CASH FLOW TO
SERVICE ITS DEBT
    
 
   
     Esprit Telecom has substantial indebtedness. At September 30, 1998, under
UK generally accepted accounting principles or GAAP, Esprit Telecom's total
indebtedness was approximately L401.7 million, its shareholders' funds were a
deficit of approximately L7.2 million and its total assets were approximately
L394.5 million, of which approximately L99.0 million would have been intangible
assets. For the years ended September 30, 1997 and September 30, 1998, under UK
GAAP, Esprit Telecom's consolidated EBITDA was negative L8.7 million and
negative L18.3 million, respectively, and its earnings would have been
insufficient to cover fixed charges by L10.9 million and L42.4 million,
respectively. Esprit Telecom and its subsidiaries may incur additional
indebtedness in the future, subject to limitations imposed by their debt
instruments. The indentures governing Esprit Telecom's outstanding debt
securities do not limit the amount of indebtedness that Esprit Telecom may incur
to finance the cost of expanding its communications network.
    
 
   
     Esprit Telecom will need to improve substantially its operating cash flow
in order to meet its debt service obligations. We cannot assure you that Esprit
Telecom will generate sufficient positive operating cash flow in the future to
service its debt and to allow Esprit Telecom to make necessary capital
expenditures. If Esprit Telecom is unable to generate sufficient positive cash
flow in the future, it may need to refinance all or a portion of its debt, sell
assets or obtain additional financing. We cannot assure you that a refinancing
would be possible or that assets could be sold.
    
 
   
     As a result of the high level of Esprit Telecom's debt, Esprit Telecom:
    
 
   
     -     will have significant cash requirements to service debt, thereby
           reducing funds available for operations and future business
           opportunities and increasing the vulnerability of Esprit Telecom to
           adverse general economic and industry conditions;
    
 
                                       39
<PAGE>   43
 
   
     -     may be restricted in the future from obtaining any necessary
           financing for working capital, capital expenditures, debt service
           requirements, acquisitions or other purposes;
    
 
   
     -     will have limited flexibility in planning for, or reacting to,
           changes in its business;
    
 
   
     -     will be more highly leveraged than some of its competitors, which may
           place it at a competitive disadvantage; and
    
 
   
     -     will be required to comply with financial covenants and other
           restrictions contained in its debt instruments.
    
 
   
     If Esprit Telecom failed to meet its debt service obligations or to comply
with the covenants contained in its debt instruments, Esprit Telecom could
trigger a default under those agreements. A default could result in the debt
under one or more of those agreements becoming immediately due and payable.
Under any of these circumstances, we cannot assure you that Esprit Telecom and
its subsidiaries would have sufficient funds to satisfy all of their debt
obligations on a timely basis.
    
 
   
 ESPRIT TELECOM WILL NEED ADDITIONAL FINANCING
    
 
   
     Esprit Telecom will need substantial capital to develop and expand its
network, open new sales offices, introduce new telecommunications services and
make future acquisitions. Substantial capital will also be needed to fund
operating losses and net cash outflows. During the years ended September 30,
1998, 1997 and 1996, Esprit Telecom made fixed asset investments of
approximately L41.2 million in fiscal 1998, L10.1 million in fiscal 1997 and
L6.0 million in fiscal 1996. Esprit Telecom has historically been funded by
equity contributions from its principal securityholders, financing from banks,
vendors and other third parties and net proceeds from financings. None of the
principal securityholders has any obligation to make additional investments in
Esprit Telecom. Esprit Telecom does not currently maintain lines of credit or
similar facilities with commercial banks. It has obtained credit through vendor
financing and credit secured by Esprit Telecom's receivables. Other future
sources of capital for Esprit Telecom could include additional public and
private debt and equity financings. We cannot assure you that these sources of
financing would be available to Esprit Telecom in the future or, if available,
that they could be obtained on terms acceptable to Esprit Telecom.
    
 
   
     Esprit Telecom's future capital requirements will depend upon many factors.
Some of these factors include the performance of Esprit Telecom's business, the
rate and manner in which it expands the Esprit Telecom communications network
and opens new sales offices, makes future acquisitions and increases staffing
levels and customer growth. Other factors not within Esprit Telecom's control
include competitive conditions, regulatory or other government actions and
capital costs. If Esprit Telecom's plans or assumptions change or prove to be
inaccurate or the funds from financings, internally generated funds, working
capital and financings by vendors prove to be insufficient to fund Esprit
Telecom's growth and operations as currently anticipated, then some or all of
Esprit Telecom's development and expansion plans could be delayed or abandoned.
In addition, Esprit Telecom could need to seek additional funds earlier than
currently anticipated, including from additional debt and/or equity financings.
    
 
                                       40
<PAGE>   44
 
   
 ESPRIT TELECOM MAY NOT DEVELOP ITS NETWORK ON SCHEDULE OR AS BUDGETED
    
 
   
     Esprit Telecom's ability to achieve its strategic objectives largely
depends on the successful, timely and cost-effective expansion of its
communications network and its ability to accurately project traffic volume and
route preferences in order to achieve optimal utilization of its network. Esprit
Telecom's continued expansion and development of its network largely depends on
Esprit Telecom's ability to:
    
 
   
     - enter new markets;
    
 
   
     - access transmission backbone network routes;
    
 
   
     - install service and sales facilities;
    
 
   
     - acquire rights-of-way and building access;
    
 
   
     - obtain required governmental licenses, authorizations and permits; and
    
 
   
     - interconnect with the networks of the incumbent PTOs or other
       infrastructure providers, all in a timely manner, at reasonable costs and
       acceptable terms and conditions.
    
 
   
The successful implementation of Esprit Telecom's expansion strategy faces a
number of risks. These risks include:
    
 
   
     - operating and technical problems beyond Esprit Telecom's control;
    
 
   
     - uncertainties in obtaining needed licenses and permits;
    
 
   
     - possible delays in the full implementation of EU directives liberalizing
       the European telecommunications market;
    
 
   
     - competitive disadvantages resulting from time-consuming negotiations for
       low cost access to networks that Esprit Telecom's competitors have
       already obtained; and
    
 
   
     - lack of capital.
    
 
   
For a more comprehensive discussion of the expansion of the Esprit Telecom
telecommunications network, see "Item 1 -- Business -- Pan-European Integrated
Network with Local Market Expertise; Esprit Network Expansion" in Esprit
Telecom's Annual Report on Form 20-F for the year ended September 30, 1998
incorporated by reference in the registration statement of which this prospectus
is a part.
    
 
   
 SYSTEM FAILURES OR INTERRUPTIONS IN ESPRIT TELECOM'S NETWORK MAY CAUSE LOSS OF
CUSTOMERS
    
 
   
     Esprit Telecom's success depends on the seamless uninterrupted operation of
its network and on the management of traffic volumes and route preferences over
the network. Furthermore, as Esprit Telecom continues to expand its network to
increase both its capacity and reach, and as traffic volume continues to
increase, Esprit Telecom will face increasing demands and challenges in managing
its circuit capacity and traffic management systems. Any prolonged failure of
the Esprit Telecom communications network or other systems or hardware that
causes significant interruptions to Esprit Telecom's operations could seriously
damage the reputation of Esprit Telecom and result in customer attrition and
financial losses.
    
 
                                       41
<PAGE>   45
 
   
     Esprit Telecom's operations also depend on its ability to successfully
integrate new and emerging technologies and equipment. These include the
technology and equipment of the Plusnet business and the SDH and Wavelength
Division Multiplexing (WDM) equipment, which is equipment that allows multiple
signals to be carried simultaneously used in Esprit Telecom's broadband fiber
network. Integrating these new technologies could increase the risk of system
failure and result in further strains. Additionally, any damage to the Esprit
Telecom network management center and major switching centers could harm Esprit
Telecom's ability to monitor and manage the network operations and generate
accurate call detail reports from which billing information is derived. For a
more comprehensive discussion of the operations of the Esprit Telecom
communications network, see the Esprit Telecom Annual Report on Form 20-F "Item
1 -- Business -- Network and Operations Function," -- Transmission
Infrastructure and Network" for the year ended September 30, 1998 incorporated
by reference in the registration statement of which this prospectus is a part.
    
 
   
 ESPRIT TELECOM MAY INCUR OPERATING LOSSES ON THE LEASED PORTION OF ITS NETWORK
    
 
   
     Esprit Telecom has only completed a relatively small part of its planned
telecommunications transmission infrastructure. It leases the remainder from
facilities-based long distance carriers. As a result, Esprit Telecom depends
upon facilities-based carriers such as the PTOs and other alternative
telecommunications networks in each of the countries in which Esprit Telecom
operates. Esprit Telecom can offer no assurance that it will be successful in
securing, or maintaining existing, interconnect arrangements at attractive
rates. Esprit Telecom's ability to connect its retail customers to the Esprit
Network also depends on Esprit Telecom securing interconnection agreements with
the local PTOs in the markets where Esprit Telecom operates. Some of these
carriers are or may become competitors of Esprit Telecom. Esprit Telecom can
offer no assurance that it will be successful in securing, or maintaining
existing, interconnect arrangements at attractive rates.
    
 
   
     Esprit Telecom currently leases a substantial portion of its network
transmission capacity under agreements which generally have twelve-month or
longer fixed terms. These lease arrangements result in high fixed costs. The
revenues generated by transporting traffic in these leased fiber routes may vary
with traffic volumes and prices. Accordingly, if Esprit Telecom does not carry
enough traffic volume over the particular route or is unable to charge an
appropriate price for such traffic, Esprit Telecom could fail to generate
revenue sufficient to cover its lease costs, and would therefore incur operating
losses on the particular route or routes. In addition, most of Esprit Telecom's
off-network transmission is obtained under a variety of volume-based
arrangements with facilities-based carriers including PTOs. Under these
arrangements, Esprit Telecom is subject to the risk of unanticipated price
fluctuations and service restrictions or cancellations.
    
 
   
     If Esprit Telecom's lease and interconnect arrangements deteriorate or
terminate and Esprit Telecom is unable to enter into new arrangements, Esprit
Telecom's cost structure, service quality, network coverage, results of
operations and financial condition could be harmed.
    
 
                                       42
<PAGE>   46
 
   
 ESPRIT TELECOM MAY NOT IMPLEMENT EFFECTIVE BILLING AND MANAGEMENT INFORMATION
SYSTEMS ON SCHEDULE
    
 
   
     Esprit Telecom must record and process millions of call detail records
quickly and accurately in order to efficiently produce customer bills in a
timely and flexible manner. Esprit Telecom has recently selected a new billing
system to support Esprit Telecom's anticipated growth. For a more comprehensive
discussion of Esprit Telecom's billing and management information systems, see
"Item 1 -- Business -- Billing and Management Information Systems." Esprit
Telecom's Annual Report on Form 20-F for the year ended September 30, 1998
incorporated by reference in the registration statement of which this prospectus
is a part.
    
 
   
     Esprit Telecom may encounter difficulties in implementing and enhancing the
new billing and management information systems and in integrating new technology
into such systems. If Esprit Telecom fails to implement the new systems or any
required system enhancement, to acquire new systems or to integrate new
technology in a timely and cost-effective manner, its business, results of
operations and financial condition could be materially adversely affected.
    
 
   
 RISKS ASSOCIATED WITH POTENTIAL WITH POTENTIAL FAILURE OF ESPRIT TELECOM'S
SYSTEMS TO RECOGNIZE YEAR 2000
    
 
   
     A significant percentage of the software running on most of the computers
worldwide relies on two-digit date codes to perform a number of computation and
decision making functions. The date change from 1999 to 2000 may impair the
ability of these programs to interpret date codes properly. This could result in
system failures, miscalculations or errors, causing disruptions of operations or
other business problems, including the inability to process transactions, send
invoices or engage in similar normal business activities.
    
 
   
     Esprit Telecom is undertaking a comprehensive program of assessment,
remedial strategies and actual implementation and testing to address the Year
2000 issue in its own business.
    
 
   
     Esprit Telecom has spent approximately $4.0 million for Year 2000
compliance on its own systems through September 30, 1998, and expects to spend
approximately an additional $4.0 million through the end of calendar year 1999.
Out of this total of $8.0 million in expenditures, Esprit Telecom expects to
spend a total of $1.0 million on repairing existing systems and the remainder on
testing and replacement.
    
 
   
     Esprit Telecom's Year 2000 program also involves analyzing Esprit Telecom's
most reasonably likely worst-case Year 2000 scenario. Esprit Telecom expects
that this would involve either or both of the following:
    
 
     -     a loss of interconnect capacity from one or more major suppliers of
           transmission capacity; and/or
 
     -     Esprit Telecom's inability to record, track or invoice billable
           minutes which could ultimately cause it to temporarily stop carrying
           traffic.
 
   
Either scenario would adversely affect Esprit Telecom's revenue and, if not
quickly remedied, would have a material adverse effect on its business, results
of operations and financial condition. For a more comprehensive discussion of
the components of Esprit Telecom's Year 2000 program, see "Esprit Telecom
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."
    
                                       43
<PAGE>   47
 
   
THE EUROPEAN TELECOMMUNICATIONS MARKETS MAY NOT LIBERALIZE AS PLANNED
    
 
   
     Much of Esprit Telecom's planned growth is predicated upon the
liberalization of telecommunications markets, and further, upon the
implementation and enforcement of existing EU directives. Esprit Telecom can
offer no assurance that such liberalization will occur as anticipated, or that
the effects of such liberalization will not be different than expected.
    
 
   
ESPRIT TELECOM'S TECHNOLOGY MAY BECOME OBSOLETE
    
 
   
     The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new products and services. Carriers are
offering increased transmission capacity. The Internet is increasingly being
used for voice and data transmission. Esprit Telecom's success will depend
substantially on its ability to predict these future networks, products and
services and budget the costs to develop these networks, products and services.
Esprit Telecom will be particularly exposed to these technology and equipment
risks as it expands and develops its communications network. The costs to
implement emerging and future technologies are significant. We cannot assure you
that Esprit Telecom will obtain appropriate new technology on a timely basis, or
on satisfactory terms. The network has performed at or above design
specifications. However, if Esprit Telecom fails to maintain the technical
specifications of its network, as traffic continues to grow and the network is
further expanded, the viability of its network and Esprit Telecom's
competitiveness could be harmed.
    
 
   
 ESPRIT TELECOM IS DEPENDENT ON MAJOR SUPPLIERS FOR ITS KEY SWITCH EQUIPMENT
    
 
   
     Esprit Telecom is significantly dependent on the technology and products
which it acquires from its main suppliers. Esprit Telecom purchases its
international and local equipment from telecommunications equipment
manufacturers that may provide vendor financing for, and maintenance of, this
equipment. Esprit Telecom's main suppliers are Nortel, Ericsson and Siemens.
Esprit Telecom could obtain equipment of comparable quality from several
alternative suppliers. However, if Esprit Telecom failed to acquire switches
that are compatible from an alternative source, or acquire additional equipment
(regardless of the vendor) on a timely and cost-efficient basis, Esprit Telecom
could face delays, operational problems and increased expenses.
    
 
   
     In addition, Esprit Telecom occasionally enters into turn-key contracts
with specific suppliers as a means of reducing its costs and development risks.
If any of Esprit Telecom's technologies and products became incompatible with
industry standards, or if any of Esprit Telecom's turn-key contracts failed to
provide the expected benefits, Esprit Telecom's business, results of operations
and financial condition could be harmed.
    
 
   
 ESPRIT TELECOM'S REVENUES FROM ITS WHOLESALE AND RESELLER BUSINESSES ARE
SUBJECT TO FLUCTUATION
    
 
   
     Esprit Telecom's wholesale and reseller customers typically change their
routing or providers to take advantage of the lowest cost alternative, resulting
in potentially greater fluctuations in revenue generated by these customers than
for other categories of customers, Due to capacity and quality constraints on
its least-cost routes, Esprit Telecom has on occasion been forced to carry
traffic over a higher-cost route. In response to such constraints, Esprit
Telecom decided to reduce the volume of wholesale traffic on the Esprit Network
    
 
                                       44
<PAGE>   48
 
   
until the third quarter of fiscal 1998 when sufficient spare capacity became
available to provide services to wholesale customers profitably. Esprit
Telecom's credit exposure to resellers may be greater since, unlike wholesale
customers, resellers do not typically furnish any services to Esprit Telecom.
Esprit Telecom may continue to experience short term fluctuations in usage and
revenue as customers change routing and providers. For a more complete
discussion of Esprit Telecom's wholesale and resale customers, see "Business --
Markets and Services -- Wholesale" and "-- Service Provider/Reseller" in Esprit
Telecom's Annual Report on Form 20-F for the year ended September 30, 1998,
incorporated by reference in the registration statement of which this prospectus
is a part.
    
 
   
ESPRIT TELECOM'S RISK OF FRAUD AND BAD DEBT MAY GROW AS ITS SMALL TO MEDIUM
SIZED CUSTOMERS INCREASE
    
 
   
     Esprit Telecom has experienced problems relating to the fraudulent use of
its access codes and the failure of some customers to make full payment for
services rendered. However, Esprit Telecom does not believe that its experiences
with such problems are substantially different from what is generally
experienced in the telecommunications industry. Esprit Telecom may have to make
provisions for non-payment if it believes that it will not be able to collect.
Esprit Telecom expects that the credit risk characteristic of its customer base
may increase as the share of Esprit Telecom's revenue deriving from small to
medium sized enterprises and service provider/reseller customers increases.
    
 
   
ESPRIT TELECOM'S SENIOR MANAGEMENT TEAM IS NEW
    
 
   
     In the past 20 months, Esprit Telecom has hired a number of new senior
managers, including a new Chief Executive Officer, a new Chief Operations
Officer and a new Managing Director -- Sales and Marketing. Esprit Telecom's
senior management team therefore includes a number of key people who have been
with Esprit Telecom for a relatively short period of time. Esprit Telecom cannot
assure you that it will be able to attract, recruit and retain sufficient
qualified personnel as Esprit Telecom grows and expands its current operations
and enters into new markets.
    
 
   
     Esprit Telecom has also retained the managers of the businesses it has
recently acquired to assist it in integrating such businesses and in further
developing certain lines of business within Esprit Telecom. Any problems in
integrating these managers could have a material adverse impact on Esprit
Telecom's business.
    
 
   
 ESPRIT TELECOM MAY NOT BE ABLE TO EXECUTE ITS ACQUISITION STRATEGY
    
 
   
     Esprit Telecom intends to continue to selectively pursue strategic
acquisitions, investments and alliances where these initiatives would strengthen
its operations and position in particular segments of a market. We cannot assure
you that Esprit Telecom will be successful in identifying attractive acquisition
candidates, completing and financing additional acquisitions on favorable terms,
or integrating the acquired businesses or assets into its existing operations.
Esprit Telecom's ability to make acquisitions may depend on the availability of
additional financing on acceptable terms and will be subject to compliance with
the covenants contained in its debt instruments.
    
 
   
     Esprit Telecom has brought the senior managers of each of its recently
acquired businesses into its management team and is relying on such individuals
to assist Esprit Telecom in integrating such acquired businesses. However,
Esprit Telecom can offer no
    
                                       45
<PAGE>   49
 
   
guarantee that Esprit Telecom will be able to attract and retain managers from
any additional acquired businesses or be successful in integrating any such new
managers and businesses.
    
 
   
     We cannot assure you that Esprit Telecom will achieve the benefits that its
management expects to realize or that such benefits will be realized within the
time frames currently contemplated. In addition, Esprit Telecom expects that
realizing acquisition-related benefits may be dependent upon its taking actions
which will result in one-time charges or expenses.
    
 
   
 DELAYS IN IMPLEMENTING LIBERALIZATION DIRECTIVES MAY AFFECT ESPRIT TELECOM'S
EXECUTION OF ITS STRATEGY
    
 
   
     Esprit Telecom's ability to penetrate several European markets and to
deploy and expand the its communications network depends to a significant degree
on the implementation of liberalization initiatives in each such country. In
particular, Esprit Telecom's ability to purchase ownership rights in
transmission lines or to build its own transmission lines depends upon the
timely implementation by European Union member states of the liberalization
directives. Greece, Luxembourg and Portugal have not yet implemented the
liberalization directives. If the implementation or enforceability of the
liberalization directives is challenged or delayed in any of Esprit Telecom's
current or potential markets, Esprit Telecom's business, results of operations
and financial condition could be materially adversely affected.
    
 
   
     In addition, the terms and conditions of interconnection to the networks
operated by the government-run local telephony providers will have a material
effect on the competitive position of Esprit Telecom. Although the EU has issued
a directive governing the terms of such interconnection, Esprit Telecom can
offer no assurance that such directive will be implemented in a timely and
consistent manner or that it will provide Esprit Telecom with economical access
to and termination on those networks. Accordingly, customers' ability to access
competitive telecommunications providers such as Esprit Telecom may be
restricted in some EU countries.
    
 
   
 ESPRIT TELECOM MAY NOT BE ABLE TO ROUTE SOME TRAFFIC THROUGH THE UNITED STATES
    
 
   
     Esprit Telecom may be permitted by the U.S. Federal Communications
Commission, or FCC, to use leased private lines between the United States and a
country that is a party to the WTO's Basic Telecommunications Services Agreement
if it satisfies a "benchmark" test that became effective on January 1, 1998.
Under the benchmark test, use of international private lines will be permitted
by the FCC if at least half of the settled traffic on a route in question to a
WTO member is being settled at rates that are at or below a benchmark set by the
FCC. The FCC has sanctioned the use of interconnected leased private lines from
the United States to the United Kingdom, Canada, New Zealand, Australia, Sweden,
The Netherlands, France, Germany, Belgium, Denmark, Norway, and Luxembourg.
However, with respect to other countries to which Esprit Telecom would like to
route traffic from the United States, Esprit Telecom can offer no assurance that
the FCC will sanction the use of international private lines to these other
countries. The FCC's refusal to allow international private line resale may
limit Esprit Telecom's ability to route traffic through the United States in
connection with the provision of its Indirect Access services outside the United
Kingdom. More generally, the application of these lower benchmarks for
international settlement rates will likely reduce traffic termination costs for
calls originated in or routed through the United States, but may also
substantially decrease profit margins on the routes.
    
 
                                       46
<PAGE>   50
 
   
 ESPRIT TELECOM DEPENDS ON LICENSES TO OPERATE IN ITS MARKETS
    
 
   
     Esprit Telecom's operations are dependent on licenses which it acquires
from governmental authorities in each jurisdiction in which it operates.
Currently, Esprit Telecom has network operator or international facilities
licenses or otherwise has authority which allow it to purchase ownership rights
in transmission lines or construct its own international facilities and to
provide public voice telephony services in various markets. For a more
comprehensive discussion of the countries in which Esprit Telecom is licensed to
operate, see Item 1. "Description of the Business -- Regulation" in Esprit
Telecom's Annual Report on Form 20-F for the year ended September 30, 1998
incorporated by reference in the registration statement of which this prospectus
is a part. These licenses and authorizations generally contain clauses pursuant
to which Esprit Telecom may be fined or its license may be revoked on short or
no notice. If government authorities revoke licenses or levy fines, Esprit
Telecom's business, results of operations and financial condition could be
materially adversely affected.
    
 
   
 ESPRIT TELECOM MAY NOT BE COMPETITIVE WITH NATIONAL PTOS
    
 
   
     The liberalization of the European telecommunications market has coincided
with technological innovation to create an increasingly competitive market,
characterized by still-dominant PTOs as well as an increasing number of new
market entrants. Customers in most of these markets are not accustomed to
alternative service providers, and may be reluctant to switch from the dominant
PTOs to competitors such as Esprit Telecom. In particular, Esprit Telecom's
target customers, which include medium-to-large-sized businesses and
governmental agencies and organizations, may be reluctant to entrust their
telecommunications needs to what they perceive to be a group of relatively new
and unproven operators.
    
 
   
     Prices for international long distance calls have decreased substantially
over the last few years in most of Esprit Telecom's current and potential
markets. Some of Esprit Telecom's larger competitors may be able to use their
greater financial resources to cause severe price competition for Esprit
Telecom. Esprit Telecom expects that prices for its services will continue to
decrease for the foreseeable future. Any price competition could have a material
adverse effect on Esprit Telecom's business, results of operations and financial
condition. Moreover, as PTOs improve their product offerings and service, Esprit
Telecom's competitiveness could be adversely affected if Esprit Telecom is
unable to provide similar levels of offerings and service.
    
 
   
     In each of its current markets, Esprit Telecom competes primarily with the
national PTOs and other providers which have established market presences,
fully-built networks and financial and other resources which are substantially
greater than those of Esprit Telecom. Additionally, these carriers own and
operate infrastructure which provides them with significant cost advantages.
Since Esprit Telecom utilizes these networks to provide its services, if it
failed to gain economical access to these networks, its business, results of
operations and financial condition could be materially adversely affected. The
reluctance of some national regulators to accept liberalizing policies, grant
regulatory approvals and to enforce access to PTO networks may have a material
adverse effect on Esprit Telecom's competitive position. For a more
comprehensive discussion of Esprit Telecom's competition,
    
 
                                       47
<PAGE>   51
 
   
see "Item 1. Description of the Business -- Competition" in Esprit Telecom's
Annual Report on Form 20-F for the year ended September 30, 1998 incorporated by
reference in the registration statement of which this prospectus is a part.
    
 
   
 ESPRIT TELECOM IS EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCIES
    
 
   
     Esprit Telecom is exposed to fluctuations in foreign currencies as its
revenue, and some of its costs, assets and liabilities are denominated in
multiple local currencies. This exposure may increase as Esprit Telecom expands
into additional countries in Europe, although this risk may be reduced with the
adoption of the Euro in eleven member States of the European Union. Its major
financings were denominated and have been maintained in U.S. dollars and
Deutschmarks, and Esprit Telecom expects to incur many of its expenses in the
expansion of its network and the opening of new sales offices in the local
European currency of the country in which it is expanding (which, in many cases,
will be the Euro) and in pounds sterling. The DM-denominated Esprit Telecom
11.5% Senior Notes due 2007 and 10.875% Senior Notes due 2008 will be
effectively redenominated in Euros. A change in the currency exchange rates that
reduces the amount obtained in pounds sterling (or other non-Euro European
currencies) upon conversion of the U.S. dollar and Deutschmark proceeds from its
major financings could have a material adverse effect on Esprit Telecom and its
ability to make the planned capital expenditures. Currently, the revenues of
Esprit Telecom are largely denominated in pounds sterling and Euro countries'
currencies, but principal and interest on the U.S. dollar-denominated Esprit
Telecom 11.5% Senior Notes due 2007 and 10.875% Senior Notes due 2008 and the
DM-denominated Esprit Telecom bonds will be payable in U.S. dollars and DM (or
Euro), respectively. Therefore, the ability of Esprit Telecom to pay interest
and principal on the U.S. dollar-denominated Esprit Telecom bonds and the
DM-denominated Esprit Telecom bonds when due is dependent on the then current
exchange rates between U.S. dollars and DM (or Euro), on the one hand, and
pounds sterling (or other non-Euro European currencies), on the other hand,
which rates are and will be subject to fluctuation. Esprit Telecom does not
currently use financial hedging instruments, although in the future Esprit
Telecom may elect to manage the exchange rate exposure presented by the U.S.
dollar Esprit Telecom bonds and the DM Esprit Telecom bonds by entering into
hedging transactions. Esprit Telecom can offer no assurance however, that
exchange rate fluctuations will not have a material adverse effect on Esprit
Telecom's ability to make principal and interest payments when due.
    
 
   
     Esprit Telecom can offer no assurance that the Euro will maintain its value
relative to other currencies.
    
 
   
     For further discussion of Esprit Telecom's exposure to currency
fluctuations, see "Esprit Telecom Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Foreign Exchange Rates."
    
 
                                       48
<PAGE>   52
 
   
                           FORWARD-LOOKING STATEMENTS
    
 
   
     This prospectus includes forward-looking statements as to how we and Esprit
Telecom Group may perform in the future. We have based these forward-looking
statements on our current expectations and projections about future events and
financial trends affecting the financial condition of our business. These
forward-looking statements are subject to risks, uncertainties and assumptions
about us and about Esprit Telecom Group, including, among other things:
    
 
   
          - Risk of delay in implementing our business plan
    
 
   
          - Risks of completing acquisitions and integrating acquired businesses
    
 
   
          - Political, economic and legal changes in the markets where we
            operate
    
 
   
          - Heightened competition
    
 
   
          - Our need for additional, substantial financing.
    
 
   
These forward-looking statements are principally contained in the following
sections of the prospectus:
    
 
   
          - Risk Factors
    
 
   
          - GTS Management's Discussion and Analysis of Financial Condition and
            Results of Operations
    
 
   
          - Esprit Telecom Management's Discussion and Analysis of Financial
            Conditions and Results of Operations
    
 
   
          - Business.
    
 
   
     In addition, in those and other portions of this prospectus, the words and
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimated", "intends", "plans", "projection" and "outlook", as
they relate to Global TeleSystems Group, Inc. or our management, are intended to
identify forward-looking statements. These statements should be viewed with
caution.
    
 
   
     These forward-looking statements may differ materially from actual results
because they involve estimates, assumptions and uncertainties. In making these
forward-looking statements in this prospectus, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1998. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
    
 
                                       49
<PAGE>   53
 
                                USE OF PROCEEDS
 
   
     The selling stockholders will receive all of the proceeds from the sale of
our common stock and we will not receive any proceeds from the sale thereof.
    
 
                          PRICE RANGE OF COMMON STOCK
 
   
     The common stock has been traded on the Nasdaq National Market since
February 5, 1998, the date of the IPO, under the symbol "GTSG." The following
table sets forth, for the periods indicated, the high and low closing bid prices
per share of the Common Stock as reported on the Nasdaq National Market.
    
 
   
<TABLE>
<CAPTION>
                                                    HIGH          LOW
                                                   ------        ------
<S>                                                <C>           <C>
Quarter ending March 31, 1998....................  $49.00        $25.94
Quarter ending June 30, 1998.....................  $51.25        $35.38
Quarter ending September 30, 1998................  $64.25        $24.50
Quarter ending December 31, 1998.................  $59.50        $21.13
                                                   ------        ------
Quarter ending March 31, 1999 (through February
  11, 1999)......................................  $68.25        $55.13
                                                   ======        ======
</TABLE>
    
 
   
     The closing bid price for the Common Stock as reported on the Nasdaq
National Market on February 11, 1999 was $60.88. As of December 31, 1998, there
were approximately 484 holders of record of the Company's Common Stock.
    
 
                                DIVIDEND POLICY
 
     GTS has not paid any dividend on its Common Stock and does not intend to
pay dividends in the foreseeable future. In addition, the indenture governing
the Company's 9 7/8% Notes currently prohibits the payment of dividends. This
indenture contains restrictions on the making of restricted payments (in the
form of the declaration or payment of certain dividends or distributions, the
purchase, redemption or other acquisition of any capital stock of the Company,
the voluntary prepayment of pari passu or subordinated indebtedness and the
making of certain investments, loans and advances) unless no Default or Event of
Default (each, as defined in such indenture) exists, its leverage ratio does not
exceed 6.0 to 1.0 and such restricted payments do not exceed certain amounts.
 
                                       50
<PAGE>   54
 
               UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
 
     The following unaudited pro forma combined financial statements have been
prepared from GTS' historical consolidated financial statements included in this
prospectus and Esprit Telecom's historical consolidated financial statements
included in this prospectus. The accompanying unaudited pro forma combined
statement of operations presents the historical results of operations of GTS and
Esprit Telecom giving effect to the combination as if it had occurred at the
beginning of the earliest period presented in accordance with US GAAP under the
"pooling of interests" method of accounting.
 
     The pro forma combined statement of operations combines the results of GTS
for each of the three years in the period ended December 31, 1997 and for the
nine months ended September 30, 1998 with the results of Esprit Telecom for each
of the three years in the period ended September 30, 1998 and for the nine
months ended September 30, 1998. The unaudited pro forma combined income
statement gives effect to the combination as if it had occurred on January 1,
1997. The unaudited pro forma combined balance sheet gives effect to the
combination as if it had occurred on September 30, 1998, combining the balance
sheets of GTS and Esprit Telecom at September 30, 1998.
 
     The unaudited pro forma combined financial statements have been prepared in
accordance with US GAAP. The financial statements of Esprit Telecom have been
converted from UK GAAP to US GAAP and translated into US dollars for purposes of
this presentation. UK GAAP differs in certain significant respects from US GAAP.
A reconciliation of Esprit Telecom's net loss and stockholders' equity from UK
GAAP to US GAAP is presented in Esprit Telecom's historical consolidated
financial statements.
 
     As described in this prospectus, the exchange ratios are: (i) each
outstanding Esprit Telecom Ordinary Share will be converted into .1271 of a
share of Common Stock and (ii) each outstanding Esprit Telecom ADR will be
converted into .89 of a share of Common Stock. These exchange ratios were used
in the accompanying unaudited pro forma combined financial statements.
 
   
     The unaudited pro forma combined financial statements are presented for
comparative purposes only and are not intended to be indicative of what the
actual results would have been if the combination occurred as of the dates
indicated above nor do they purport to be indicative of the results which may be
attained in the future. These unaudited pro forma combined financial statements
should be read in conjunction with the historical consolidated financial
statements of GTS and Esprit Telecom and the related notes thereto.
    
 
                                       51
<PAGE>   55
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
            UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
 
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
   
<TABLE>
<CAPTION>
 
                                                                                   PRO FORMA
                                                                                    COMBINED
                                                      NETSOURCE     PRO FORMA        (GTS &       ESPRIT
                                           GTS(2)     EUROPE(3)   ADJUSTMENTS(4)   NETSOURCE)   TELECOM(2)   PLUSNET(6)
                                          ---------   ---------   --------------   ----------   ----------   ----------
<S>                                       <C>         <C>         <C>              <C>          <C>          <C>
REVENUES, NET:
 Telecommunication and other services...  $ 111,195   $ 29,364                     $ 140,559     $115,309     $12,456
 Equipment sales........................      6,104         --                         6,104           --          --
                                          ---------   --------       --------      ---------     --------     -------
                                            117,299     29,364                       146,663      115,309      12,456
                                          ---------   --------       --------      ---------     --------     -------
OPERATING COSTS AND EXPENSES
 Cost of revenues:
   Telecommunication and other
     services...........................     77,525     31,089                       108,614       91,131       8,559
   Equipment sales......................      4,542         --                         4,542           --          --
 Selling, general and administrative....     75,150     27,741                       102,891       49,464       4,601
 Depreciation and amortization..........     13,953      3,077          7,295         24,325       17,758       1,613
 Non-income taxes.......................      5,140         --                         5,140           --          --
                                          ---------   --------       --------      ---------     --------     -------
                                            176,310     61,907          7,295        245,512      158,353      14,773
 Equity in (earnings) losses of
   ventures.............................     (4,142)        --                        (4,142)          --          --
                                          ---------   --------       --------      ---------     --------     -------
LOSS FROM OPERATIONS....................    (54,869)   (32,543)        (7,295)       (94,707)     (43,044)     (2,317)
OTHER INCOME /(EXPENSE):
 Interest income........................     28,110        675                        28,785           --         246
 Interest expense.......................    (52,603)    (1,319)                      (53,922)     (19,872)         --
 Foreign currency losses................    (10,364)                                 (10,364)          --          --
                                          ---------   --------       --------      ---------     --------     -------
                                            (34,857)      (644)            --        (35,501)     (19,872)        246
                                          ---------   --------       --------      ---------     --------     -------
Net loss before income taxes, minority
 interest and extraordinary loss........    (89,726)   (33,187)        (7,295)      (130,208)     (62,916)     (2,071)
Income taxes............................      2,151         --                         2,151            3          --
                                          ---------   --------       --------      ---------     --------     -------
Net loss before minority interest and
 extraordinary loss.....................    (91,877)   (33,187)        (7,295)      (132,359)     (62,919)     (2,071)
Minority interest.......................      3,746         --                         3,746           --          --
                                          ---------   --------       --------      ---------     --------     -------
Net loss before extraordinary loss......  $ (88,131)  $(33,187)      $ (7,295)     $(128,613)    $(62,919)    $(2,071)
Loss per share before extraordinary
 loss...................................
Weighted average common shares
 outstanding............................
 
<CAPTION>
                                                           PRO FORMA                     PRO FORMA
                                                            COMBINED                     COMBINED
                                                            (ESPRIT                       (GTS &
                                            PRO FORMA      TELECOM &      PRO FORMA       ESPRIT
                                          ADJUSTMENTS(7)    PLUSNET)    ADJUSTMENTS(8)   TELECOM)
                                          --------------   ----------   --------------   ---------
<S>                                       <C>              <C>          <C>              <C>
REVENUES, NET:
 Telecommunication and other services...     $   (475)      $127,290       $ (1,760)     $ 266,089
 Equipment sales........................                          --                         6,104
                                             --------       --------       --------      ---------
                                                 (475)       127,290         (1,760)       272,193
                                             --------       --------       --------      ---------
OPERATING COSTS AND EXPENSES
 Cost of revenues:
   Telecommunication and other
     services...........................         (475)        99,215         (2,989)       204,840
   Equipment sales......................                          --                         4,542
 Selling, general and administrative....                      54,065                       156,956
 Depreciation and amortization..........        3,771         23,142                        47,467
 Non-income taxes.......................                          --                         5,140
                                             --------       --------       --------      ---------
                                                3,296        176,422         (2,989)       418,945
 Equity in (earnings) losses of
   ventures.............................                          --                        (4,142)
                                             --------       --------       --------      ---------
LOSS FROM OPERATIONS....................       (3,771)       (49,132)         1,229       (142,610)
OTHER INCOME /(EXPENSE):
 Interest income........................                         246                        29,031
 Interest expense.......................       (8,774)       (28,646)                      (82,568)
 Foreign currency losses................                          --                       (10,364)
                                             --------       --------       --------      ---------
                                               (8,774)       (28,400)            --        (63,901)
                                             --------       --------       --------      ---------
Net loss before income taxes, minority
 interest and extraordinary loss........      (12,545)       (77,532)         1,229       (206,511)
Income taxes............................                           3                         2,154
                                             --------       --------       --------      ---------
Net loss before minority interest and
 extraordinary loss.....................      (12,545)       (77,535)         1,229       (208,665)
Minority interest.......................                          --                         3,746
                                             --------       --------       --------      ---------
Net loss before extraordinary loss......     $(12,545)      $(77,535)      $  1,229      $(204,919)
Loss per share before extraordinary
 loss...................................                                                 $   (2.80)
                                                                                         =========
Weighted average common shares
 outstanding............................                                                    73,192
                                                                                         =========
</TABLE>
    
 
                            See accompanying notes.
 
                                       52
<PAGE>   56
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
            UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
 
                          YEAR ENDED DECEMBER 31, 1997
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                                      PRO         ESPRIT
                                                                                     FORMA       TELECOM
                                                                                    COMBINED       YEAR
                                                      NETSOURCE     PRO FORMA        (GTS &       ENDED
                                           GTS(2)     EUROPE(3)   ADJUSTMENTS(4)   NETSOURCE)   9/30/97(2)   PLUSNET(6)
                                          ---------   ---------   --------------   ----------   ----------   ----------
<S>                                       <C>         <C>         <C>              <C>          <C>          <C>
REVENUES, NET:
 Telecommunication and other services...  $  41,300   $ 14,102                     $  55,402     $ 74,596     $ 27,072
 Equipment sales........................      5,798                                    5,798           --           --
                                          ---------   --------       --------      ---------     --------     --------
                                             47,098     14,102             --         61,200       74,596       27,072
                                          ---------   --------       --------      ---------     --------     --------
OPERATING COSTS AND EXPENSES
 Cost of revenues:
   Telecommunication and other
     services...........................     37,206     13,593                        50,799       62,263       28,799
   Equipment sales......................      5,513         --                         5,513           --           --
 Selling, general and administrative....     68,425     12,250                        80,675       26,622       10,451
 Depreciation and amortization..........      6,227      2,120          9,726         18,073        4,653        6,017
 Non-income taxes.......................      2,085         --                         2,085           --           --
                                          ---------   --------       --------      ---------     --------     --------
                                            119,456     27,963          9,726        157,145       93,538       45,267
 Write-off of venture-related assets....      1,673         --                         1,673           --           --
 Equity in losses of ventures...........     14,599         --                        14,599           --           --
                                          ---------   --------       --------      ---------     --------     --------
LOSS FROM OPERATIONS....................    (88,630)   (13,861)        (9,726)      (112,217)     (18,942)     (18,195)
OTHER INCOME /(EXPENSE):
 Interest income........................     11,361         --                        11,361        1,890           --
 Interest expense.......................    (39,086)      (538)                      (39,624)        (750)          --
 Foreign currency losses................     (1,826)                                  (1,826)          --           --
                                          ---------   --------       --------      ---------     --------     --------
                                            (29,551)      (538)            --        (30,089)       1,140           --
                                          ---------   --------       --------      ---------     --------     --------
Net loss before income taxes and
 minority interest......................   (118,181)   (14,399)        (9,726)      (142,306)     (17,802)     (18,195)
Income taxes............................      2,482        (12)                        2,470            3           --
                                          ---------   --------       --------      ---------     --------     --------
Net loss before minority interest.......   (120,663)   (14,387)        (9,726)      (144,776)     (17,805)     (18,195)
Minority interest.......................      3,677         --                         3,677           --           --
                                          ---------   --------       --------      ---------     --------     --------
NET LOSS................................  $(116,986)  $(14,387)      $ (9,726)     $(141,099)    $(17,805)    $(18,195)
                                          =========   ========       ========      =========     ========     ========
Net loss per share......................
Weighted average common shares
 outstanding............................
 
<CAPTION>
                                                           PRO FORMA                    PRO FORMA
                                                           COMBINED                     COMBINED
                                                            (ESPRIT                      (GTS &
                                            PRO FORMA      TELECOM &     PRO FORMA       ESPRIT
                                          ADJUSTMENTS(7)   PLUSNET)    ADJUSTMENTS(8)   TELECOM)
                                          --------------   ---------   --------------   ---------
<S>                                       <C>              <C>         <C>              <C>
REVENUES, NET:
 Telecommunication and other services...     $   (510)     $101,158          (110)      $ 156,450
 Equipment sales........................           --            --                         5,798
                                             --------      --------        ------       ---------
                                                 (510)      101,158          (110)        162,248
                                             --------      --------        ------       ---------
OPERATING COSTS AND EXPENSES
 Cost of revenues:
   Telecommunication and other
     services...........................         (510)       90,552          (110)        141,241
   Equipment sales......................           --            --                         5,513
 Selling, general and administrative....           --        37,073                       117,748
 Depreciation and amortization..........       11,990        22,660                        40,733
 Non-income taxes.......................           --            --                         2,085
                                             --------      --------        ------       ---------
                                               11,480       150,285          (110)        307,320
 Write-off of venture-related assets....           --            --                         1,673
 Equity in losses of ventures...........           --            --                        14,599
                                             --------      --------        ------       ---------
LOSS FROM OPERATIONS....................      (11,990)      (49,127)                     (161,344)
OTHER INCOME /(EXPENSE):
 Interest income........................           --         1,890                        13,251
 Interest expense.......................      (26,880)      (27,630)                      (67,254)
 Foreign currency losses................           --            --                        (1,826)
                                             --------      --------        ------       ---------
                                              (26,880)      (25,740)                      (55,829)
                                             --------      --------        ------       ---------
Net loss before income taxes and
 minority interest......................      (38,870)      (74,867)                     (217,173)
Income taxes............................           --             3                         2,473
                                             --------      --------        ------       ---------
Net loss before minority interest.......      (38,870)      (74,870)                     (219,646)
Minority interest.......................           --            --                         3,677
                                             --------      --------        ------       ---------
NET LOSS................................      (38,870)     $(74,870)           --       $(215,969)
                                             ========      ========        ======       =========
Net loss per share......................                                                $   (3.87)
                                                                                        =========
Weighted average common shares
 outstanding............................                                                   55,772
                                                                                        =========
</TABLE>
 
                            See accompanying notes.
 
                                       53
<PAGE>   57
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
            UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
 
                          YEAR ENDED DECEMBER 31, 1996
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                       ESPRIT        PRO FORMA
                                                                      TELECOM         COMBINED
                                                                     YEAR ENDED    (GTS & ESPRIT
                                                           GTS(2)    9/30/96(2)       TELECOM)
                                                          --------   ----------    --------------
<S>                                                       <C>        <C>           <C>
REVENUES, NET:
  Telecommunication and other services..................  $ 19,210    $38,402         $ 57,612
  Equipment sales.......................................     4,907         --            4,907
                                                          --------    -------         --------
                                                            24,117     38,402           62,519
                                                          --------    -------         --------
OPERATING COSTS AND EXPENSES
  Cost of revenues:
     Telecommunication and other services...............    14,741     28,950           43,691
     Equipment sales....................................     4,200         --            4,200
  Selling, general and administrative...................    47,940     11,590           59,530
  Stock compensation costs..............................                3,498            3,498
  Depreciation and amortization.........................     4,165      2,270            6,435
  Non-income taxes......................................       850         --              850
                                                          --------    -------         --------
                                                            71,896     46,308          118,204
  Equity in losses of ventures..........................    10,150         --           10,150
                                                          --------    -------         --------
LOSS FROM OPERATIONS....................................   (57,929)    (7,906)         (65,835)
OTHER INCOME/(EXPENSE):
  Interest income.......................................     3,569        219            3,788
  Interest expense......................................   (11,122)      (533)         (11,655)
  Foreign currency losses...............................    (1,176)        --           (1,176)
                                                          --------    -------         --------
                                                            (8,729)      (314)          (9,043)
                                                          --------    -------         --------
Net loss before income taxes and minority interest......   (66,658)    (8,220)         (74,878)
Income taxes............................................     1,360         --            1,360
                                                          --------    -------         --------
Net loss before minority interest.......................   (68,018)    (8,220)         (76,238)
                                                          --------    -------         --------
Minority interest.......................................        27         --               27
NET LOSS................................................  $(67,991)   $(8,220)        $(76,211)
                                                          ========    =======         ========
Net loss per share......................................                              $  (1.69)
                                                                                      ========
Weighted average common shares outstanding..............                                45,130
                                                                                      ========
</TABLE>
 
                            See accompanying notes.
 
                                       54
<PAGE>   58
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
            UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS(1)
 
                          YEAR ENDED DECEMBER 31, 1995
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                         ESPRIT       PRO FORMA
                                                                         TELECOM       COMBINED
                                                                       YEAR ENDED    GTS & ESPRIT
                                                             GTS(2)    9/30/95(2)      TELECOM
                                                            --------   -----------   ------------
<S>                                                         <C>        <C>           <C>
REVENUES, NET:
  Telecommunication and other services....................  $  5,979     $22,167       $ 28,146
  Equipment sales.........................................     2,433          --          2,433
                                                            --------     -------       --------
                                                               8,412      22,167         30,579
                                                            --------     -------       --------
OPERATING COSTS AND EXPENSES
  Cost of revenues:
     Telecommunication and other services.................     8,150      16,907         25,057
     Equipment sales......................................       246          --            246
  Selling, general and administrative.....................    37,291       6,534         43,825
  Depreciation and amortization...........................     3,491         968          4,459
  Non-income taxes........................................       234       1,255          1,489
                                                            --------     -------       --------
                                                              49,412      25,664         75,076
  Equity in losses of ventures............................     7,871          --          7,871
                                                            --------     -------       --------
LOSS FROM OPERATIONS......................................   (48,871)     (3,497)       (52,368)
OTHER INCOME/(EXPENSE):
  Other non-operating income..............................    10,270          41         10,311
  Interest income.........................................     2,177        (394)         1,783
  Interest expense........................................      (728)         --           (728)
  Foreign currency losses.................................      (685)         --           (685)
                                                            --------     -------       --------
                                                              11,034        (353)        10,681
                                                            --------     -------       --------
Net loss before income taxes and minority interest........   (37,837)     (3,850)       (41,687)
Income taxes..............................................     2,565          --          2,565
                                                            --------     -------       --------
Net loss before minority interest.........................   (40,402)     (3,850)       (44,252)
Minority interest.........................................         2          --              2
                                                            --------     -------       --------
NET LOSS..................................................  $(40,400)    $(3,850)      $(44,250)
                                                            ========     =======       ========
Net loss per share........................................                             $  (1.12)
                                                                                       ========
Weighted average common shares outstanding................                               39,680
                                                                                       ========
</TABLE>
 
                            See accompanying notes.
 
                                       55
<PAGE>   59
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                 UNAUDITED PRO FORMA COMBINED BALANCE SHEET(1)
 
                            AS OF SEPTEMBER 30, 1998
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                                                       PRO FORMA
                                                                            PRO FORMA                                   COMBINED
                                                                             COMBINED                                    (GTS &
                                               NETSOURCE     PRO FORMA        (GTS &       ESPRIT       PRO FORMA        ESPRIT
                                    GTS(2)     EUROPE(3)   ADJUSTMENTS(5)   NETSOURCE    TELECOM(2)   ADJUSTMENTS(8)    TELECOM
                                  ----------   ---------   --------------   ----------   ----------   --------------   ----------
<S>                               <C>          <C>         <C>              <C>          <C>          <C>              <C>
CURRENT ASSETS
  Cash and cash equivalents.....  $  993,928   $  3,049       $(46,099)     $ 950,878    $ 230,745                     $1,181,623
  Accounts receivable, net......      59,822     13,602                        73,424       50,037                        123,461
  Restricted cash...............      42,047         --                        42,047       83,218                        125,265
  Prepaid expenses..............      22,122      3,255                        25,377           --                         25,377
  Other assets..................      12,539      3,602                        16,141       44,599                         60,740
                                  ----------   --------       --------      ----------   ---------        -----        ----------
        TOTAL CURRENT ASSETS....   1,130,458     23,508        (46,099)     1,107,867      408,599                      1,516,466
Property and equipment, net.....     436,019      4,329                       440,348       93,587        $ 876           534,811
Investments in and advances to
  ventures......................      61,705         --                        61,705           --                         61,705
Goodwill and intangible assets,
  net...........................     161,893     22,068        145,894        329,855      168,290                        498,145
Restricted cash and other
  noncurrent assets.............      24,818        222                        25,040           --                         25,040
                                  ----------   --------       --------      ----------   ---------        -----        ----------
        TOTAL ASSETS............  $1,814,893   $ 50,127       $ 99,795      $1,964,815   $ 670,476        $ 876        $2,636,167
                                  ==========   ========       ========      ==========   =========        =====        ==========
 
                                              LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES
  Accounts payable and accrued
    expenses....................  $  135,565   $ 27,296       $  2,000      $ 164,861    $ 123,937                     $  288,798
  Debt maturing within one
    year........................      23,741     13,302                        37,043           --                         37,043
  Current portion of capital
    lease obligations...........      31,130         --                        31,130           --                         31,130
  Related party debt maturing
    within one year.............                  8,333                         8,333           --                          8,333
  Other current liabilities.....      32,408         --                        32,408           --        $(353)           32,055
                                  ----------   --------       --------      ----------   ---------        -----        ----------
        TOTAL CURRENT
          LIABILITIES...........     222,844     48,931          2,000        273,775      123,937         (353)          397,359
Long-term debt, less current
  portion.......................     962,232         --                       962,232      526,370                      1,488,602
Long-term portion of capital
  lease obligations.............     187,900         --                       187,900           --                        187,900
Related party long-term debt,
  less current portion..........       3,530         --                         3,530           --                          3,530
Taxes and other non-current
  liabilities...................      27,378      1,486                        28,864       32,403                         61,267
                                  ----------   --------       --------      ----------   ---------        -----        ----------
        TOTAL LIABILITIES.......   1,403,884     50,417          2,000      1,456,301      682,710         (353)        2,138,658
COMMITMENTS AND CONTINGENCIES
  Minority interest.............      43,957         --                        43,957           --                         43,957
  Common stock, subject to
    repurchase..................      15,643         --                        15,643           --                         15,643
SHAREHOLDERS' EQUITY
  Common stock, 80,434,986 pro
    forma combined shares issued
    and outstanding.............       6,050        745            396          6,446        2,133         (536)            8,043
  Additional paid-in capital....     696,574     23,402         97,109        793,683       97,071          536           891,290
  Accumulated other
    comprehensive loss..........      (7,496)        --                        (7,496)          --                         (7,496)
  Accumulated deficit...........    (343,719)   (24,437)                     (343,719)    (111,438)       1,229          (453,928)
                                  ----------   --------       --------      ----------   ---------        -----        ----------
        TOTAL SHAREHOLDERS'
          EQUITY................     351,409       (290)        97,505        448,914      (12,234)       1,229           437,909
                                  ----------   --------       --------      ----------   ---------        -----        ----------
        TOTAL LIABILITIES AND
          SHAREHOLDERS'
          EQUITY................  $1,814,893   $ 50,127       $ 99,505      $1,964,815   $ 670,476        $ 876        $2,636,167
                                  ==========   ========       ========      ==========   =========        =====        ==========
</TABLE>
 
                            See accompanying notes.
 
                                       56
<PAGE>   60
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
 
1. The accompanying unaudited pro forma combined financial statements do not
   include any transition costs and expenses which are expected to be incurred
   in connection with consummating the combination and integrating the
   operations of GTS and Esprit Telecom. It is not feasible to determine the
   actual amount of these costs and expenses until the combination is completed
   and the related operational and transitional plans are complete. These costs
   and expenses relate directly to completing the transaction, such as
   professional and registration fees; employee benefit-related costs such as
   severance, relocation and retention incentives, facility consolidations,
   systems integration, and satisfaction of contractual obligations. It is
   anticipated that a significant portion of these costs and expenses will
   result in charges to the earnings of the combined businesses. The exact
   timing of these charges cannot be determined; however, management of the
   combined businesses anticipate that plans and decisions will be completed and
   a substantial portion of the related charges recorded in 1999. Additionally,
   while the pro forma combined statement of operations does not reflect any
   anticipated cost savings or other synergies that may be achieved by the
   combination, the combination is expected to result in reduced costs for the
   combined businesses.
 
2. These columns represent historical results of operations and financial
   position.
 
3. On November 30, 1998 GTS completed the acquisition of NetSource in a
   transaction accounted for as a purchase. GTS's results of operations for the
   year ended December 31, 1997 and the nine months ended September 30, 1998
   have been adjusted to give effect to the acquisition of NetSource as if it
   had occurred as of January 1, 1997. GTS' balance sheet as of September 30,
   1998 has been adjusted to give effect to the acquisition of NetSource as if
   it had occurred on that date.
 
4. This entry reflects the adjustment to amortization expense for the effect of
   the excess of consideration over net assets acquired in the NetSource
   acquisition. For purposes of the unaudited pro forma combined financial
   statements, the excess consideration has been amortized over an estimated
   life of 15 years. A final determination of the lives attributable to the
   intangible assets has not yet been made. As discussed in Note 5, a portion of
   the excess consideration may be allocated to certain in-process research and
   development projects. To the extent amounts are allocated to certain
   in-process research and development projects, pro forma amortization expense
   would be reduced accordingly.
 
5. These adjustments reflect the acquisition of NetSource by GTS. A preliminary
   allocation of the purchase price has been presented in the unaudited pro
   forma combined financial statements. The excess of consideration over the
   fair value of the net assets acquired from NetSource has been preliminarily
   allocated to goodwill and other intangibles. A final allocation of the
   purchase price to the fair value of the NetSource assets acquired and
   liabilities assumed is dependent upon certain valuations and studies that
   have not progressed to a stage where there is sufficient information to make
   such an allocation in the accompanying pro forma financial information. GTS'
   management believes that the consideration in excess of the historical book
   value of NetSource's net assets acquired is comprised of goodwill, certain
   in-process research and development projects and other intangible assets. To
   the extent that a portion of the purchase price is allocated to in-process
   research and development projects, a charge, which may be material to GTS'
   results of operations, would be recognized in the quarter ended December 31,
   1998. See Note 4.
 
   
6. During July 1998, Esprit Telecom completed the acquisition of Plusnet in a
   transaction accounted for as a purchase. Esprit Telecom's results of
   operations for the year ended September 30, 1997 and the nine months ended
   September 30, 1998 have been adjusted to give effect to the acquisition of
   Plusnet as if it had occurred as of October 1, 1996.
    
 
7. These adjustments reflect the elimination of intercompany revenue between
   Esprit Telecom and Plusnet, the additional amortization expense associated
   with amortizing the excess of consideration over net assets acquired in the
   Plusnet acquisition, and the assumed interest expense incurred by Esprit
   Telecom in order to finance the Plusnet acquisition.
 
                                       57
<PAGE>   61
 
8. These adjustments reflect the following:
 
          An adjustment to prepaid phone card revenue in order to conform Esprit
     Telecom's revenue recognition policy to GTS' revenue recognition policy.
     Esprit Telecom recognizes prepaid phone card revenue upon sale of the phone
     card. GTS recognizes prepaid phone card revenue over the estimated service
     period.
 
          An adjustment to depreciation expense in order to conform Esprit
     Telecom's fiber optic cable depreciation policy with GTS' policy. Esprit
     Telecom depreciates fiber optic cable using an accelerated method whereas
     GTS depreciates fiber optic cable on a straight-line basis.
 
          To eliminate inter-company revenue.
 
          To reclassify the stockholders' equity accounts as a result of the
     pooling of interests.
 
                                       58
<PAGE>   62
 
             SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF GTS
 
     The following selected historical consolidated financial data as of and for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 are derived from
GTS' audited consolidated financial statements. The following unaudited selected
historical consolidated financial data as of September 30, 1998 and for the
three and nine months ended September 30, 1997 and 1998 are derived from GTS'
unaudited consolidated financial statements. The selected financial data
presented below should be read in conjunction with "GTS 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, many of GTS' ventures are
accounted for by the equity method of accounting. Under this method, the
operating results of the ventures are included in our consolidated statement of
operations as a single line item, "Equity in (losses) earnings of ventures." GTS
recognizes 100% of the losses in ventures where we bear all of the financial
risk (which includes all of our significant ventures except for Sovintel and,
historically, HER). Also, the assets, liabilities and equity of the ventures are
included in GTS' Consolidated Balance Sheets as a single line item "Investments
in and Advances to Ventures." See Note 3 to GTS' audited consolidated financial
statements and "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview." Financial information about GTS' equity
ventures is included below under "Supplemental Information -- Selected
Historical Financial Data of GTS -- Combined Equity Investments."
 
   
<TABLE>
<CAPTION>
                                                                                         THREE MONTHS           NINE MONTHS
                                                                                             ENDED                 ENDED
                                             YEARS ENDED DECEMBER 31,                    SEPTEMBER 30,         SEPTEMBER 30,
                               ----------------------------------------------------   -------------------   --------------------
                                1993       1994       1995       1996      1997(1)      1997       1998       1997       1998
                               -------   --------   --------   --------   ---------   --------   --------   --------   ---------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                            <C>       <C>        <C>        <C>        <C>         <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net................  $   328   $  2,468   $  8,412   $ 24,117   $  47,098   $ 12,921   $ 63,834   $ 30,216   $ 117,299
Gross margin.................      328         23         16      5,176       4,379     (2,468)    24,985      1,864      35,232
Operating expenses...........    3,340     12,863     41,016     52,955      78,410     24,971     42,833     53,732      94,243
Equity in earnings (losses)
  of ventures................      472       (135)    (7,871)   (10,150)    (14,599)    (8,067)    (3,485)   (18,234)      4,142
Other income (expense).......      100        990     11,034     (8,729)    (29,551)   (10,942)   (15,484)   (16,902)    (34,857)
Loss before extraordinary
  loss.......................   (2,440)   (11,985)   (40,400)   (67,991)   (116,986)   (48,185)   (37,478)   (87,872)    (88,131)
Extraordinary loss(2)........       --         --         --         --          --         --         --         --     (12,704)
Net loss.....................   (2,440)   (11,985)   (40,400)   (67,991)   (116,986)   (48,185)   (37,478)   (87,872)   (100,835)
Loss per share before
  extraordinary loss.........    (0.29)     (0.74)     (1.70)     (2.33)      (3.26)     (1.34)     (0.62)     (2.49)      (1.65)
Extraordinary loss per
  share(2)...................       --         --         --         --          --         --         --         --       (0.24)
Net loss per share...........    (0.29)     (0.74)     (1.70)     (2.33)      (3.26)     (1.34)     (0.62)     (2.49)      (1.89)
</TABLE>
    
 
<TABLE>
<CAPTION>
                                                                                                           AT SEPTEMBER 30,
                                                    1993       1994       1995       1996      1997(1)           1998
                                                   -------   --------   --------   --------   ---------   -------------------
                                                                                 (IN THOUSANDS)
<S>                                                <C>       <C>        <C>        <C>        <C>         <C>          <C>
 
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents........................  $ 3,641   $ 29,635   $  9,044   $ 57,874   $ 318,766   $  993,928
Property and equipment, net......................      829      8,393     29,523     35,463     236,897      436,019
Investments in and advances to ventures..........      794     13,841     56,153    104,459      76,730       61,705
Total assets.....................................    5,968     61,957    115,621    237,378     780,461    1,814,893
Total debt.......................................      725      2,152     27,454     85,547     639,359    1,208,533
Minority interest and stock subject to
  repurchase.....................................       --          8      5,273      6,248      31,255       59,600
Shareholders' equity.............................    4,685     54,684     55,322    113,668      26,967      351,409
</TABLE>
 
- ---------------
 
(1) As a result of GTS' increase in ownership interest and amendment to the HER
    Shareholders Agreement that was completed on July 16, 1997, GTS accounts for
    its ownership interest in HER under the consolidation method of accounting.
    Prior to this date, GTS accounted for HER under the equity method of
    accounting.
 
(2) GTS recognized a $12.7 million extraordinary charge to earnings in the first
    quarter of 1998, as a result of GTS' early extinguishment of certain related
    party debt obligations. The nature of the charge is comprised of the
    write-off of $11.6 million of unamortized debt discount and $1.1 million of
    unamortized debt issuance costs that were deferred as financing costs and
    were being amortized over the original maturity of the debt.
 
                                       59
<PAGE>   63
 
                SUPPLEMENTAL INFORMATION -- SELECTED HISTORICAL
              FINANCIAL DATA OF GTS -- COMBINED EQUITY INVESTMENTS
 
     The following unaudited selected historical financial data -- equity
investments for the years ended December 31, 1995, 1996 and 1997 and for the
three and nine months ended September 30, 1997 and 1998, are derived from GTS'
financial records. It is intended to supplement the aforementioned selected
historical consolidated financial data. The financial data set forth below
represents 100% of the results of operations for each of the entities.
 
     GTS believes that this information provides additional insight on GTS'
unconsolidated equity method investments. Generally accepted accounting
principles prescribe inclusion of revenues and expenses for consolidated
interests (generally interests of more than 50%, absent some other factors), but
not for equity interests (generally interests of 20% to 50%) or cost interests
(generally interests of less than 20%). Further, equity accounting ordinarily
results in the same net income as consolidation; however, the net operating
results are reflected on one line within the income statement.
 
<TABLE>
<CAPTION>
                                                        OWNERSHIP                 COST OF    OPERATING        NET
                                                       INTEREST(1)     REVENUES   REVENUES   EXPENSES    INCOME/(LOSS)
                                                       -----------     --------   --------   ---------   -------------
                                                                  (IN THOUSANDS, EXCEPT OWNERSHIP INTEREST)
<S>                                                    <C>             <C>        <C>        <C>         <C>
YEAR ENDED DECEMBER 31, 1995
  Sovintel...........................................       50%        $44,292    $26,247    $  7,047      $  7,648
  TCM................................................       50%             49         --          57            (7)
  TeleRoss...........................................       50%            176         59         242          (193)
  Sovam..............................................     66.7%          4,434      2,914       3,273        (1,789)
  GTS Cellular Companies.............................       50%(2)       4,574      2,834       2,960        (2,165)
  Other..............................................       50%(2)         526        957       9,379        (9,874)
                                                                       --------   --------   --------      --------
        Total........................................                   54,051     33,011      22,958        (6,380)
  ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)....                   (2,270)    (2,215)     (6,967)
 
YEAR ENDED DECEMBER 31, 1996
  Sovintel...........................................       50%        $75,040    $43,910    $ 10,411      $ 14,762
  TCM................................................       50%         16,507      3,330       1,854         8,874
  TeleRoss...........................................       50%          2,413        832       2,293          (841)
  Sovam..............................................     66.7%         11,671      8,236       5,714        (2,138)
  GTS Cellular Companies.............................       50%(2)      25,778     11,883      13,614        (3,406)
  Other..............................................       50%(2)      12,063     12,235      21,132       (22,471)
                                                                       --------   --------   --------      --------
        Total........................................                  143,472     80,426      55,018        (5,220)
  ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)....                  (15,385)   (13,562)     (8,083)
 
YEAR ENDED DECEMBER 31, 1997
  Sovintel...........................................       50%        $113,962   $72,629    $ 17,020      $ 18,464
  TCM................................................       50%         29,308      7,169       3,286        12,512
  TeleRoss...........................................       50%          6,794      2,138       3,612            71
  Sovam..............................................     66.7%         17,808     10,684       5,653           780
  GTS Cellular Companies.............................       50%(2)      44,275     21,355      17,678          (906)
  Other..............................................       50%(2)      14,013     13,757      27,596       (26,591)
                                                                       --------   --------   --------      --------
        Total........................................                  226,160    127,732      74,845         4,330
  ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(3)....                  (24,927)   (23,250)     (8,357)
</TABLE>
 
                                       60
<PAGE>   64
 
<TABLE>
<CAPTION>
                                                        OWNERSHIP                 COST OF    OPERATING        NET
                                                       INTEREST(1)     REVENUES   REVENUES   EXPENSES    INCOME/(LOSS)
                                                       -----------     --------   --------   ---------   -------------
                                                                  (IN THOUSANDS, EXCEPT OWNERSHIP INTEREST)
<S>                                                    <C>             <C>        <C>        <C>         <C>
NINE MONTHS ENDED SEPTEMBER 30, 1997
  Sovintel...........................................       50%        $82,029    $51,048    $ 12,324      $ 14,215
  TCM................................................       50%(2)      20,715      4,733       2,270         9,653
  TeleRoss...........................................       50%          5,113      1,419       2,460           512
  Sovam..............................................     66.7%(3)      12,877      7,867       4,635          (168)
  GST Cellular Companies.............................       50%(4)(5)   29,412     14,227      13,022        (2,746)
  Other..............................................       50%(4)       8,860      8,400      25,736       (25,146)
                                                          ----         --------   --------   --------      --------
        Total........................................                  159,006     87,694      60,447        (3,680)
  ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(6)....                  (17,049)   (15,853)    (11,105)
 
NINE MONTHS ENDED SEPTEMBER 30, 1998 (2)(3)(5)
  Sovintel...........................................       50%        $99,498    $65,779    $ 17,653      $  6,891
  TCM................................................       50%(2)      21,586      5,689       1,857         8,843
  TeleRoss...........................................       50%          7,436      2,163       3,241          (121)
  GTS Cellular Companies.............................       50%(4)(5)   40,186     18,737      14,158           458
  Other..............................................       50%(4)      18,838     18,107       3,961        (2,591)
                                                          ----         --------   --------   --------      --------
        Total........................................                  187,544    110,475      40,870        13,480
  ADJUSTMENTS FOR INTER-AFFILIATE TRANSACTIONS(6)....                  (25,001)   (23,960)      1,493
</TABLE>
 
- ---------------
 
(1) The ownership interest column indicates GTS' legal ownership percentage for
    the respective equity investments. The information is being provided to
    assist an investor or analyst in determining GTS' legal rights associated
    with the presented financial data.
 
(2) During the quarter ended September 30, 1998, GTS purchased the remaining
    47.36% interest in GTS Vox Limited, the intermediate holding company of TCM.
    As a result, effective July 1998, GTS will have a 95% interest in TCM and
    will also account for its interest in TCM using the consolidation as opposed
    to the equity method of accounting. The results of TCM for the six months
    ended June 30, 1998 have been included within the nine months ended
    September 30, 1998 presented above.
 
(3) GTS purchased the remaining 33% interest in Sovam in February 1998 and as a
    result, effective February 1998, Sovam is accounted for by the consolidation
    as opposed to the equity method of accounting.
 
(4) GTS generally maintains a 50% ownership interest in these equity
    investments.
 
(5) Prior to July 1, 1998, GTS beneficially owned approximately 25% of Golden
    Telecom and included its results within the GTS Cellular companies accounted
    for under the equity method. During the second quarter of 1998, GTS
    completed a restructuring of the capital and ownership of Golden Telecom,
    which results in GTS beneficially owning approximately 57% of Golden
    Telecom. As a result, effective June 30, 1998, Golden Telecom is accounted
    for under the consolidation as opposed to equity method of accounting. The
    results of Golden Telecom for the three months ended March 31, 1998 have
    been included within the nine months ended September 30, 1998 presented
    above.
 
(6) The adjustment amounts represent the effect of inter-affiliate transactions
    between GTS' consolidated and equity method ventures. More detailed
    information about inter-affiliate transactions is included under "GTS
    Management's Discussion and Analysis of Financial Condition and Results of
    Operations -- Accounting Methodology."
 
                                       61
<PAGE>   65
 
       SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF ESPRIT TELECOM
 
SELECTED HISTORICAL FINANCIAL DATA OF ESPRIT TELECOM
 
     The table below sets forth selected historical consolidated financial data
for Esprit Telecom for each of the years in the five-year period ended September
30, 1998. The selected consolidated financial data set forth below for the years
ended September 30, 1994, 1995, 1996 and 1997 have been excerpted or derived
from, and are qualified by reference to, Esprit Telecom's historical
consolidated financial statements, which have been audited by
PricewaterhouseCoopers, independent public accountants. The selected
consolidated financial data set forth below for the year ended September 30,
1998 have been excerpted or derived from, and are qualified by reference to,
Esprit Telecom's historical consolidated financial statements, which have been
audited by PricewaterhouseCoopers, independent public accountants. The
historical consolidated financial statements have been prepared in accordance
with UK GAAP, which differs in certain respects from US GAAP. The principal
differences between UK GAAP and US GAAP are summarized in Note 30 to Esprit
Telecom's audited historical consolidated financial statements included
elsewhere in this prospectus. The following information should be read in
conjunction with (i) "Esprit Telecom Management's Discussion and Analysis of
Financial Condition and Results of Operations", (ii) the historical consolidated
financial statements of Esprit Telecom and (iii) "Unaudited Pro Forma
Consolidated Financial Statements" included elsewhere in this prospectus.
   
<TABLE>
<CAPTION>
                                                              YEAR ENDED SEPTEMBER 30,
                                                   -----------------------------------------------
                                                    1994     1995      1996      1997       1998
                                                   ------   -------   -------   -------   --------
<S>                                                <C>      <C>       <C>       <C>       <C>
                                                     L         L         L         L         L
 
<CAPTION>
                                                      (IN THOUSANDS, EXCEPT PER ORDINARY SHARE
                                                                AND PER ADS AMOUNTS)
<S>                                                <C>      <C>       <C>       <C>       <C>
CONSOLIDATED PROFIT AND LOSS ACCOUNT DATA(1)
UK GAAP
Revenue..........................................   3,820    13,950    24,880    45,466     82,588
Cost of sales....................................  (3,924)  (10,640)  (18,756)  (37,949)   (65,829)
Gross (loss)/profit..............................    (104)    3,310     6,124     7,517     16,759
Other operating expenses:
  Selling, general and administrative............  (2,833)   (4,112)   (7,509)  (15,505)   (35,178)
  Stock compensation costs(1)....................    (187)     (588)   (2,035)     (417)      (112)
  Restructuring costs............................      --        --        --      (312)        --
  Depreciation and amortization(2)...............    (447)     (790)   (1,471)   (2,836)   (10,382)
  European network amortization..................      --        --        --        --     (1,519)
Operating loss...................................  (3,571)   (2,180)   (4,891)  (11,553)   (30,432)
Profit on sale of investment.....................      --        --        --        --        200
Net interest expense/income......................    (305)     (222)     (203)      695    (12,213)
Loss on ordinary activities before taxation......  (3,876)   (2,402)   (5,094)  (10,858)   (42,445)
Taxation on loss on ordinary activities..........      --        --        --        (2)        (2)
Loss for the financial year......................  (3,876)   (2,402)   (5,094)  (10,860)   (42,447)
Loss per Ordinary Share(3).......................   (0.09)    (0.05)    (0.07)    (0.10)     (0.34)
Loss per ADS(3)(4)...............................   (0.63)    (0.35)    (0.49)    (0.70)     (2.38)
US GAAP
Net loss.........................................      --    (2,423)   (5,325)  (10,852)   (42,447)
Net loss per Ordinary Share(5)...................      --     (0.05)    (0.08)    (0.10)     (0.34)
Net loss per ADS(4)(5)...........................      --     (0.35)    (0.56)    (0.70)     (2.38)
OTHER FINANCIAL DATA
EBITDA(6) (UK GAAP)..............................  (3,124)   (1,390)   (3,420)   (8,711)   (18,331)
EBITDA(6) (US GAAP)..............................      --    (1,411)   (3,651)   (8,703)   (18,331)
Ratio of earnings to fixed charges(7)............      --        --        --        --         --
</TABLE>
    
 
                                       62
<PAGE>   66
<TABLE>
<CAPTION>
                                                              YEAR ENDED SEPTEMBER 30,
                                                   -----------------------------------------------
                                                    1994     1995      1996      1997       1998
                                                   ------   -------   -------   -------   --------
<S>                                                <C>      <C>       <C>       <C>       <C>
                                                     L         L         L         L         L
 
<CAPTION>
                                                      (IN THOUSANDS, EXCEPT PER ORDINARY SHARE
                                                                AND PER ADS AMOUNTS)
<S>                                                <C>      <C>       <C>       <C>       <C>
CONSOLIDATED CASH FLOW STATEMENT DATA UK GAAP
Cash (outflow)/inflow from operating
  activities.....................................  (2,465)      187    (2,245)   (2,999)   (29,131)
Returns on investments and servicing of
  finance........................................    (305)     (222)     (203)      695     (4,834)
Taxation.........................................      --        --        --        (2)        (2)
Capital expenditure and financial investment.....  (1,101)   (1,685)   (3,594)   (7,919)   (22,478)
Acquisitions and disposals.......................      --        --        --      (852)   (91,643)
Management of liquid resources...................      --        --    (2,335)  (20,541)  (158,058)
Financing........................................   3,826     6,868     6,541    29,799    308,309
CONSOLIDATED BALANCE SHEET DATA
UK GAAP
Bank balances, cash, restricted securities and
  short term cash deposits.......................     180     5,615     6,430    24,525    184,749
Net current (liabilities)/assets.................  (1,677)    2,619     3,974    16,521    167,507
Fixed assets, net................................   2,400     3,514     8,005    17,727    154,100
Total assets.....................................   4,266    13,178    24,101    59,543    394,537
Creditors: amounts falling due within one year...  (3,543)   (7,045)  (12,122)  (25,295)   (72,930)
Creditors: amounts falling due in more than one
  year...........................................    (633)     (631)   (1,968)   (2,874)  (328,806)
Total shareholders' funds........................      90     5,502    10,011    31,374     (7,199)
US GAAP
Total assets.....................................            13,178    24,101    59,543    394,537
Long term debt...................................              (631)   (1,968)   (2,874)  (328,806)
Redeemable preference shares.....................              (673)     (673)       --         --
Shareholders' equity/(deficit)...................             4,829     9,338    31,374     (7,199)
</TABLE>
 
- ---------------
 
(1) Esprit Telecom's financial information has been restated from that
    previously published prior to December 1997 in order to give effect to a
    change in UK GAAP relating to the granting of employee stock options at a
    discount to the market price. The financial value of such discounts are now
    reorganized as employee compensation and charged against net income. As
    required by UK GAAP, this accounting change has been effected by restating
    the results of previous periods. This change in accounting has no impact on
    the US GAAP financial information presented.
 
(2) Includes European network amortization.
 
(3) Under UK GAAP, Loss per Ordinary Share is calculated based upon the weighted
    average number of shares outstanding during the period, adjusted to reflect
    the redesignation of the 'A' ordinary shares as Ordinary Shares and the
    fifty for one share split that occurred in February 1997.
 
(4) Loss per ADS and Net loss per ADS are calculated by adjusting Loss per
    Ordinary Share and Net loss per Ordinary Share, respectively for the ratio
    of seven Ordinary Shares per ADS.
 
(5) Previously reported loss per Ordinary Share and net loss per Ordinary Share
    in accordance with US GAAP has been restated to reflect the adoption of
    Financial Accounting Standard No. 128, "Earnings Per Share" for all periods
    presented.
 
(6) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
    presented because it is a measure commonly used in the telecommunications
    industry and is presented solely to enhance the understanding of the Esprit
    Telecom's operating results. EBITDA, however, should not be considered as an
    alternative to operating income or income for the year as an indicator of
    the operating performance of Esprit Telecom. Similarly, EBITDA should not be
    considered as an alternative to cash flows from operating activities as a
    measure of liquidity. EBITDA is not a measure of financial performance under
    generally accepted accounting principles and may not be compatible to other
    similarly titled measures of
 
                                       63
<PAGE>   67
 
    other companies. EBITDA may not be indicative of the historic operating
    results of Esprit Telecom; nor is it meant to be predictive of potential
    future results.
 
(7) The ratio of earnings to fixed charges is calculated by dividing (i) income
    (loss) from ordinary activities before income taxes ("Earnings") plus fixed
    charges by (ii) fixed charges. Fixed charges consist of interest expense,
    and one-third of rental expense on operating leases. On a UK GAAP basis,
    earnings plus fixed charges were insufficient to cover fixed charges by
    L3,876,000 in 1994; L2,402,000 in 1995; L5,094,000 in 1996, L10,858,000 in
    1997 and L42,445,000 for the year ended September 30, 1998. On a US GAAP
    basis, earnings plus fixed charges were insufficient to cover fixed charges
    by L2,423,000 in 1995; L5,325,000 in 1996; L10,852,000 in 1997 and
    L42,445,000 for the year ended September 30, 1998.
 
                                       64
<PAGE>   68
 
        GTS 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 GTS as of September 30, 1998 and December 31, 1997 and 1996 and
for the three and nine months ended September 30, 1998 and 1997 and for the
years ended December 31, 1997, 1996 and 1995 (the following discussion should be
read in conjunction with GTS' Consolidated Financial Statements and the notes
related thereto included elsewhere in this prospectus).
 
   
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 HER, GTS
is operating and continuing to develop 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' 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. GTS' 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.
 
     GTS 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. TCM (a local access
telecommunications service provider) began operations in 1996. HER (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 1998 and beyond. The fact that these ventures are in
various stages of development affects the discussion of comparative results
below. See "Business."
 
     GTS has invested significantly in its ventures through capital
contributions and loans. In addition, GTS 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 GTS must generate additional capital
resources in order to continue its operations and meet its new development
initiatives. The ultimate recoverability of GTS' investments in and advances to
ventures is dependent on many factors including, but not limited to, the ability
of GTS 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 GTS to maintain the necessary telecommunications
licenses.
 
     GTS' 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
 
                                       65
<PAGE>   69
 
   
foreign currency regulations. For a detailed discussion of these risks, see "Our
Operations in Russia and the CIS Face Significant Political, Economic,
Regulatory, Legal and Tax Risks."
    
 
ACCOUNTING METHODOLOGY
 
     Accounting for Business Ventures. Wholly owned subsidiaries and
majority-owned ventures where GTS has unilateral operating and financial control
are consolidated. Those ventures where GTS exercises significant influence, but
does not exercise unilateral operating and financial control, are accounted for
by the equity method. GTS has certain majority-owned ventures that are accounted
for by the equity method as a result of minority shareholder rights,
super-majority voting conditions or other governmentally imposed uncertainties
so severe that they prevent GTS from exercising unilateral control of the
venture.
 
     Profit and Loss Accounting. GTS recognizes profits and losses in accordance
with its underlying ownership percentage or allocation percentage as specified
in the agreements with its partners; however, GTS recognizes 100% of the losses
in ventures where GTS bears all of the financial risk (which includes all of
GTS' significant ventures except for Sovintel and, historically, HER).
Accordingly, the portion of the losses that would normally be assigned to the
minority interest partner ("Excess Losses") is recognized by GTS. When such
ventures become profitable, GTS recognizes 100% of the profits until such time
as the Excess Losses previously recognized by GTS have been recovered. As of
September 30, 1998, $8.3 million and $7.6 million represent the net unrecovered
Excess Losses for GTS' consolidated and equity method investments, respectively,
that is expected to favorably benefit future period results from operations upon
GTS' existing business ventures becoming profitable. This accounting policy was
adopted prior to 1995; however, 1995 was the first year that the excess loss
amount was deemed material for recognition within GTS' accounting records. For
the period from January 1, 1997, through August 31, 1997, GTS recognized 100% of
HER's losses due to GTS being the financing partner during this period. As a
result of HER's issuance in August 1997, of $265 million aggregate principal
amount of 11.5% senior notes due 2007 (of which $56.6 million was placed in
escrow for the first two years' interest payments) GTS no longer considers
itself as the financing partner.
 
     Inter-Affiliate Transactions. Several of GTS' 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. GTS' ventures within the CIS region incur a 4% turnover tax
that is based on the revenues earned. GTS includes these taxes as a component of
its operating expenses, since these taxes are incidental to the revenue cycle.
 
                                       66
<PAGE>   70
 
     The following table, as of September 30, 1998, summarizes the accounting
methodology for the principal business ventures through which GTS conducts its
business.
 
<TABLE>
<CAPTION>
                                                            EFFECTIVE
                                            COUNTRY/REGION     GTS                ACCOUNTING
               COMPANY NAME                 OF OPERATIONS   OWNERSHIP             METHODOLOGY
               ------------                 --------------  ---------             -----------
<S>                                         <C>             <C>       <C>     <C>
Western Europe
  HER.....................................  Western Europe       89   %(1)    Consolidated(1)
  GTS-Monaco Access.......................  Monaco               50   %       Equity
Central Europe
  GTS-Hungary.............................  Hungary              99   %       Consolidated
  EuroHivo................................  Hungary              70   %(2)    Equity
  Czechnet................................  Czech Republic      100   %       Consolidated
  CzechCom................................  Czech Republic      100   %       Consolidated
CIS
  Sovintel................................  Russia               50   %       Equity
  TCM.....................................  Russia               95   %(3)    Consolidated(3)
  TeleRoss Operating Company..............  Russia              100   %(4)    Consolidated
  TeleRoss Ventures.......................  Russia               50   %(5)    Equity
  Sovam...................................  Russia              100   %(6)    Consolidated(6)
  GTS Cellular............................  CIS              50%-75   %(7)    Equity/Consolidated
Asia
  V-Tech..................................  China                75   %       Equity
  Beijing Tianmu..........................  China                47   %       Equity
  CDI.....................................  India               100   %       Consolidated
</TABLE>
 
- ---------------
 
(1) As of July 16, 1997, HER is accounted for by the consolidation as opposed to
    the equity method of accounting. In addition, in March 1998 and October
    1998, GTS's ownership interest in HER increased 10% and 0.5%, respectively.
 
(2) GTS sold its interest in EuroHivo in August 1998. The closing of this
    transaction did not have a material effect on GTS' results from operations
    and financial condition.
 
(3) During the quarter ended September 30, 1998, GTS purchased the remaining
    47.36% interest in GTS Vox Limited, the intermediate holding company of TCM.
    As a result, effective July 1998, GTS has a 95% interest in TCM and accounts
    for its interest in TCM using the consolidation as opposed to the equity
    method of accounting.
 
(4) The TeleRoss Operating Company is comprised of a wholly-owned subsidiary
    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. TeleRoss Operating
    Company is accounted for under the consolidation method of accounting
    because GTS has unilateral control over the operations and management
    decisions. TeleRoss Operating Company's operations are further discussed in
    "-- Results of Operations -- Consolidated Ventures" and "Business -- Russia
    and the CIS -- TeleRoss." A significant portion of TeleRoss Operating
    Company's costs of revenue consists of settlement fees paid to the TeleRoss
    Ventures, as defined in (5) below, with such fees being recorded as revenue
    by the TeleRoss Ventures. To date, 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
    TeleRoss Operating Company.
 
(5) TeleRoss Ventures is comprised of 14 joint ventures that are 50%
    beneficially owned by GTS, which originate traffic and provide local
    termination of calls through agency arrangements with 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 Ventures' operations are further discussed in
    "-- Results of Operations -- Non-Consolidated Ventures (Equity Investees)."
 
(6) GTS purchased the remaining 33% interest in Sovam in February 1998 and as a
    result, effective February 1998, Sovam is accounted for by the consolidation
    as opposed to the equity method of accounting.
 
                                       67
<PAGE>   71
 
(7) GTS conducts its cellular operations through (i) Vostok Mobile, a wholly
    owned GTS venture that owns between 50% and 100% of a series of thirteen
    cellular joint ventures in various regions in Russia, (ii) PrimTelefone, a
    50% owned venture in Vladivostok, Russia and (iii) Golden Telecom, an
    approximately 57% beneficially owned venture in Kiev, Ukraine. GTS completed
    a restructuring of the capital and ownership of Golden Telecom on June 30,
    1998, which results in GTS beneficially owning approximately 57% of Golden
    Telecom. As a result, effective June 30, 1998, Golden Telecom is accounted
    for by the consolidation as opposed to equity method of accounting.
 
     Russian Economic Crisis. GTS recorded a $13.1 million pre-tax charge to
earnings in its third quarter 1998 financial results that resulted from the
devaluation of the ruble and the consequences of the banking and economic crisis
within Russia. See "-- Liquidity and Capital Resources."
 
     Further, as identified in the preceding table that summarizes the
accounting methodology for GTS' principal business ventures, several of GTS'
business ventures within Russia are accounted for under the equity method of
accounting. Accordingly, the $13.1 million pre-tax charge; that is mainly
comprised of foreign currency exchange losses for ruble-denominated net monetary
assets with the remainder associated with estimates for uncollectible accounts
receivable and unrecoverable cash deposits in Russian banks, is primarily
reflected in the "equity in losses/(earnings) of ventures" line item with the
remainder in the "foreign currency losses" and "selling, general and
administrative" line items within GTS' condensed, consolidated statements of
operations.
 
RESULTS OF OPERATIONS -- CONSOLIDATED VENTURES
 
     Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, Sovam, TCM, Golden Telecom, HER,
GTS-Hungary and the Czech Companies. Although GTS was not able to follow the
consolidation method of accounting for Sovam, TCM and Golden Telecom in the
three and nine months ended September 30, 1997, and TCM and Golden Telecom for
the first six months of 1998, GTS has included, for comparative purposes, a
discussion of their financial performance for the three and nine months ended
September 30, 1997, and nine months ended September 30, 1998, respectively, in
our discussion of "Results of Operations -- Consolidated Ventures." See "Results
of Operations -- Non-Consolidated Ventures (Equity Investees)" for a discussion
of the operating results of Sovintel, TeleRoss Ventures, GTS Cellular and GTS-
Monaco Access.
 
     Revenue. GTS' consolidated revenue was $63.8 million and $117.3 million for
the third quarter and year to date ended September 30, 1998, respectively, which
was $50.9 million and $87.1 million above the same periods in 1997. The growth
in revenue was primarily attributable to the inclusion of HER, TeleRoss, Sovam,
TCM and Golden Telecom in GTS' consolidated financial results, who contributed
$42.9 million, $22.2 million, $18.8 million, $12.3, and $7.0 million,
respectively, for the nine months ended September 30, 1998. TCM and Golden
Telecom third quarter revenues are included in GTS' consolidated revenues for
the third quarter and year to date ended September 30, 1998.
 
     The CIS region's consolidated revenue increased 345.1% and 237.1% to $31.6
million and $60.0 million for the three and nine months ended September 30,
1998, respectively, from the comparable periods in 1997. TeleRoss Operating
Company generated revenue of $6.8 million and $22.2 million, representing 21.5%
and 37.0% of the CIS region's consolidated revenue for the three and nine months
ended September 30, 1998, respectively. The growth in TeleRoss Operating Company
revenue of 35.4% for the year to date from the same periods last year was the
result of the increase in traffic volume generated by the TeleRoss Ventures due
to the increase in the number of cities and number of VSAT's installed at
customer locations outside of cities in which they have a presence.
 
     Sovam generated revenue of $6.4 million and $18.8 million for the three and
nine months ended September 30, 1998, respectively. The 30.6% and 45.7% increase
from prior year periods in Sovam revenue is
 
                                       68
<PAGE>   72
 
primarily attributable to the expansion of Sovam's network throughout Russia and
the CIS and the wider variety of service offerings. (Sovam was an equity method
company in 1997.)
 
     TCM's revenue for the three and nine months ended September 30, 1998
increased 57.7% and 63.8% to $12.3 million and $33.9 million, respectively, from
the comparable periods in 1997. This increase was primarily due to increases in
local and international/long distance traffic revenue and increases in monthly
port charges and the sale of additional local access lines. (TCM was an equity
method company prior to July 1, 1998.)
 
     Revenue for Golden Telecom was $7.0 million and $16.9 million for the three
and nine months ended September 30, 1998, respectively, which represents a
218.2% and 322.5% increase from the comparable periods in 1997. The growth in
revenue was primarily attributable to the increase in cellular subscribers.
(Golden Telecom was an equity method company prior to July 1, 1998.)
 
     HER generated $27.0 million and $42.9 million of revenue in the three and
nine months ended September 30, 1998, respectively, compared to $1.7 million and
$2.3 million, respectively, in the same periods in 1997 (HER was an equity
method company prior to July 1997). The growth in revenue is attributable to the
continued deployment of the HER network as well as the inclusion of Ebone, whose
revenue was $7.4 million for the three months ended September 30, 1998. HER
commenced commercial service over the Brussels-Amsterdam route in late 1996, the
London-Paris portion in November 1997, Frankfurt, Zurich, Geneva, Stuttgart,
Dusseldorf and Munich were added in the second quarter of 1998, and Milan was
added during the third quarter of 1998.
 
     The Central Europe region's consolidated revenue increased 29.4% and 32.6%
to $4.4 million and $12.6 million for the three and nine months ended September
30, 1998, respectively, from the comparable periods in 1997. This growth is
attributable to the expansion of the customer base and product offerings of
these businesses.
 
     Gross Margin. GTS's consolidated gross margin was $25.0 million and $35.2
million, or 39.2% and 30.0% of revenue, for the three and nine months ended
September 30, 1998, respectively, and ($2.4) million and $1.9 million, or
(18.6%) and 6.3% of revenue, for the three and nine months ended September 30,
1997, respectively.
 
     Sovam represented 11.2% and 25.0% of the consolidated gross margin for the
three and nine months ended September 30, 1998, respectively. (Sovam was an
equity method company in 1997.) Sovam had gross margin as a percentage of
revenues of 43.8% and 46.8% for the three and nine months ended September 30,
1998, respectively. The increase of 0.9% and 8.0% in gross margin as a
percentage of revenue in comparison to the same periods in 1997 reflects the
higher margin service offerings that Sovam is currently providing and also
management's focus to improve its cost structure; i.e., the negotiation of
improved channel costs from suppliers and controlled growth in both personnel
and capital expenditures.
 
     The TeleRoss Operating Company represented 1.2% and 6.0% of the
consolidated gross margin for the three and nine months ended September 30,
1998, respectively, and 20.8% and 52.6% for the three and nine months ended
September 30, 1997, respectively. TeleRoss had gross margin as a percentage of
revenue of 4.4% and 9.5% for the three and nine months ended September 30, 1998,
respectively. The increase of 12.1% and 3.4% in margin as a percentage of
revenue in comparison to the comparable periods in 1997 reflects the overall
increase in revenue as discussed above.
 
     TCM represented 36.0% of the consolidated gross margin for the third
quarter 1998 (TCM was an equity method company prior to July 1, 1998). TCM had
gross margin as a percentage of revenues of 73.2% and 73.5% for the three and
nine months ended September 30, 1998, respectively. Gross margin as a percentage
of revenue decreased 1.2% and 3.8% in comparison to the same period in 1997 as a
result of higher infrastructure and settlement costs.
 
     Golden Telecom represented 17.6% of the consolidated gross margin for the
third quarter 1998 (Golden Telecom was an equity method company prior to July 1,
1998). Golden Telecom's gross margin was 62.9%
                                       69
<PAGE>   73
 
and 58.6% of revenue for the three months ended September 30, 1998 compared to
gross margin of 54.5% and 37.5% of total revenue for the comparable periods
during 1997.
 
     HER had a favorable effect on consolidated gross margins of $7.3 million
and $6.3 million for the three months and nine months ended September 30, 1998.
For comparative purposes, HER had an unfavorable gross margin of ($1.0) million
and ($3.7) million for the three and nine months ended September 30, 1997 (HER
was an equity method company prior to July 1997). HER represented 29.2% and
17.9% of the consolidated gross margin for the three and nine months ended
September 30, 1998. The improvement in gross margins in 1998 as compared to 1997
is reflective of the increased utilization of the network as well as the
inclusion of Ebone, whose gross margin was $3.9 million for the three months
ended September 30, 1998.
 
     The Central European region had gross margin as a percentage of revenue of
31.8% and 33.3% for the three and nine months ended September 30, 1998,
respectively. The decrease of 3.5% and 5.6% in gross margin as a percentage of
revenue in comparison to the comparable periods in 1997 primarily reflects the
startup activities of the GTS Net product offering in Hungary.
 
     Operating Expenses. Consolidated operating costs were $42.8 million and
$94.2 million for the three and nine months ended September 30, 1998,
respectively, a 71.5% and 81.0% increase above the comparable periods in 1997.
The increase in operating costs is attributable to the inclusion of HER, Sovam,
TCM and Golden Telecom in the Company's consolidated financial results, the
growth in expenditures associated with building business infrastructure for
primarily the TeleRoss Operating Company and costs attributable to increasing
the corporate staff.
 
     Equity in (Losses)/Earnings of Ventures. GTS recognized (losses)/earnings
of ($3.5) million and $4.1 million for its investments in non-consolidated
ventures in the three and nine months ended September 30, 1998, respectively, as
compared to recognizing losses of $8.1 million and $18.2 million in the
comparable periods, respectively, in 1997. This improvement was primarily the
result of HER and Golden Telecom no longer being equity method investees offset
by a $7.7 million charge to earnings associated with GTS' business operations in
Russia as a result of the deterioration of the economic conditions in Russia
during the quarter. The $7.7 million charge is principally comprised of foreign
exchange losses with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks. In
addition, GTS' third quarter 1997 financial results were unfavorably affected by
management's decision to write-off certain investments in and advances to
ventures in Asia and Central Europe. As a result of the application of GTS'
previously discussed profit and loss accounting, additional losses of $1.6
million were recognized for the three and nine months ended September 30, 1998.
Included in the quarter and year to date results for September 30, 1997 were
$3.1 million and $10.9 million of additional losses. See "Results of
Operations -- Non-Consolidated Ventures (Equity Investees)" for a discussion of
the results of operations of GTS' significant equity investees.
 
     Interest, Net. GTS earned interest income of $13.9 million and $28.1
million for the three and nine months ended September 30, 1998, respectively, a
344.7% and 432.6% increase over the same periods in 1997, primarily as a result
of investing the proceeds from GTS' 1997 and 1998 capital raising efforts. See
"-- Liquidity and Capital Resources."
 
     GTS incurred interest expense of $22.0 million and $52.6 million for the
three and nine months ended September 30, 1998, respectively, which was 58.1%
and 149.5% above the comparable periods in 1997. The significant increase in
interest expense was due to the $571.9 million increase in debt raised in 1998
and the $409.8 million debt raised in 1997. See "-- Liquidity and Capital
Resources."
 
   
     Foreign Currency Losses. GTS recognized foreign currency losses of $7.3
million and $10.4 million for the three and nine months ended September 30,
1998. These losses are primarily attributable to the devaluation of the Russian
ruble and foreign currency exposure at HER. HER has recorded foreign exchange
losses due to its foreign exchange exposure associated with its issuance in
August 1997 of aggregate principal $265 million U.S. dollar denominated debt,
other U.S. dollar denominated cash and payable balances, losses
    
 
                                       70
<PAGE>   74
 
   
on several forward exchange contracts and the weakening of the U.S. dollar
versus European currencies in the third quarter of 1998. See "-- Liquidity and
Capital Resources -- Liquidity Analysis" for further discussion.
    
 
   
     Provision for Income Taxes. GTS' consolidated tax provision was $0.8
million and $2.2 million for the three and nine months ended September 30, 1998
and $1.0 million and $1.8 million for the three and nine months ended September
30, 1997, respectively. GTS' 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 non-U.S. loss carryforwards
will be allowed, in part or in full, by local tax authorities against future
income.
    
 
     Extraordinary Loss. GTS recognized a $12.7 million extraordinary charge to
earnings in the first quarter of 1998, as a result of GTS' early extinguishment
of certain related party debt obligations. The nature of the charge is comprised
of the write-off of $11.6 million of unamortized debt discount and $1.1 million
of unamortized debt issuance costs that were deferred as financing costs and
were being amortized over the original maturity of the debt.
 
     Year Ended December 31, 1997 compared to Year Ended December 31, 1996 and
compared to Year Ended December 31, 1995
 
     Management's discussion included within "-- Results of
Operations -- Consolidated Ventures" reflects the following significant
operating ventures: TeleRoss Operating Company, GTS-Hungary, the Czech Companies
and HER (for 1997). See "Results of Operations -- Non-Consolidated Ventures
(Equity Investees)" for a discussion of the operating results of Sovintel, TCM,
Sovam, TeleRoss Ventures, GTS Cellular, HER (prior to 1997), GTS-Monaco Access,
EuroHivo and the Asia business ventures.
 
     Revenue. GTS' consolidated revenue was $47.1 million, $24.1 million and
$8.4 million for the years ended December 31, 1997, 1996, and 1995,
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, and HER's initial
Amsterdam to Brussels route and further expansion to London and Paris during
1997.
 
     The CIS region's consolidated revenue was $27.1 million, $12.7 million, and
$3.8 million for the years ended December 31, 1997, 1996 and 1995 respectively.
TeleRoss Operating Company generated revenue of $24.7 million, $9.2 million and
$3.8 million, representing 91.1%, 72.4% and 100% of the region's consolidated
revenue for the years ended December 31, 1997, 1996 and 1995, respectively.
Service revenue represented 81.8%, 64.1% and 21.1% of TeleRoss Operating
Company's revenue for the years ended December 31, 1997, 1996 and 1995,
respectively, with the balance of its revenue in such periods principally
represented by installation and equipment sales. The growth in revenue was a
result of increased traffic volume generated by the TeleRoss Ventures as they
expanded to 13 cities for the year ended December 31, 1997, added customers in
existing cities and installed several VSATs at customer locations outside of
cities in which they have a presence.
 
     Within the Central Europe region, GTS-Hungary and the Czech Companies
accounted for 100% of the revenue earned, of which GTS-Hungary and the Czech
Companies provided $8.5 million and $5.1 million of GTS' consolidated revenue in
1997, respectively, compared to $6.9 million and $2.3 million in 1996,
respectively, and $4.2 million and $0.3 million in 1995, respectively. The
growth in revenue of GTS-Hungary from 1995 to 1997 was due to the expansion of
its customer base and the introduction of microwave technology services. The
Hungary state lottery accounted for 50.6%, 55.3% and 65.0% of GTS-Hungary's
revenue in 1997, 1996 and 1995, respectively. The growth in revenue of the Czech
Companies was generated through increases in voice traffic carried from
twenty-five buildings at December 31, 1997, as compared to sixteen buildings at
December 31, 1996.
 
     All of Western Europe's consolidated revenue of $5.4 million for the year
ended December 31, 1997 was derived from HER.
 
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<PAGE>   75
 
     Gross Margin. GTS's consolidated gross margin was $4.4 million, or 9.3% of
revenue, for the year ended December 31, 1997, $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 year ended December 31, 1995.
 
     The CIS region had a gross margin of $4.0 million, $0.8 million and $(0.9)
million for the years ended December 31, 1997, 1996 and 1995, respectively.
TeleRoss Operating Company had a gross margin of $3.5 million, or 14.2% of
revenues, for the year ended December 31, 1997 and a negative gross margin of
$(1.0) million for each of the years ended December 31, 1996 and 1995, which was
the result of the high fixed cost component of its network hub in Moscow.
GTS-Hungary and the Czech Companies comprised 100% of the Central Europe
region's gross margin. GTS-Hungary had a gross margin of $3.5 million, $3.0
million, and $1.7 million, representing 41.2%, 43.4%, and 40.5% of GTS-Hungary's
revenue for the years ended December 31, 1997, 1996 and 1995, respectively. The
favorable gross margin trend reflected the increased utilization of
GTS-Hungary's 1,000 VSAT capacity hub located in Budapest. The Czech Companies
had a gross margin of $1.5 million, $0.3 million and $(0.1) million for the
years ended December 31, 1997, 1996 and 1995, respectively. HER incurred a
negative gross margin of $(4.6) million for the year ended December 31, 1997,
which was primarily due to the initial cost structure of the new routes and
minimal revenue generated.
 
     Operating Expenses. Consolidated operating costs were $76.7 million, $52.9
million, and $41.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in operating costs reflected the growth in
expenditures associated with building business infrastructure for primarily the
TeleRoss Operating Company and GTS-Hungary, the inclusion of HER's operating
expenses in 1997 and increasing corporate staff.
 
     Equity in (Losses)/Earnings of Ventures. GTS recognized losses from its
investments in non-consolidated ventures of $14.6 million, $10.2 million and
$7.9 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in these losses were $3.6 million, $5.7 million and $5.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively, that related to
GTS's ownership share of the losses. Also included in the losses for the year
ended December 31, 1997 was a write-off of approximately $5.4 million which
represented the net balance of certain investments in and advances to ventures
in Asia (primarily Beijing Tianmu and V-Tech) and Central Europe (EuroHivo) that
were stated in excess of their net realizable value. GTS followed the
authoritative guidance as prescribed by APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock," for its determination of the $5.4
million charge. GTS' recoverability analysis was based on its projected
undiscounted cash flows of their equity investees, since this is the lowest
level of cash flow information available. The underlying reasons for the
write-down of GTS' investments were the result of the problems that are more
specifically addressed in "Results of Operations -- Non-Consolidated Ventures
(Equity Investees) -- Asia," "Business -- Central Europe" and "Business --
Asia." Additionally, included within GTS's ownership share of the losses
incurred and the Excess Losses for the year ended December 31, 1997 is
approximately $14.4 million of losses (of the $14.4 million, approximately $13.5
million related to the write-off of advances to several Chinese-owned operating
telecommunications companies to which GTS provides technical and financial
assistance, and $0.9 million related to the write-off of inventories,
receivables, and other assets) which represented GTS' share of asset write-offs
recorded by certain of the ventures in Asia (Beijing Tianmu and V-Tech). See
"-- Results of Operations -- Non-Consolidated Ventures (Equity
Investees) -- Asia". GTS would have recognized earnings from its investments in
non-consolidated ventures of $5.2 million for the year ended December 31, 1997,
had GTS not recognized the write-downs of investments and assets of
approximately $5.4 million and $14.4 million, respectively. The write-down of
Central Europe's investment in EuroHivo was a result of GTS' decision in the
third quarter to recognize the contingent liabilities associated with the
expected liquidation and discontinuation of EuroHivo's operations as of
September 30, 1997. In addition, GTS' results were negatively affected due to
the recognition of Excess Losses of $5.6 million, $4.5 million and $2.7 million
for the years ended December 31, 1997, 1996 and 1995, respectively. See
"-- Overview." GTS' 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 $15.5 million, $11.8 million and $3.8
million for the years ended December 31, 1997, 1996 and 1995, respectively,
which partially offset losses generated by other ventures.
 
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<PAGE>   76
 
     Other Non-Operating Income. Favorably affecting the 1995 results was the
non-recurring $10.3 million gain that GTS recognized as a result of its cash
settlement of certain claims with a third party in 1995.
 
     Interest, Net. GTS incurred interest expense of $39.1 million, $11.1
million and $0.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Interest expense is comprised of interest incurred from debt
maturing within one year, long-term debt obligations, capital lease obligations,
amortization of debt discount on the long-term debt obligations and various
other debt obligations. The significant increase in interest expense was due to
the $409.8 million increase in debt raised in 1997. See "-- Liquidity and
Capital Resources."
 
     GTS earned interest income of $11.4 million, $3.6 million and $2.2 million
for the years ended December 31, 1997, 1996 and 1995, respectively, primarily as
a result of investing the proceeds from private placements of common stock in
various highly liquid investments.
 
   
     Provision for Income Taxes. GTS' consolidated tax provision was $2.5
million, $1.4 million and $2.6 million for the years ended December 31, 1997,
1996 and 1995, respectively. GTS' 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 non-U.S. loss carryforwards
will be allowed, in part or in full, by local tax authorities against future
income.
    
 
RESULTS OF OPERATIONS -- NON-CONSOLIDATED VENTURES (EQUITY INVESTEES)
 
  Three and Nine Months Ended September 30, 1998 compared to Three and Nine
Months Ended September 30, 1997
 
  RUSSIA -- CIS
 
     Sovintel. Sovintel's revenue was $32.4 million and $99.5 million for the
third quarter and year to date ended September 30, 1998, which increased $4.5
million and $17.5 million over revenues for the comparable periods in 1997. The
growth in revenue was primarily the result of telecommunications service
revenue, which increased 8.3% and 14.3% to $21.8 million and $70.2 million for
the three and nine months ended September 30, 1998, respectively, from
comparable periods in 1997, due to the Moscow customer base growth and traffic
from other GTS ventures that generated increased volume of outgoing
international and domestic minutes carried by Sovintel. Sovintel realized a
35.4% and 28.7% increase in outgoing international and domestic revenues for the
three and nine months ended September 30, 1998, as compared with the same
periods a year ago. Revenue from incoming international minutes decreased by
55.1% and 38.5% to $1.5 million and $6.1 million for the three and nine months
ended September 30, 1998, respectively, from the same periods in 1997.
 
     Sovintel's non-traffic-related revenue increased 36.6% and 42.4% to $10.6
million and $29.3 million for three and nine months ended September 30, 1998,
respectively, over the comparable periods in 1997, which was primarily
attributable to port sales and monthly port fees revenue.
 
     Sovintel's gross margin as a percentage of revenues was 34.6% and 33.9%,
for the three and nine months ended September 30, 1998, and was 34.8% and 37.8%
for comparable periods in 1997. The decrease in gross margin as a percentage of
revenue for the respective periods in 1998 and 1997 was attributable to a
general price decrease in international and domestic revenue due to competitive
pressures and a higher percentage of domestic minutes, which yield a lower
margin.
 
     Operating expenses were $7.9 million and $17.7 million, or 24.4% and 17.8%
of total revenue, for the three and nine months ended September 30, 1998. The
increase of 9.3% and 2.8% in operating expenses in comparison to the same
periods in 1997 was primarily due to charges related to the Russian financial
crisis, specifically, $1.9 million of uncollectible accounts receivable and $0.4
million in unrecoverable cash.
 
     Sovintel recorded a foreign exchange loss of $5.2 million during the
quarter, of which $5.1 million was attributable to the devaluation of the ruble
in mid-August 1998.
 
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<PAGE>   77
 
     TeleRoss Ventures. Revenue for the TeleRoss Ventures increased 4.3% and
45.1% to $2.4 million and $7.4 million for the three and nine months ended
September 30, 1998, respectively, from the comparable periods in 1997. Revenues
were primarily resulted from settlement fees charged to TeleRoss Operating
Company. The growth in revenue reflects the growth of the customer base.
 
     Gross margin as a percentage of revenue was 75.0% and 71.6% for the three
and nine months ended September 30, 1998, respectively, compared to 60.9% and
72.5% for the three and nine months ended September 30, 1997, respectively.
Operating expenses were $1.0 million and $3.2 million, or 41.7% and 43.2% of
revenue, for the three and nine months ended September 30, 1998, respectively,
compared to 30.4% and 49.0% of revenue, for the comparable periods in 1997.
 
     GTS Cellular. GTS operates three cellular networks through differing
ownership structures: Vostok Mobile, PrimTelefone and Golden Telecom
(consolidated for the three months ended September 30, 1998).
 
     Revenue for Vostok Mobile was $6.2 million and $20.9 million for the three
and nine months ended September 30, 1998, respectively, which represented a
47.6% and 39.3% increase from the comparable periods in 1997. The growth in
revenue was primarily attributable to subscriber growth.
 
     Vostok Mobile's gross margin was 40.9% and 46.9% of revenue, for the three
and nine months ended September 30, 1998, respectively, compared to 45.2% and
50.7% of revenue, for the comparable periods in 1997. Operating expenses were
$5.5 million and $11.7 million, or 88.7% and 56.0% of revenue, for the three and
nine months ended September 30, 1998, respectively, compared to ($0.2) million
and $4.8 million, or (4.8%) and 32% of revenue, for the comparable periods in
1997.
 
     Vostok Mobile recorded a foreign exchange loss of $2.4 million during the
third quarter 1998, that resulted primarily from the devaluation of the ruble in
mid-August 1998.
 
     Revenue for PrimTelefone was $2.9 million and $10.2 million for the three
and nine months ended September 30, 1998, respectively, which represented a 9.4%
decrease and a 24.4% increase from the comparable periods in 1997. The decrease
in current period revenue is due to decreases in airtime, subscriber fees and
handset sales during the third quarter of 1998. The growth in year to date
revenue was primarily attributable to the subscriber growth in the first and
second quarters of 1998.
 
     PrimTelefone's gross margin was 58.6% and 57.8% of total revenue, and
operating expenses were $0.9 million and $3.2 million for the three and nine
months ended September 30, 1998, respectively, compared to gross margin of 43.8%
and 57.3% of total revenue, and operating expenses of $1.2 million and $2.7
million, respectively, for the comparable periods in 1997.
 
WESTERN EUROPE
 
     GTS-Monaco Access: Total revenue was $6.8 million and $18.7 million for the
three and nine months ended September 30, 1998, respectively, which represented
a 100.0% and 136.7% increase from the comparable periods in 1997. Gross margin
was ($0.3) million and $0.7 million, or (4.4%) and 3.7% of revenue, for the
three and nine months ended September 30, 1998, respectively, compared to $0.3
million and $0.4 million, or 7.7% and 5.1% of revenue, for the comparable
periods in 1997. The decrease in gross margin for the third quarter of 1998 is
primarily the result of service credit recorded in September.
 
  Year Ended December 31, 1997 compared to Year Ended December 31, 1996 and
compared to Year Ended December 31, 1995
 
RUSSIA -- CIS
 
     Sovintel. Sovintel's revenue for the years ended December 31, 1997, 1996
and 1995 was $114.0 million, $75.0 million and $44.3 million, respectively. The
increase in revenue was primarily the result of telecommunications service
revenue, which increased to $85.4 million for the year ended December 31, 1997
from
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<PAGE>   78
 
$50.8 million and $26.8 million for the years ended December 31, 1996 and 1995,
respectively, due to the Moscow customer base growth and traffic from other GTS
ventures that generated increased volume of outgoing international and domestic
minutes carried by Sovintel. Revenue from incoming international minutes also
increased to $13.1 million for the year ended December 31, 1997, from $6.8
million and $2.2 million for the years ended December 31, 1996 and 1995,
respectively. Included in Sovintel's traffic revenue for 1997 and 1996 was $12.4
million and $5.0 million, respectively, that was related to customers using
phone numbers provided by TCM. This revenue was derived primarily from
international/long distance traffic and local traffic. Sovintel and TCM have an
arrangement whereby Sovintel reimburses TCM 50% of installation charges, monthly
fees and local traffic revenues and approximately 33% of international/long
distance billings from TCM-supplied phone numbers.
 
     Sovintel's non-traffic-related revenue of $28.6 million, $24.2 million and
$17.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively, was primarily attributable to port sales and monthly port fees
revenues.
 
     Sovintel's gross margin was $41.3 million, $31.1 million and $18.0 million,
or 36.2%, 41.5% and 40.6% of revenue, for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease in gross margin percentage was
attributable to a general price decrease in international and domestic revenues
due to competitive pressures and a higher percentage of domestic minutes, which
yield a lower margin.
 
     Operating expenses were $17.0 million, $10.3 million and $7.1 million, or
14.9%, 13.7% and 16.0% of total revenue, for the years ended December 31, 1997,
1996 and 1995, respectively. The increase in operating expenses was related to
increases 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 $5.7 million, $5.2 million and $2.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in
income tax expense was attributable to Sovintel's profitable operations.
 
     TCM. TCM's revenue was $29.3 million and $16.5 million for the years ended
December 31, 1997 and 1996, respectively. TCM had minimal activities in 1995.
TCM had a gross margin of $22.1 million and $13.2 million, or 75.4% and 80.0% of
total revenue. The decrease in gross margin as a percentage of revenue was
attributable to higher infrastructure and settlement costs. TCM had operating
expenses of $3.3 million and $1.9 million, or 11.3% and 11.5% of total revenue,
for the years ended December 31, 1997 and 1996, respectively.
 
     Sovam. Sovam's revenue was $17.8 million, $11.7 million and $4.4 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The increase
in revenues is primarily attributable to the expansion of Sovam's network
throughout Russia and the CIS and the wider variety of service offerings,
including the introduction of Russia On Line services.
 
     Gross margin was $7.1 million, $3.4 million and $1.5 million, or 39.9%,
29.1% and 34.1% of total revenue for the years ended December 31 in 1997, 1996
and 1995, respectively. Operating expenses were $5.7 million, $5.7 million and
$3.3 million, or 32.0%, 48.7% and 75.0% of total revenue, for the years ended
December 31, 1997, 1996 and 1995, respectively.
 
     TeleRoss Ventures. Revenue for the TeleRoss Ventures for the years ended
December 31, 1997, 1996 and 1995 was $6.8 million, $2.4 million and $0.2
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, an additional seven new cities in the network in 1996 and an additional
city in 1997.
 
     Gross margin for the years ended December 31, 1997, 1996 and 1995 was $4.7
million, $1.6 million and $0.1 million, respectively. Operating expenses of $3.6
million, $2.3 million and $0.2 million were incurred for the years ended
December 31, 1997, 1996 and 1995, respectively.
 
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<PAGE>   79
 
     GTS Cellular. GTS operates three cellular networks through differing
ownership structures: Vostok Mobile, PrimTelefone and Golden Telecom.
 
     Revenue for Vostok Mobile was $25.8 million, $16.5 million and $2.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Vostok
Mobile's gross margin was $13.6 million, $9.3 million and $1.1 million, or
52.7%, 56.4% and 55.0% of total revenue, and operating expenses were $10.1
million, $9.2 million and $4.7 million for the years ended December 31, 1997,
1996 and 1995, respectively.
 
     Revenue for PrimTelefone was $12.1 million, $8.4 million and $2.2 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
PrimTelefone's gross margin was $6.6 million, $4.7 million and $0.6 million, or
54.5%, 56.0% and 27.3% of total revenue, and operating expenses were $3.6
million, $3.7 million and $0.7 million for the years ended December 31, 1997,
1996 and 1995, respectively.
 
     Golden Telecom did not have significant operations until 1997. Revenue for
Golden Telecom was $7.2 million and gross margin was $2.8 million, or 38.9% of
total revenue, for the year ended December 31, 1997. Operating expenses were
$4.9 million for the year ended December 31, 1997.
 
  WESTERN EUROPE
 
     HER. HER earned a small revenue stream in 1996 and no revenue in 1995.
Operating expenses were $10.6 million and $6.7 million for the years ended
December 31, 1996 and 1995, respectively. The increase in selling, general and
administrative expenses reflected HER's continued transition from the start-up
phase to the operational phase. In 1997, HER was included in the consolidated
results of GTS.
 
     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 $13.0 million and
$3.9 million and gross margin was $0.2 million and $(0.4) million for the years
ended December 31, 1997 and 1996, respectively.
 
  CENTRAL EUROPE
 
     EuroHivo. EuroHivo's operating results were minimal for the years ended
December 31, 1997, 1996 and 1995. In September 1997, GTS recorded a $2.4 million
charge to recognize the liabilities associated with the planned liquidation and
discontinuance of EuroHivo's operations. See Footnote 3 in GTS audited financial
statements for additional disclosures related to EuroHivo.
 
  ASIA
 
     Most of GTS' 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 for the year ended December 31, 1996, and had
minimal revenues in 1997 and 1995. The revenue in 1996 consisted principally of
equipment sales. GTS believes that future revenue will be derived primarily from
providing telecommunications engineering and consulting services.
 
     During the year ended December 31, 1997, the V-Tech and Beijing Tianmu
business ventures (the "Asia Ventures") determined that a charge of $14.4
million (GTS's portion) was appropriate as a result of the write-off of $13.5
million of advances to several Chinese-owned operating telecommunications
companies to which the Asia Ventures provide technical and financial assistance
and $0.9 million related to the write-off of inventories, receivables and other
assets. The Asia Ventures followed the authoritative guidance as prescribed by
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," for their determination of the $13.5
million charge as they believed that the advances, as evidenced by legal
agreements between the Asia Ventures and the underlying operating
telecommunications companies, represents long-lived assets. (The Asia Ventures
would have reflected the same charge had they followed the authoritative
accounting guidance as prescribed by APB No. 18 or SFAS No. 5, "Accounting for
 
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<PAGE>   80
 
Contingencies.") The Asia Ventures recoverability analysis was based on their
projected undiscounted cash flows of their respective operations since this is
the lowest level of cash flow information available. The underlying reasons for
the write-offs were the result of problems dealing with one of the Asian
partners, the inability of the Chinese operating telecommunications companies to
develop markets for their services, and technical problems, all of which
surfaced during the third quarter of 1997. See Footnote 3 in GTS' audited
financial statements for additional disclosures related to GTS' Asia operations
and "Business -- Asia."
 
LIQUIDITY AND CAPITAL RESOURCES
 
  CORPORATE
 
     The telecommunications business is capital intensive. GTS 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.
 
   
     GTS has raised capital through the issuance of equity securities and
through various debt agreements. The issuance of equity securities has raised
$358.6 million, $36.4 million, $107.7 million, $42.1 million and $62.1 million
in the first nine months of 1998, and in the full years of 1997, 1996, 1995 and
1994, respectively, net of placement fees, for a total of $606.9 million. In
addition, GTS and HER received $571.9 million, $409.8 million, $60.0 million and
$23.3 million in gross proceeds in the first nine months of 1998, and in the
full years of 1997, 1996 and 1995, respectively, for a total of $1,065.0 million
under various debt agreements. Included within the debt proceeds identified
above, GTS 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, GTS as a result of their (or their affiliates) ownership of
our common stock, of which $70.0 million was repaid in 1998.
    
 
     GTS had working capital of $907.6 million and $353.4 million as of
September 30, 1998 and 1997, respectively. GTS had an accumulated deficit of
$343.7 million as of September 30, 1998, including net losses of approximately
$37.5 million and $100.8 million for the three and nine months ended September
30, 1998 and $48.2 million and $87.9 million for the three and nine months ended
September 30, 1997, respectively. During 1998, GTS 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 spend over $1.2 billion in cash related to capital expenditures
and investments in ventures during the next three years. GTS obtained funds in
1998 through a variety of financing arrangements, including (i) approximately
$255.3 million in gross proceeds from the IPO, (ii) $105.0 million in gross
proceeds from the sale of 9.875% senior notes due February 15, 2005, of which
$19.6 million was placed in escrow to fund the first two years' interest
payments. The initial public stocking offering constituted a "complying public
equity offering" under GTS' 8.75% Senior Subordinated Convertible Bonds due
2000, and as a result, the conversion price of these Bonds is $20 per share,
(iii) approximately $127.4 million in gross proceeds from a secondary public
stock offering of 2.8 million shares of our common stock at $45.50 per common
share, and (iv) approximately $466.9 million in gross proceeds from the sale of
5 3/4% Convertible Senior Subordinated Debentures due 2010. These Debentures are
redeemable from July 1, 2001 at the option of GTS, at redemption prices set
forth in the agreement relating to them and are convertible into shares of
common stock at any time prior to maturity or redemption at a conversion price
of $55.05 per common share. The Debentures are subordinated to all existing and
future indebtedness of GTS, except for the Bonds, with which they rank pari
passu in right of payment.
    
 
   
     GTS believes that its existing cash balances, after giving effect to the
January 4, 1999 offering of HER notes, which notes are on substantially similar
terms as HER's existing senior notes, and cash flow from operations will be
sufficient to fund its expected capital needs under its current business plan,
excluding any funds expended in connection with the implementation of GTS'
European Services Strategy. See "-- Liquid-
    
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<PAGE>   81
 
   
ity and Capital Resources -- European Services Strategy." GTS contemplates that
it will raise additional debt financing through a newly formed subsidiary of
GTS, the proceeds of which will be applied toward the implementation of GTS'
European services strategy. GTS has not yet determined the actual amount and
timing of such financing.
    
 
   
     The actual amount and timing of GTS' future capital requirements may differ
materially from management's estimates. In particular, the accuracy of
management's estimates is subject to changes and fluctuations in GTS' revenues,
operating costs and development expenses, which can be affected by GTS' ability
to (i) effectively and efficiently manage the expansion of the HER network and
operations, (ii) obtain infrastructure contracts, rights-of-way, licenses and
other regulatory approvals necessary to complete and operate the HER 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. GTS' revenues and costs are also dependent upon
factors that are not within GTS' control such as political, economic and
regulatory changes, changes in technology, increased competition and various
factors such as strikes, weather, and performance by third parties in connection
with GTS' 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 GTS' future capital requirements.
Historically, GTS has experienced liquidity problems resulting in part from GTS'
need to meet the capital requirements of certain of its ventures in excess of
forecast amounts. In addition, certain of GTS' 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 GTS expands its operations at an accelerated rate
or consummates acquisitions, GTS' funding needs will increase, possibly to a
significant degree, and it will expend its capital resources sooner than
currently expected. GTS may also be required to repay the above-referenced Bonds
upon maturity on June 30, 2000 to the extent they are not converted into shares
of our common stock. As a result of the foregoing, or if GTS' capital resources
otherwise prove to be insufficient, GTS will need to raise 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 GTS will be able to consummate additional
financing on favorable terms. As a result, GTS 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 GTS 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 GTS.
 
  HER
 
   
     Construction of the HER fiber optic network is one of GTS' most significant
business activities. HER has spent approximately $136 million in cash on network
capital expenditures through September 30, 1998 and expects to incur an
additional $654 million in cash through 2000 in order to complete the buildout
of the network. The total capital expenditures required for the buildout of the
network has increased as a result of additional routes being planned, including
transatlantic capacity, and for enhancing the speed and capacity of the network.
Additionally, as of September 30, 1998, GTS has capitalized $242.2 million in
connection with long-term fiber lease arrangements and expects to capitalize an
additional $181 million through 2000 in order to complete the buildout of the
network. Moreover, subsequent to September 30, 1998, HER entered into an
additional contractual commitment for $36.8 million, payable within twelve
months, to lease an indefeasible right of use to transatlantic capacity for a
term of twenty-five years. In August 1997, HER completed the issuance of $265.0
million in gross proceeds of 11.5% Senior Notes due in August 2007. These Senior
Notes are general unsecured obligations of HER. GTS believes that the net
proceeds from the senior notes and the offering of the January 4, 1999 notes,
combined with HER's projected internally generated funds, should be sufficient
to fund HER's expected capital expenditures as well as payments on the long-term
fiber lease arrangements and other cash needs. However the actual amount and
timing of HER's future capital
    
 
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<PAGE>   82
 
requirements may differ materially from management's estimates. If the actual
amount and timing of HER's future capital requirements differ materially from
management's estimates, any failure to obtain necessary financing may require
HER to delay or abandon its plans for deploying the remainder of the network and
would jeopardize the viability of HER, or may require GTS to make additional
capital contributions to HER at the expense of GTS' other operations, either of
which could have a material adverse effect on the operations of GTS. There can
be no assurance that GTS or its partners in HER would have sufficient capital to
make contributions to HER, or that they would be willing to do so.
 
  EUROPEAN SERVICES STRATEGY
 
   
     Due to the early stage of implementation of GTS' European services
strategy, GTS cannot estimate with any degree of certainty the amount and timing
of GTS' future capital requirements for its implementation, which will be
dependent on many factors, including the success of GTS' European end-user
services business, the rate at which GTS expands its networks and develops new
networks, the types of services GTS offers, staffing levels, acquisitions and
customer growth, as well as other factors that are not within GTS' control,
including competitive conditions, regulatory developments and capital costs.
Management believes that it is likely that GTS will need to raise additional
capital above that raised through July 31, 1998. GTS expects that it will have
significant operating and net losses and will record significant net cash
outflow, before financing, in coming years in connection with its European
end-user services business. There can be no assurance that GTS' operations,
including GTS' European end-user services business, will achieve or sustain
profitability or positive cash flow in the future.
    
 
  LIQUIDITY ANALYSIS
 
     GTS had cash and cash equivalents of $993.9 million and $366.8 million as
of September 30, 1998 and 1997, respectively. GTS had restricted cash of $66.9
million and $59.8 million as of September 30, 1998 and 1997, respectively. The
restricted cash at September 30, 1998 primarily represents amounts held in
escrow to pay the first two years interest payments on the $105 million of the
9.875% Senior Notes due 2005 of GTS and $265 million of the Senior Notes of HER.
 
     During the three and nine months ended September 30, 1998, GTS' operations
provided cash of $29.2 million and used $5.4 million, respectively, compared to
a cash use of $15.7 million and $38.9 million, respectively, in the comparable
periods of 1997. Cash used for investing activities was $89.7 million and $142.9
million for the three months and nine months ended September 30, 1998 and $55.9
million and $73.0 million for the three and nine months ended September 30,
1997, respectively. The use of cash in operations and for investing activities
reflected primarily the development and buildout of existing telecommunications
networks and the funding of fully operational ventures. There can be no
assurance that GTS' operations will achieve or sustain profitability or positive
cash flow in the future. If GTS 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.
 
   
     In February 1998, GTS used approximately $85.2 million of the net proceeds
from the initial public offering and the $105.0 million Senior Notes to repay
$70.0 million plus accrued interest of debt from lenders who are affiliated
with, and are considered related parties to, GTS as a result of their (or their
affiliates) ownership of common stock.
    
 
   
     Substantially all of GTS' operations are in foreign countries and therefore
GTS' consolidated financial results are subject to fluctuations in currency
exchange rates. GTS' consolidated operations transact their business in the
following significant currencies: Russian Ruble, Hungarian Florint, Belgium
Franc and the European Currency Equivalent. For those operating companies that
transact their business in currencies that are not readily convertible, GTS
attempts to minimize its exposure by indexing its invoices and collections to
the applicable dollar/foreign currency exchange rate to the extent its costs
(including interest expense, capital expenditures and equity) are incurred in
U.S. dollars. Although GTS is attempting to match revenues, costs, borrowing and
repayments in terms of their respective currencies, GTS has experienced, and may
continue to
    
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<PAGE>   83
 
   
experience, losses and a resulting negative impact on earnings with respect to
holdings solely as a result of foreign currency exchange rate fluctuations,
which include foreign currency devaluations against the U.S. dollar.
Furthermore, certain of GTS' operations have notes payable and notes receivable
which are denominated in a currency other than their own functional currency or
loans linked to the U.S. dollar. GTS may also experience economic loss and a
negative impact on earnings related to these monetary assets and liabilities.
    
 
     GTS has developed risk management policies that establish guidelines for
managing foreign exchange risk. GTS is currently evaluating the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. GTS' ability to hedge its exposure is
limited since certain of its operations are located in countries whose
currencies are not easily convertible. Financial hedge instruments for these
countries are nonexistent or limited and also pricing of these instruments is
often volatile and not always efficient. GTS is designing reporting processes to
monitor the potential exposure on an ongoing basis and expects to implement this
process before the end of 1998. GTS will use the output of this process to
execute financial hedges to cover foreign exchange exposure when practical and
economically justified.
 
     In April 1998, GTS consummated an economic transaction to hedge the foreign
exchange exposure resulting from the issuance of $265 million Senior Notes by
HER.
 
   
     On August 17, 1998 the Russian government and the Russia Central Bank
announced the following measures: a) The repayment of GKO treasury bills and OFZ
federal bonds was suspended; subsequently, secondary trading therein was halted.
Since many Russian banks had substantial investments in these securities, severe
liquidity problems resulted for the banks. b) The value of the ruble was allowed
to fluctuate below the ruble/U.S. dollar exchange rate corridor that the
government had committed to support; this represented an effective devaluation
of the ruble. c) A 90-day moratorium on offshore credit repayments was issued.
The 90-day moratorium was not extended when it expired on November 16, 1998 and
it is anticipated that the ruble will continue to be devalued. Due to the
devaluation and the end of the 90-day moratorium, there is an ongoing risk that
many Russian banks may be declared bankrupt. Deposits held at Russian banks,
other than Sberbank, are not insured. The official exchange rate as of September
30, 1998 and December 18, 1998 was 16.0645 and 20.7 rubles per U.S. dollar,
respectively. The last official exchange rate prior to the suspension of trading
on August 17, 1998 was 6.2725 rubles per U.S. dollar.
    
 
   
     As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, GTS recorded a $13.1 million pre-tax
charge within its financial statements for the third quarter 1998, that is
mainly comprised of foreign currency exchange losses for ruble-denominated net
monetary assets with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks. These
results are further discussed in "Results of Operations -- Consolidated
Ventures" and "Results of Operations -- Non-Consolidated Ventures (Equity
Investees)."
    
 
   
     Moreover, the Russian government has defaulted on payments, and proposed a
restructuring, of GKO treasury bills and OFZ federal bonds which has been
criticized by Western holders of such obligations. As a result, it is likely
that the Russian government and Russian businesses will have difficulty
accessing Western financial markets for the foreseeable future. The consequences
of the decision on August 17th and its aftermath remain unclear, but GTS cannot
assure you that these emergency measures, coupled with the policies of Russia's
new government, will be sufficient to stabilize the currency, enhance liquidity
or prevent further economic dislocation. In particular, GTS cannot assure you
that there will not be a further significant and sudden decline in the value of
the ruble and consequent increased GTS exchange-related losses and increased
loss of investor confidence in the Russian economy. Such consequences coupled
with an overall downturn in the Russian economy and resulting reduced demand for
telecommunication services could have a material adverse effect on GTS and its
financial condition and results of operations.
    
 
YEAR 2000 COMPLIANCE
 
     The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year (the "Year 2000 Issue"). Because
of this programming convention, software, hardware or
                                       80
<PAGE>   84
 
firmware may recognize a date using "00" as the year 1900 rather than the year
2000. Use of non-Year 2000 compliant programs could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including, among others, a temporary inability to process transactions
and invoices or engage in similar normal business activities.
 
     Issues Posed by the Year 2000 Issue. GTS is exposed to the Year 2000 Issue
in a number of ways. Among other things, the Year 2000 Issue might affect GTS':
(i) computer hardware and software; (ii) telecommunications equipment and other
systems with embedded logic (among other things, this includes GTS' fire
detection, access control systems, heating, ventilation and air conditioning,
and uninterruptible power supply); (iii) operating partners and organizations
upon which GTS is dependent; (iv) local access connections, upon which GTS is
dependent; and (v) supply chain.
 
   
     Global TeleSystems Group Inc.'s Year 2000 Compliance Program. GTS has
initiated a Year 2000 compliance program to address the aforementioned risks
which the Year 2000 Issue poses and to avoid any material loss or impact to GTS
or its customers due to these risks. The object of this Year 2000 compliance
program is to ensure that neither the performance nor functionality of GTS'
operations are affected by dates, prior to, during and after 2000. The scope of
the Year 2000 compliance program includes all of the business functions,
locations and resources which are essential to GTS. The resources which are
within the scope of the Year 2000 compliance program are, among other things,
GTS' computer systems, software, vendor supplied software, telecommunications
equipment, third party telecommunications partners and other network service
suppliers, environmental and building control systems, internal communication
systems and other interfaces with third party services. As explained below, GTS'
efforts to assess its systems as well as non-system areas related to Year 2000
compliance involve (i) a wide-ranging assessment of the Year 2000 problems that
may affect GTS, (ii) the development of remedies to address the problems
discovered in the assessment phase and (iii) testing of the remedies.
    
 
   
     Assessment Phase. The assessment phase includes internal and third party
review of potential risks associated with the availability, integrity and
reliability of operational systems necessary to conduct business. During the
assessment phase GTS has identified substantially all of its major hardware and
software platforms, applications, telecommunications equipment and other non-IT
resources that support the business functions. The assessment phase of the Year
2000 compliance program further identified the internal and external technical
interfaces, third party business relationships and internally developed systems
which might be materially impacted by Year 2000 issues. GTS' observations from
the assessment phase during the third and fourth quarters of 1998 is that most
of GTS' telecommunications equipment and software has been purchased within the
past three years and the majority is already compliant or can be made compliant
with minor upgrades. GTS completed the assessment phase of its Year 2000
readiness in the fourth quarter of 1998.
    
 
     Remediation, Prevention and Testing Phases. Based on those resources
identified in the assessment phase, GTS developed a detailed plan in the fourth
quarter of 1998, that will then be followed by an upgrade, a remediation, a
prevention and a testing phase in early 1999. These phases are expected to be
completed during the second quarter of 1999.
 
   
     Assessment of Third Party Compliance. As noted above, GTS has also
undertaken under its Year 2000 compliance program to assess and monitor the
progress of third party vendors in resolving Year 2000 issues. To ensure the
compliance of vendors of hardware and software applications used by GTS, GTS is
obtaining confirmations from GTS' primary telecommunication vendors, business
partners and hardware and software vendors as to what plans, if any, are being
developed or are already in place to address their ability to process
transactions in the Year 2000. GTS intends to continue follow up with any
vendors who indicate any material problems in their replies. GTS expects to
receive statements of intended compliance by mid-1999.
    
 
     Worst Case Scenario for GTS. The worst case scenario for GTS would be the
failing of its telecommunications equipment, power providers and/or interfaces
with other telecommunication vendors. These cases would create business
interruption at some of GTS' operations and would adversely affect GTS'
revenues. For example, the Moscow power authorities have publicly stated that
they do not intend to address Year 2000 issues until problems arise. However,
GTS has operations that are geographically diversified; therefore, it is not
anticipated that the worst case scenario would affect all operations at the same
time. Additionally, if power
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<PAGE>   85
 
failures occur, GTS currently has diesel generators at certain of its major
sites. Based on its assessment during the third and fourth quarters of 1998, GTS
does not foresee a material loss due to these conditions and management is
hopeful that its remediation and testing efforts will ensure that it has
addressed its Year 2000 readiness. However, there can be no assurance that Year
2000 non-compliance by GTS' systems or the systems of vendors, customers,
partners or others will not result in a material adverse effect.
 
   
     Contingency Plans. GTS is considering a contingency plan to address its
worst case scenario; however, certain of the initiatives are subject to
execution risk. This risk would include the ability to have access to diesel
fuel or large generators should power failures occur, the ability to quickly
replace telecommunications equipment and the ability to contract with
alternative telecommunication and maintenance providers at reasonable terms.
Moreover, GTS is further limited in resources in certain geographical regions
due to the market volatility and weak economies in which GTS has business
operations, which is thoroughly discussed in the section "Risk Factors -- Risks
Specific to GTS -- Our operations in Russia and the CIS face significant
political, economic, regulatory, legal and tax risks."
    
 
     Costs Related to the Year 2000 Issue. GTS expects that it will incur
between $2.0 million to $3.5 million in expenses to complete the assessment,
detailed planning, remediation, prevention and testing phases, exclusive of
replacement costs for telecommunications equipment and software, of which
approximately $0.6 million had been incurred for the nine months ended September
30, 1998. It is estimated that between $1.0 million to $2.0 million of the total
expenditure will be required to complete the remediation and testing phase,
excluding the replacement of telecommunications equipment and software. GTS is
currently unable to quantify the costs that it may incur during the remediation
and testing phase associated with the replacement of any telecommunications
equipment and software due to the early stage of the Year 2000 readiness review.
These costs will be funded from operating cash flows and expensed as incurred.
In addition, the preceding cost estimate does not include amounts associated
with the accelerated acquisition of replacement systems as none are included in
the initial assessment during the third and fourth quarters of 1998. GTS does
not expect that the costs of addressing its Year 2000 readiness will have a
material effect on GTS' financial condition or results of operations. However,
there can be no assurance that Year 2000 non-compliance by GTS' systems or the
systems of vendors, customers, partners or others will not result in a material
adverse effect on GTS.
 
   
     Risks Related to the Year 2000 Issue. Although GTS' efforts to be Year 2000
compliant are intended to minimize the adverse effects of the Year 2000 issue on
GTS' business and operations, the actual effects of the issue will not be known
until 2000. Difficulties in implementing the remediation or prevention phases or
failure by GTS to fully implement the planning or remediation phases or the
failure of its major vendors, third party network service providers, and other
material service providers and customers to adequately address their respective
Year 2000 issues in a timely manner would have a material adverse effect on GTS'
business, results of operations, and financial condition. For a comprehensive
discussion of Year 2000 risks to GTS, see "Risk Factors -- Risks Specific to
GTS -- Risks Associated with Potential Failure of GTS' Systems to Recognize Year
2000."
    
 
INTRODUCTION OF THE EURO
 
     On January 1, 1999, certain countries of the EU are scheduled to establish
fixed conversion rates between their existing sovereign currencies and a new
currency to be called the "Euro." The Euro is now trading on currency exchanges
and is available for non-cash transactions. Thereafter and until January 1,
2002, the existing sovereign currencies will remain legal tender in these
countries. On January 1, 2002, the Euro is scheduled to replace the sovereign
legal currencies of these countries. Through certain of its subsidiaries, GTS
has significant operations within the EU, including many of the countries that
are scheduled to adopt the Euro. GTS is currently evaluating the systems and
business issues raised by the adoption of the Euro, including the need to adapt
information systems and the competitive impact of cross-border pricing
transparency. GTS has not yet completed its evaluation of the potential impact
likely to be caused by the Euro adoption.
 
                                       82
<PAGE>   86
 
             ESPRIT TELECOM MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following is a discussion of the financial condition and results of
operation of Esprit Telecom for each of the years in the three-year period ended
September 30, 1998 (the following discussion should be read in conjunction with
Esprit Telecom's Consolidated Financial Statements and the notes related thereto
included elsewhere in this prospectus).
 
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
 
     Certain statements contained in "Esprit Telecom 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 Esprit Telecom's competitive environment and (iv)
the performance of future equity-method investments, contain forward-looking
statements concerning Esprit Telecom'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.
 
REVENUE
 
   
     Revenue is based primarily on the volume of traffic minutes billed by
Esprit Telecom and, to a lesser extent, on the additional services and products
provided through the Esprit Telecom communications network. Esprit Telecom
provides both national and international long distance telecommunications
services to its customers. In addition, Esprit Telecom has recently introduced
two new categories of service to its established telecommunications services and
products: bandwidth services and enhanced services. Esprit Telecom currently
provides services and products to three targeted customer segments: retail,
wholesale, and service provider/reseller.
    
 
     Most of Esprit Telecom's retail revenue is currently derived from SMEs and
medium- to large-sized businesses, governmental agencies and other
organizations. Contracts are typically for one year, although shorter periods
may apply to certain customers or market segments. Esprit Telecom provides both
national and international long distance telecommunication services to its
retail service customers. Revenues are derived from the number of minutes of use
(or fractions thereof) billed by Esprit Telecom and are recorded upon completion
of calls. Esprit Telecom has experienced, and expects to continue to experience,
declining revenue per minute in all of its markets as a result of increasing
competition in telecommunications services and an increasing proportion of
lower-priced national traffic, which Esprit Telecom expects will be partially
offset by increased minute volumes and additional product introductions. Esprit
Telecom maintains local market pricing structures for its services and offers
its retail services at rates which it believes represent an attractive discount
from the rates generally offered by PTOs. This category also includes revenues
from the sale of enhanced services to retail customers, which include toll free
services and calling cards. Though currently relatively small, Esprit Telecom
expects the range of enhanced services to expand substantially as Esprit Telecom
increases the capabilities of the its network through additional intelligence
capabilities.
 
   
     Wholesale revenues are derived from customers that are long distance
carriers that connect with Esprit Telecom to carry their traffic to
destinations, where Esprit Telecom's rates are competitive, both on the Esprit
Telecom communications network and on other off-network routes. Contracts with
wholesale customers generally do not include minimum or maximum usage levels. As
a result, wholesale customers typically change their routing to take advantage
of the lowest cost alternative, resulting in potentially greater fluctuations in
revenue from these customers than from other categories of customers. In several
cases, Esprit Telecom also uses its wholesale customers as suppliers for
termination of its off-network calls, although there are not usually formal
contracts requiring any balancing of traffic between the parties. Wholesale
traffic supports the expansion of its network by increasing the capacity
utilization of a particular network route. Also included in this segment is
revenue generated from the sale of bandwidth services to wholesale customers.
Currently this represents a relatively small revenue source as only the first
ring of Esprit Telecom's SDH
    
                                       83
<PAGE>   87
 
broadband fiber network is in service. However, as further rings are brought
into service during 1999 these revenues are expected to increase and may in the
future be reported as a separate category once they are significant.
 
   
     Esprit Telecom provides its service provider/reseller customers with
network management and termination services. Service providers generally provide
value-added services such as calling cards, and together with resellers,
generally target customers with products or at spend levels different to those
currently targeted by Esprit. Revenue from service provider/reseller services is
based upon the number of service provider/reseller customers and on the volumes
from such customers' underlying clients. Revenue from service provider/ reseller
services has grown rapidly and is expected to continue to grow as Esprit Telecom
increases its customer base and its service offerings in different markets, and
as Esprit Telecom's service provider/reseller customers increase their own
client base.
    
 
     Esprit Telecom competes based on its ability to offer the best value in
terms of quality and price to customers that desire reliable, high quality and
cost effective services. Prices in the long distance industry in Europe have
declined in recent years and, as competition continues to increase, Esprit
Telecom expects that prices will continue to fall. Esprit Telecom believes,
however, that the impact on its results from such decreases in price will be at
least partially offset by increased traffic volume, continuing decreases in the
cost of providing telecommunications services and the introduction of new
products and services.
 
     In addition, Esprit Telecom expects to benefit from the continuing
liberalization of the European telecommunication markets, to the extent that it
will be able to introduce new services and reduce its costs. The Plusnet
business has added substantially to Esprit Telecom's revenue and is expected to
provide opportunities for significant growth following the liberalization of the
German telecommunications market.
 
COST OF REVENUE
 
   
     Esprit Telecom's costs of revenue fall into four general categories: access
costs, network costs, termination costs and direct sales costs. Access costs
represent the cost of bringing the traffic from the customer's premises to the
nearest point on the Esprit Telecom communications network. In the case of
larger retail customers who have direct access to its network, the access is via
dedicated leased lines, and hence this cost is fixed for each customer, but
variable with the number of customers. The rental costs of these access lines
depend upon the bandwidth and the distance to the customer site. There are
substantial differences in leased line rental costs within Europe, which in most
cases have to be leased from the PTOs. Esprit Telecom believes that there will
be a reduction in the effective cost per minute of such bandwidth as alternative
infrastructure providers compete in providing leased lines and EU directives
requiring cost-oriented pricing by PTOs are enforced. However, in the event that
leased circuit rental costs were to fall at a slower rate than Esprit Telecom's
price per minute, Esprit Telecoms's gross margins would be likely to be
adversely impacted. In the case of retail customers which connect to its network
using indirect access codes, Esprit Telecom is charged on a usage basis for
bringing calls from customer sites onto the Esprit Telecom communications
network pursuant to its intercompany arrangement with the local PTO. Access
costs for wholesale services and for certain service provider and reseller
customers may be low since these customers either provide their own access
equipment within the Esprit Telecom switch site or are, in many cases, located
in close proximity to Esprit Telecom's switch sites.
    
 
   
     Network costs represent the costs of bringing the call over the Esprit
Telecom communications network from its point of entry to its point of exit.
Currently, these costs are comprised primarily of the rental costs for national
and international leased circuits, which are largely fixed over the short term.
These costs will be variable over the longer term as circuit capacity and
network scope are expanded. When the demand for Esprit Telecom's leased circuits
exceeds capacity, calls must be rerouted over alternative routes purchased from
other carriers on a spot rate per minute ("overflow") basis, which costs are
recorded as termination costs. Acquiring capacity on an overflow basis may have
a negative impact on margins, but enables Esprit Telecom to maintain
uninterrupted service to its customers. Until European liberalization in 1998,
with the exception of in the United Kingdom, national and international capacity
could only be leased from local PTOs. Such
    
 
                                       84
<PAGE>   88
 
capacity is costly in comparison to markets in which competition in
infrastructure is established, such as the United States. As with access circuit
rental costs, Esprit Telecom also believes that there will be a reduction in the
effective rental cost per minute of such bandwidth in the future. As Esprit
Telecom's SDH broadband fiber network is established and expanded, its direct
operating and maintenance expenses will be recognized in network costs. Certain
direct third party billing costs are also included in the category of network
costs.
 
     Esprit Telecom intends to expand substantially the reach and scope of its
SDH broadband fiber network and expects that the resulting higher operating and
maintenance costs will have a depressing effect on gross margins until circuit
utilization is increased through higher traffic volumes. Additionally, following
price cuts which are due to be implemented by Deutsche Telekom on German
national traffic in January 1999, and which are likely to result in lower
selling prices by Esprit Telecom and other competitors in that market, gross
margins in Germany may be negatively impacted until such time as Esprit Telecom
is able to establish a lower cost base network in Germany.
 
   
     Termination costs currently represent the largest category of costs to
Esprit Telecom, comprising approximately 65.5% of revenue for the year ended
September 30, 1997 and 60.3% of revenue for the year ended September 30, 1998.
These represent the costs Esprit Telecom pays to other carriers for taking calls
from the final point at which they leave the Esprit Telecom communications
network to their ultimate destination. Termination costs are variable with
traffic volumes. If the call is terminated in a city in which Esprit Telecom has
a point of presence, the call is usually passed to the local PTO for termination
via the local loop. If it is to a destination where Esprit Telecom does not have
a point of presence, then the call must be passed to another carrier with which
Esprit Telecom connected. As the latter is typically an international leg,
whereas the former is a local leg, the cost of the latter is usually a greater
proportion of the call revenue than the former. Using least-cost routing
technologies, the Esprit Telecom switch is programmed to select the most cost
efficient route and carrier for the required destination. Esprit Telecom
believes that there should be a reduction in the unit cost of termination, as
Esprit Telecom builds out the Esprit Telecom communications network to
additional points of presence thus increasing the proportion of traffic that may
be carried on this network, and interconnects with additional PTOs or other
infrastructure providers thus incurring lower local termination costs. In
addition, Esprit Telecom believes that, over time, unit termination costs will
also decrease as the emergence of new telecommunication service providers and
the construction of new transmission facilities result in increased competition.
Esprit Telecom expects that an increasing amount of its total operating costs
will be fixed in the medium term, as the capacity of Esprit Telecom's SDH
broadband fiber network, and certain of its MIUs and IRUs, is significantly
greater than current traffic volumes.
    
 
     Direct sales costs represent commissions payable to external agents for
customer contracts generated by such agents. These commissions may be set as a
fixed cost per contract or may be set as a percentage of revenues generated for
a defined period. Prior to the acquisitions of the Plusnet business and IMS,
Esprit Telecom's use of such agents was minimal.
 
SALES, GENERAL AND ADMINISTRATIVE EXPENSES
 
   
     Indirect expenses are comprised primarily of salaries, commissions and
other employee benefits, office and administrative expenses and professional
fees, as well as marketing costs, provision for bad debt, travel costs and other
support costs. These expenses have increased as Esprit Telecom has developed and
expanded its workforce, and are expected to continue to increase as new
operations are established and the Esprit Telecom communications network is
expanded. Selling, general and administrative expenses as a percentage of
revenue will continue to vary from period to period as a result of start-up
costs relating to new sales offices. Selling, general and administrative
expenses also include gains or losses on foreign currency transactions excluding
financing facilities, where such gains or losses are shown in net interest. See
Note 3 to Esprit Telecom's Consolidated Financial Statements.
    
 
     Esprit Telecom has grown and intends to continue to grow by establishing
sales offices in additional European cities. Each of Esprit Telecom's local
sales offices is in a different stage of development. The development and
expansion of these sales offices involves substantial start-up costs, a large
portion of which
 
                                       85
<PAGE>   89
 
will be reflected as fixed costs and recorded as selling, general and
administrative charges. Accordingly, Esprit Telecom's consolidated results of
operations will vary depending on the timing and speed of Esprit Telecom's
expansion strategy and, during a period of rapid expansion, selling, general and
administrative expenses will be relatively higher than during more stable
periods of growth.
 
DEPRECIATION
 
   
     The broadband fiber network and associated SDH broadband fiber network
equipment will be depreciated using an accelerated method over a ten-year
period. Esprit Telecom capitalizes its own direct costs, and third party costs
which are related specifically to the construction of its SDH broadband fiber
network, and expenses its own overhead costs related to the establishment of new
sales offices and terminating sites or the expansion of other elements of the
Esprit Telecom communications network. The increased level of capital
expenditure related to the expansion and development of this network, including
the broadband SDH fiber network, and the establishment of sales offices and
terminating sites in new and existing markets and amortization of goodwill from
the addition of the Plusnet business, is expected to result in an increased
level of depreciation in future periods.
    
 
FOREIGN EXCHANGE RATES
 
   
     Esprit Telecom is exposed, and as it expands into additional countries in
Europe, may be increasingly exposed, to fluctuations in foreign currencies as
its revenue, and certain of its costs, assets and liabilities are denominated in
local currencies, although these currencies will be reduced in number upon the
adoption of the Euro in Euro countries. Esprit Telecom's proceeds from its
financings, and the principal and interest amounts payable under the Esprit
Telecom 11.5% Senior Notes due 2007 and the 10.875% Senior Notes due 2008, are
denominated in U.S. Dollars and Deutschmarks (until redenominated as Euros).
Additionally, Esprit Telecom may maintain significant cash, cash balances or
short term loans in currencies other than pounds sterling. As a result, Esprit
Telecom's financial condition and results of operations, as reported in pounds
sterling, are and will continue to be affected by fluctuations in the value of
the local currencies in which Esprit Telecom transacts business and in
particular, Esprit Telecom's ability to make principal and interest payments in
U.S. Dollars and Deutschmarks (or Euros) may be adversely impacted by
fluctuation in exchange rates. Approximately 52.3% of revenue during the year
ended September 30, 1998 was denominated in the currencies of Euro countries.
Esprit Telecom expects that its share of revenue in such currencies will
continue to increase in future periods.
    
 
INFLATION
 
     Inflation has not had a significant effect on Esprit Telecom's results of
operations and financial condition during the three financial years ended
September 30, 1998.
 
SEASONALITY
 
     The level of Esprit Telecom's revenue in a given month is substantially
influenced by the number of business days in that month. In addition, Esprit
Telecom experiences reduced levels of revenue in the months of July, August,
December and January, as these months are traditional holiday periods in most
European countries.
 
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<PAGE>   90
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, certain turnover
and cost data as a percentage of revenue.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED SEPTEMBER 30,
                                               ------------------------------------------------
                                                    1996             1997             1998
                                               --------------   --------------   --------------
                                                 L        %       L        %       L        %
                                                      (IN THOUSANDS, EXCEPT PERCENTAGES)
<S>                                            <C>      <C>     <C>      <C>     <C>      <C>
TURNOVER
Retail......................................   12,460    50.1   18,926    41.6   51,616    62.5
Wholesale...................................   10,870    43.7   19,425    42.7   14,869    18.0
Service Provider/Reseller...................    1,550     6.2    7,115    15.7   16,103    19.5
                                               ------   -----   ------   -----   ------   -----
                                               24,880   100.0   45,466   100.0   82,588   100.0
COST OF SALES
Access costs................................    1,328     5.3    2,266     5.0    7,152     8.6
Network costs...............................    3,407    13.7    5,921    13.0    8,565    10.4
Termination costs...........................   14,021    56.4   29,762    65.5   49,780    60.3
Direct sales costs..........................       --      --       --      --      332     0.4
                                               ------   -----   ------   -----   ------   -----
                                               18,756    75.4   37,949    83.5   65,829    79.7
                                               ------   -----   ------   -----   ------   -----
GROSS MARGIN................................    6,124    24.6    7,517    16.5   16,759    20.3
</TABLE>
 
     The following table sets forth, for the periods indicated, revenue by major
geographic region served by The Esprit Network:
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED SEPTEMBER 30,
                                               ------------------------------------------------
                                                    1996             1997             1998
                                               --------------   --------------   --------------
                                                 L        %       L        %       L        %
                                                      (IN THOUSANDS, EXCEPT PERCENTAGES)
<S>                                            <C>      <C>     <C>      <C>     <C>      <C>
REVENUE
United Kingdom..............................   17,846    71.7   31,088    68.4   39,411    47.7
The Netherlands.............................    5,229    21.0    8,825    19.4   16,289    19.7
Germany.....................................       --      --      215     0.5   15,950    19.3
Rest of Europe(1)...........................    1,805     7.3    5,338    11.7   10,938    13.3
                                               ------   -----   ------   -----   ------   -----
                                               24,880   100.0   45,466   100.0   82,588   100.0
</TABLE>
 
- ---------------
 
(1) Includes Belgium, Spain, France and, since 1998, Italy.
 
YEAR 2000 COMPLIANCE
 
     A significant percentage of the software running on most of the computers
worldwide relies on two-digit date codes to perform a number of computation and
decision making functions. The date change from 1999 to 2000 may impair the
ability of these programs to interpret date codes properly, which could result
in system failures, miscalculations or errors, causing disruptions of operations
or other business problems, including the inability to process transactions,
send invoices or engage in similar normal business activities.
 
     Esprit Telecom is undertaking a comprehensive program to address the Year
2000 issue with respect to:
 
     -  its transmission, switching, billing and management information systems;
 
     -  its non-information technology systems (including buildings, plant,
       equipment and other infrastructure that may contain embedded technology);
       and
 
     -  systems of its primary traffic carriers and vendors.
 
Esprit Telecom is also trying to raise awareness of Year 2000 issues in its
customers' systems.
 
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<PAGE>   91
 
This program involves four phased steps:
 
     -  identifying and assessing potential Year 2000 problems which may impact
       Esprit Telecom;
 
     -  developing remedial strategies and actions to address those problems;
 
     -  implementing those remedial strategies and actions; and
 
     -  testing the foregoing solutions.
 
     The program also involves analyzing Esprit Telecom's most reasonably likely
worst-case Year 2000 scenario. Esprit Telecom expects that this would involve
either or both of the following:
 
     -  a loss of interconnect capacity from one or more major suppliers of
       transmission capacity; and/or
 
     -  Esprit Telecom's inability to record, track or invoice billable minutes
       which could ultimately cause it to temporarily stop carrying traffic.
 
Either scenario would adversely affect Esprit Telecom's revenue and, if not
quickly remedied, would have a material adverse effect on its business, results
of operations and financial condition.
 
     Assessment
 
     Esprit Telecom is currently in the process of auditing and testing its
systems to determine if they will suffer problems associated with the transition
to Year 2000. Since a complete analysis of Esprit Telecom's systems would
require an interruption of service, Esprit Telecom is selectively testing
various elements of such systems. Esprit Telecom has an active in-house
assessment program, with a staff of six persons assigned to Year 2000 compliance
issues. Despite devoting these resources to addressing Year 2000 compliance,
Esprit Telecom has not delayed the implementation of any projects related to
management information systems. Esprit Telecom's Year 2000 compliance team is in
the process of reviewing each of Esprit Telecom's switching sites and other
network points to identify equipment, hardware and software that is unlikely to
function through the Year 2000 transition.
 
   
     In addition, Esprit Telecom actively cooperates with other carriers in a
global Year 2000 program through International Telecommunications Union (ITU)-T
Year 2000 Taskforce, and the UK Year 2000 Operators forum. As part of the latter
forum Esprit Telecom is participating in a voluntary and independent health
check review of our Year 2000 program (conducted by another operator).
    
 
     Remedial Strategies and Actions
 
     Following its assessment, Esprit Telecom expects to replace, rather than
upgrade, the majority of the problem equipment within its own network systems,
which includes information technology and non-information technology systems.
Esprit Telecom will require that any systems being replaced or upgraded be
warranted as Year 2000 compliant by the vendors or suppliers of these systems.
Esprit Telecom is currently in the process of replacing its billing and
management information systems, which Esprit Telecom expects will be fully
operational by mid-1999. Esprit Telecom also intends to ensure that it is
capable of providing back up power and other equipment at switch sites, as well
as alternative routing around switch sites which experience problems despite
these remedial actions.
 
     To address its worst case scenarios, Esprit Telecom has also determined to
obtain supplemental interconnect and transmission capacity in the event that one
or more of its primary carriers experience system failures. Esprit Telecom has
undertaken joint Year 2000 compliance reviews through industry forums and with
several of its major carriers. Ultimately, however, Esprit Telecom has no
control of the Year 2000 readiness of any of its suppliers or customers, and
will be exposed to risks associated with their failure to assess and address
Year 2000 problems. There are many Year 2000 issues outside of the control of
Esprit Telecom, and like most telecommunications service providers, Esprit
Telecom believes it is inappropriate to provide specific guarantees that service
will not be affected by the transition to the new millennium.
 
                                       88
<PAGE>   92
 
     Implementation
 
     Esprit Telecom is in the process of securing supplemental interconnect and
transmission capacity from several carriers in addition to its current primary
carriers. With respect to its own systems, Esprit Telecom has spent
approximately $4.0 million for Year 2000 compliance through September 30, 1998,
and expects to spend approximately an additional $4.0 million through the end of
calendar year 1999. Out of this total of $8.0 million in expenditures, Esprit
Telecom expects to spend a total of $1.0 million on repairing existing systems
and the remainder on testing and replacement.
 
     Testing
 
     Esprit Telecom expects to test numerous elements of its systems for Year
2000 compliance, as well as its ability to interconnect with and utilize back-up
carriers, throughout 1999. In particular, Esprit Telecom expects to test its new
billing and management information systems when the same become operational in
mid-1999. As noted above, however, Esprit Telecom will be unable to test its
network systems in their entirety since to do so would involve shutting down its
network for a period of time.
 
IMPACT OF EURO
 
   
     In accordance with the Treaty on EU, signed at Maastricht on February 7,
1992, Stage III of the Economic and Monetary Union (EMU) will commence on
January 1, 1999. At that time, a single currency, the 'Euro', will be
introduced. The Euro will exist in parallel with national currencies, and
transactions may be denominated in either currency until December 31, 2001
(though only notes and coins of the national currencies will be available for
physical exchange). From January 1, 2002, Euro notes and coins will be
introduced and national currencies will be withdrawn by June 30, 2002. Those
participating member states will also transfer authority for conducting monetary
policy to a European Central Bank. From January 1, 1999, the value of the Euro
as against the currencies of each of the participating member states will be
irrevocably fixed.
    
 
     On May 3, 1998, European governments and central banks announced that the
following eleven member states would participate in the third stage of EMU:
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The
Netherlands, Portugal and Spain. They also announced the bilateral exchange
rates at which the eleven currencies of these participating member states are
expected to be fixed against one another on January 1, 1999. Although it is
expected that the relevant central banks will take market action to ensure that
market exchange rates on December 31, 1998 will be equal to the announced rates,
this is not certain.
 
     Esprit Telecom has significant operations within the EU. The implications
are currently being considered by a working party which includes representatives
from each of the relevant business functions. These include: preparing business
systems for trading in Euros and converting the accounting systems of companies
in the common currency area from their national currency to Euros; the benefit
of the elimination of exchange rate risk in cross border transactions within the
common currency area; the potential impact of increases in pricing transparency
on price differentials between member states; and training and human resources
issues. Esprit Telecom is working actively with key business suppliers and
customers to prepare for EMU. In addition, monetary union may have a significant
impact on macroeconomic factors, including interest and foreign exchange rates.
 
     Esprit Telecom's readiness is being managed as a discrete business project
across the group; all businesses expect to have systems and procedures in place
which will enable them to conduct Euro transactions appropriate to their local
market requirements. Equally, Euro capability requirements are being
incorporated into the financial system and projects of the corporate centre. The
principal business system which will be most affected by EMU is billing; a new
billing system has been contracted and is in the process of implementation. This
system is fully Euro-compatible. Costs in other areas have not been quantified.
 
     Looking forward, key commercial risks, such as pricing transparency, are
being analyzed by each business, with a view to minimizing any impact through
active management in these areas over the EMU transition period and beyond.
However, there can be no assurance that the Euro will not have a negative
 
                                       89
<PAGE>   93
 
impact. The impact of future entry to EMU of other European countries
(particularly the United Kingdom)is being similarly analyzed.
 
US GAAP RECONCILIATION
 
     Esprit Telecom's financial statements are prepared in accordance with UK
GAAP, which differ in certain significant respects from US GAAP. The main
differences relevant to Esprit Telecom relate to stock based compensation.
 
     For further explanation of the differences between UK GAAP and US GAAP, see
Note 30 to Esprit Telecom's Consolidated Financial Statements.
 
    RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER
    30, 1998
 
REVENUE
 
     Revenue increased from approximately L45.5 million for the year ended
September 30, 1997 to approximately L82.6 million for the year ended September
30, 1998, representing an increase of 81.6%. This increase was mainly due to the
increase in Esprit Telecom's retail customer base and customer traffic in all of
its European operations, particularly in the United Kingdom, The Netherlands and
Germany partially offset by a decline in prices for Esprit Telecom's products
and services and a reduction in wholesale revenues. Revenue from Belgium, Spain,
France and Italy increased by 104.9% between the two periods due to the increase
in Esprit Telecom's retail and service provider/reseller customer base and
customer traffic.
 
   
     Revenue from retail services increased from approximately L18.9 million for
the year ended September 30, 1997 to approximately L51.6 million for the year
ended September 30, 1998, representing an increase of 172.7%. This increase was
due mainly to the increase in Esprit Telecom's customer base resulting from an
expanded direct sales force throughout Europe and to the launch of national long
distance and retail indirect Access service in several countries, particularly
The Netherlands and Germany. In addition, the acquisition of the Plusnet
business contributed approximately L12.5 million of net revenue to the results
for the year ended September 30, 1998. Revenue from service provider/reseller
services increased from approximately L7.1 million for the year ended September
30, 1997 to approximately L16.1 million for the year ended September 30, 1998,
representing an increase of 126.3%. This increase was mainly due to both the
increase in Esprit Telecom's base of service provider/reseller customers and an
increase in such customers' underlying client base and traffic. Revenue from
wholesale services decreased from approximately L19.4 million for the year ended
September 30, 1997 to approximately L14.9 million for the year ended September
30, 1998, representing a decrease of 26.9%. This decrease was mainly due to
deliberate action taken by Esprit Telecom to reduce the volume of such traffic
until sufficient spare capacity was present on the Esprit Telecom communications
network for the profitability of wholesale services to be improved. Esprit
Telecom began re-establishing its wholesale business during the third quarter
ended June 30, 1998 and wholesale revenue in the fourth quarter rose by 177.3%
to L8.0 million compared with a total of L2.9 million in the previous quarter.
    
 
COST OF REVENUE
 
   
     Cost of revenue increased from approximately L37.9 million for the year
ended September 30, 1997, to approximately L65.8 million for the year ended
September 30, 1998, an increase of 73.5%. As a percentage of revenue, cost of
revenue decreased from 83.5% for the year ended September 30, 1997 to 79.7% for
the year ended September 30, 1998. This is primarily as a result of (i) an
increase in the efficiency of the Esprit Network as bottlenecks on key routes
were resolved and interconnect arrangements were implemented in The Netherlands
and Germany, (ii) the increased proportion of higher margin retail revenue, and
(iii) network and termination costs falling more rapidly than selling prices.
During the period from May 1, 1998 to September 30, 1998, the cost of revenue
for the Plusnet business was 57.1%. The Company anticipates that its continued
planned investment in the expansion of the Esprit Telecom communications
network, and the implementation of further interconnect arrangements, will
result in a significant improvement in unit network and termination costs in the
medium term.
    
 
                                       90
<PAGE>   94
 
   
     Access costs increased from approximately L2.3 million for the year ended
September 30, 1997, to approximately L7.2 million for the year ended September
30, 1998, an increase of 215.6%. This increase was mainly due to the increased
number of retail customers. Access costs as a percentage of revenue increased
from 5.0% for the year ended September 30, 1997, to 8.6% for the year ended
September 30, 1998, primarily due to the higher proportion of retail services
revenue and the increase in the proportion of such revenue generated in markets
outside the United Kingdom where access costs may be higher. Network costs
increased from approximately L5.9 million for the year ended September 30, 1997,
to approximately L8.6 million for the year ended September 30, 1998, an increase
of 44.7%. This increase was mainly due to an increase in national and
international leased lines obtained to satisfy the increased volume of traffic
minutes and the expansion of the Esprit Telecom communications network. Network
costs as a percentage of revenue decreased from 13.0% for the year ended
September 30, 1997, to 10.4% for the year ended September 30, 1998, due
primarily to the increased efficiency of the Esprit Network and to reductions in
unit lease line rental costs.
    
 
     Termination costs increased from approximately L29.8 million for the year
ended September 30, 1997, to approximately L49.8 million for the year ended
September 30, 1998, an increase of 67.3%. This increase was primarily due to the
increase in traffic volume. As a percentage of revenue, termination costs
decreased from 65.5% for the year ended September 30, 1997, to 60.3% for the
year ended September 30, 1998, as cost reductions outpaced selling price
reductions, as interconnect arrangements were brought into service in The
Netherlands and Germany, and as the proportion of higher margin retail traffic
increased.
 
SELLING, GENERAL AND ADMINISTRATIVE
 
   
     Selling, general and administrative expenses increased from approximately
L15.5 million for the year ended September 30, 1997, to approximately L35.2
million for the year ended September 30, 1998, an increase of 126.9%. This
increase was primarily attributable to the increase in the number of staff and
sales offices, as well as administrative and marketing costs required for
acquiring and supporting the increased customer base, the addition of the
Plusnet business, and to an investment in operational staff in advance of the
establishment of the Esprit Telecom communications network fibre ring
infrastructure and the implementation of new billing systems.
    
 
     Selling, general and administrative expenses in the year ended September
30, 1998 are net of foreign exchange gains on non financing assets and
liabilities of approximately L1.1 million.
 
STOCK OPTION COMPENSATION COST
 
     Esprit Telecom has adopted UK accounting standard UITF17, requiring
recognition of the costs associated with the issue of stock and options at
discounted values. This treatment realized a compensation cost of approximately
L112,000 in the year ended September 30, 1998, compared to a cost of
approximately L417,000 in the year ended September 30, 1997.
 
DEPRECIATION AND AMORTIZATION
 
   
     Depreciation and amortization expenses increased from approximately L2.8
million for the year ended September 30, 1997, to approximately L11.9 million
for the year ended September 30, 1998, an increase of 319.6%. This increase was
primarily due to the addition of fixed assets to support the expansion of the
Esprit Telecom communications network and its operations throughout Europe, and
to amortisation of goodwill related to the acquisition of the Plusnet business
which accounted for approximately L1.6 million of the depreciation and
amortisation expenses in the twelve month period ended September 30, 1998.
Depreciation of Esprit Telecom's SDH broadband fiber network infrastructure,
which was established in May 1998, totalled approximately L1.5 million in the
period up to September 30, 1998. The capital value of these assets is
depreciated using an accelerated method over a 10 year period, reflecting the
anticipated useful economic life of the asset.
    
 
                                       91
<PAGE>   95
 
NET INTEREST EXPENSE
 
   
     Net interest expense increased from a gain of approximately L695,000 for
the twelve month period ended September 30, 1997 to an expense of approximately
L12.2 million for the twelve month period ended September 30, 1998. The increase
was principally due to interest payable on the notes, which were issued in
December 1997 and on the notes issued in June 1998, partially offset by interest
earned on cash deposits. Approximately L22.8 million, net of ordinary bank
interest paid, was accrued as interest on both series of Notes during the twelve
month period ended September 30, 1998. The interest paid on finance leases
amounted to approximately L1.2 million for the twelve month period ended
September 30, 1998. In addition there was a foreign exchange gain of
approximately L3.6 million arising from the effect of currency movements on both
series of Notes during the twelve month period ended September 30, 1998.
    
 
     RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER
     30, 1996
 
REVENUE
 
     Revenue increased from approximately L24.9 million for the year ended
September 30, 1996 to approximately L45.5 million for the year ended September
30, 1997, representing an increase of 82.7%. This increase was mainly due to the
increase in Esprit Telecom's customer base and customer traffic in all of its
European operations, particularly in the United Kingdom and The Netherlands,
partially offset by a decline in prices for Esprit Telecom's products and
services. Revenue from Belgium, Spain, France and Germany increased by 207.6%
between the two periods.
 
   
     Revenue from retail services, both direct and indirect, increased from
approximately L12.5 million for the year ended September 30, 1996 to
approximately L18.9 million for the year ended September 30, 1997, representing
an increase of 51.9%. This increase was due mainly to the increase in Esprit
Telecom's customer base resulting from an expanded direct sales force throughout
Europe and to the launch of the retail indirect access service in the UK. In
addition, the acquisition of Telecom Europa and Swift Global contributed
approximately L557,000 of net revenue to the results for the year ended
September 30, 1997. Revenue from wholesale services increased from approximately
L10.9 million for the year ended September 30, 1996 to approximately L19.4
million for the year ended September 30, 1997, representing an increase of
78.7%. This increase was mainly due to the increase in the number of wholesale
customers and increased volume of traffic minutes from such customers to
destinations both on and off the Esprit Telecom communications network. Revenue
from service provider/reseller services increased from approximately L1.6
million for the year ended September 30, 1996 to approximately L7.1 million for
the year ended September 30, 1997, representing an increase of 359.0%. This
increase was mainly due to both the increase in Esprit Telecom's base of
resellers and service provider customers and an increase in such customers'
underlying client base and traffic.
    
 
COST OF REVENUE
 
   
     Cost of revenue increased from approximately L18.8 million for the year
ended September 30, 1996, to approximately L37.9 million for the year ended
September 30, 1997, an increase of 102.3%. As a percentage of revenue, cost of
revenue increased from 75.4% for the year ended September 30, 1996 to 83.5% for
the year ended September 30, 1997, primarily as a result of an increase in the
percentage of revenue from wholesale services for the first three quarters of
the 1997 financial year and from service provider/reseller services over all of
the 1997 financial year, a shift in wholesale traffic mix towards lower margin
routes, a decrease in the efficiency of the Esprit Telecom communications
network as key routes were congested and the strengthening of the pound sterling
against other European currencies and the U.S. dollar. The currency effect
reflected the higher percentage of Esprit Telecom's cost base denominated in
pounds sterling relative to the percentage of its revenue base denominated in
pounds sterling.
    
 
     Access costs increased from approximately L1.3 million for the year ended
September 30, 1996, to approximately L2.3 million for the year ended September
30, 1997, an increase of 70.6%. This increase was mainly due to the increased
number of retail customers. Access costs as a percentage of revenue decreased
slightly from 5.3% for the year ended September 30, 1996, to 5.0% for the year
ended September 30, 1997,
 
                                       92
<PAGE>   96
 
primarily due to the decreasing proportion of retail service revenue over the
first three quarters of the 1997 financial year.
 
   
     Network costs increased from approximately L3.4 million for the year ended
September 30, 1996, to approximately L5.9 million for the year ended September
30, 1997, an increase of 73.8%. This increase was mainly due to an increase in
national and international leased lines contracted for to satisfy the increased
volume of traffic minutes and the expansion of the Esprit Telecom communications
network. Network costs as a percentage of revenue decreased slightly from 13.7%
for the year ended September 30, 1996, to 13.0% for the year ended September 30,
1997, primarily due to lower leased line costs and increased line utilization.
    
 
   
     Termination costs increased from approximately L14.0 million for the year
ended September 30, 1996, to approximately L29.8 million for the year ended
September 30, 1997, an increase of 112.3%. This increase was primarily due to
the increase in traffic volume. As a percentage of revenue, termination costs
increased from 56.4% for the year ended September 30, 1996, to 65.5% for the
year ended September 30, 1997, primarily due to the increased proportion of
wholesale service revenue for the first three quarters of the 1997 financial
year and the increased proportion of service provider/reseller services revenue
for the 1997 financial year, both of which carry lower termination margins than
retail revenue, a shift in wholesale traffic mix towards lower margin routes, a
decrease in the efficiency of the Esprit Telecom communications network as key
routes were congested and the strengthening of the pound sterling against other
European currencies and the U.S. Dollar. Esprit Telecom has taken a number of
actions to address the problems it has experienced in its wholesale business,
and expects that revenue from wholesale will decline over the remainder of
calendar 1997. Due to delays in activating certain MIUs and IRUs previously
purchased, Esprit Telecom experienced significant congestion on key routes and
overflow to higher-cost alternatives during the second, third and fourth
quarters of financial 1997. Esprit Telecom expects that its gross margin will
continue to be adversely affected over the remainder of calendar 1997 until new
network capacity becomes available.
    
 
SELLING, GENERAL AND ADMINISTRATIVE
 
     Selling, general and administrative expenses increased from approximately
L7.5 million for the year ended September 30, 1996, to approximately L15.5
million for the year ended September 30, 1997, an increase of 106.5%. This
increase was primarily attributable to the increase in the number of staff and
sales offices, as well as administrative and marketing costs required for
acquiring and supporting the increased customer base. Selling, general and
administrative expenses for the year ended September 30, 1997 include an
unrealized foreign exchange loss of approximately L960,000, reflecting the
effect of the appreciation of the pound sterling against other currencies on
Esprit Telecom's non-sterling cash deposits and intercompany obligations. In the
year ended September 30, 1996, there was a foreign exchange loss of
approximately L163,000. In addition, Esprit Telecom made a provision against bad
debt of approximately L1.3 million during 1997, of which approximately L880,000
related to service provider/reseller customers in the fourth quarter of 1997.
 
   
     During the year ended September 30, 1997, Esprit Telecom incurred
restructuring costs of approximately L312,000 related to the reorganization and
reincorporation of Esprit Telecom, and the redesign of its stock ownership
programs, prior to Esprit Telecom's initial public offering in February 1997.
    
 
STOCK COMPENSATION COST
 
   
     Esprit Telecom has adopted a newly promulgated accounting policy under UK
generally accepted accounting principles requiring recognition of the costs
associated with the issue of stock and options at discounted values. Such costs
amounted to approximately L417,000 in the year ended September 30, 1997,
significantly lower than the costs recognized for the 1996 financial year of
approximately L2.0 million, primarily as a result of old variable option plans
being closed and the adoption of a revenue-approved savings scheme in 1997 which
does not attract a charge on the issuance of options. See Notes 4 and 6 to the
Consolidated Financial Statements of Esprit Telecom. As required by UK generally
accepted accounting principles, this accounting change has been effected by
restating the results of previous periods.
    
 
                                       93
<PAGE>   97
 
DEPRECIATION AND AMORTIZATION
 
     Depreciation and amortization expenses increased from approximately L1.5
million for the year ended September 30, 1996, to approximately L2.8 million for
the year ended September 30, 1997, an increase of 92.8%. This increase was
primarily due to the addition of fixed assets to support the expansion of the
Esprit Network and its operations throughout Europe.
 
NET INTEREST RECEIVABLE/EXPENSE
 
   
     Net interest moved from payables of approximately L203,000 for the year
ended September 30, 1996 to receivables of approximately L695,000 for the year
ended September 30, 1997. The change from the year ended September 30, 1996 to
the year ended September 30, 1997, was principally due to interest received on
cash balances resulting from the initial public offering, partially offset by
interest charges on a vendor finance lease arrangement on which Esprit Telecom
drew down initially in the second quarter of 1996 to fund the purchase of its
central office switches in London and further in the third quarter of 1997 to
fund the purchase of its central office switch in Amsterdam. The interest paid
on this finance lease amounted to approximately L315,000 for the year ended
September 30, 1997.
    
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Esprit Telecom's statement of cash flow for the periods indicated is
summarized below:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30,
                                                                -----------------------------
                                                                 1996      1997        1998
                                                                ------    -------    --------
                                                                  L          L          L
                                                                       (IN THOUSANDS)
<S>                                                             <C>       <C>        <C>
Cash (outflow)/inflow from operating activities.............    (2,245)    (2,999)    (29,133)
Returns on investments and servicing of finance.............      (203)       695      (4,834)
Taxation....................................................        --         (2)         (2)
Capital expenditure and financial investment................    (3,594)    (7,919)    (22,478)
Acquisitions and disposals..................................        --       (852)    (91,643)
                                                                ------    -------    --------
Cash outflow before financing...............................    (6,042)   (11,077)   (148,090)
Management of liquid resources..............................    (2,335)   (20,541)   (158,058)
Financing...................................................     6,541     29,799     308,309
                                                                ------    -------    --------
Decrease/(increase) in cash in the period...................    (1,836)    (1,819)      2,161
                                                                ======    =======    ========
</TABLE>
 
     Esprit Telecom's liquidity requirements arise from net cash used in
operating activities, servicing of financial obligations (principally, interest
on financing leases, bank facilities and the Notes), financial investments,
funding of acquisitions and for capital expenditures for the expansion of Esprit
Telecom's activities.
 
     Esprit Telecom's net cash used in operating activities was approximately
L29.1 million for the year ended September 30, 1998, approximately L3.0 million
for the year ended September 30, 1997 and approximately L2.2 million for the
year ended September 30, 1996. Net funds utilized for the servicing of financial
obligations amounted to a payable of approximately L4.8 million for the year
ended September 30, 1998, a receivable of approximately L695,000 for the year
ended September 30, 1997 and a payable of approximately L203,000 for the year
ended September 30, 1996.
 
     For the year ended September 30, 1998, capital expenditures, including
finance leases, totaled approximately L41.2 million, of which approximately
L19.1 million related to telecommunications equipment and approximately L16.3
million related to the capital value of the London -- Paris ring network
infrastructure. The cash usage in respect of capital expenditure, net of the
impact of capital lease funding thereon, was approximately L21.2 million in the
year ended September 30, 1998, approximately L7.9 million in the year ended
September 30, 1997 and approximately L3.6 million in the year ended September
30, 1996.
 
                                       94
<PAGE>   98
 
     On November 19, 1997 Esprit Telecom acquired IMS, a telecommunications
services company operating in The Netherlands. The minimum aggregate
consideration payable by Esprit Telecom for the acquisition is approximately
L6.8 million over the next two years. Esprit Telecom has also agreed to pay
additional amounts in respect of the acquisition over a two year period
contingent in part upon the achievement of certain financial and performance
targets. These additional amounts may increase Esprit Telecom's total investment
to a maximum aggregate of approximately L10.8 million dependent upon future
performance.
 
     In July 1998, Esprit Telecom completed the acquisition of the Plusnet
business, and paid a consideration of approximately L103.8 million (or
approximately DM307 million, based upon the exchange rates ruling as at the date
of the acquisition) net of costs. Pursuant to the sale and purchase agreement
between Esprit Telecom and Thyssen, this consideration has since been
recalculated at approximately L90.0 million (or approximately DM267 million,
based upon the exchange rates ruling as at the date of the acquisition) based
upon a final determination of the revenues of the Plusnet business for the year
ended September 30, 1998.
 
   
     Cash, deposits and restricted securities increased during the twelve month
period ended September 30, 1998 by approximately L160.2 million, from
approximately L24.5 million to approximately L184.7 million. In December 1997,
Esprit Telecom completed its offering of U.S.$230 million 11.500% Senior Notes
and DM125 million 11.500% Senior Notes, both due 2007, realizing net cash
proceeds of approximately L175.1 million, before other costs in connection with
the offering of approximately L0.6 million. In June 1998, Esprit Telecom
completed its offering of U.S.$150 million 10.875% Senior Notes and DM150
million 11.000% Senior Notes, both due 2008, realizing net cash proceeds of
approximately L136.0 million. The first six semi-annual interest payments on the
1997 Notes will be funded from restricted securities and interest thereon, the
total balance of which was approximately L49.0 million as at September 30, 1998.
    
 
     Esprit Telecom has entered into commitments to purchase equipment from
Nortel, Ericsson and Nera amounting to approximately L23.0 million related to
the expansion and development of its network and sales operations.
 
     Esprit Telecom currently anticipates spending approximately L97 million
over the next two years for capital expenditures related to the expansion and
development of its network and sales operations. In addition, Esprit Telecom
currently anticipates further investment in its SDH broadband fiber network
infrastructure, to a capital value of approximately L100 million, which is
expected to be financed mainly by long term vendor lease arrangements.
 
   
     If the proposed acquisition by GTS is completed, Esprit Telecom's financing
plans and liquidity requirements could change in significant respects. In
particular, GTS is in the process of developing its business plan and strategy
for Esprit Telecom, including the manner in which Esprit Telecom will be
integrated into the overall GTS business and corporate structure. GTS may elect
to contribute one or more GTS businesses to Esprit Telecom as part of its
strategy including the recently acquired NetSource Europe ASA. GTS also may have
one or more other GTS entities purchase assets from Esprit Telecom as part of
its strategy. Any such transactions will be effected in accordance with the
applicable covenants in Esprit Telecom's indentures. GTS may also decide in the
future to effect a tender or exchange offer or additional consent solicitations
with respect to the Esprit Telecom Notes referenced above, including if it were
advisable to better integrate Esprit Telecom into the overall GTS corporate
structure.
    
 
                                       95
<PAGE>   99
 
                                    BUSINESS
 
INTRODUCTION
 
   
     GTS provides a broad range of telecommunications services to businesses,
other telecommunications service providers and consumers in Central Europe,
Russia and the other independent countries of the CIS. Through its subsidiary
HER, GTS is developing and operating 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' strategy in emerging markets 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. GTS' 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, which are wired and wireless, and (vi) carriers'
carrier networks, which provide high volume transmission capacity to other
carriers. In addition, GTS has recently developed a business plan to offer
facilities-based telecommunications products and services to businesses and
other high-usage customers in certain metropolitan markets throughout Europe.
For a comprehensive discussion of this plan, see "-- Business
Strategy -- European Services Strategy."
    
 
   
     In Western Europe, GTS believes that it is well-positioned to establish
itself as the leading independent carriers' carrier through the development of
two ventures, HER and GTS-Monaco Access S.A.M. HER is one of the leading
carriers' carriers providing centrally managed cross-border telecommunications
transmission capacity in Europe. Its network, when completed by the end of 2000,
will extend approximately 25,000 kilometers, with points of presence in
approximately 50 cities in 20 European countries. 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 HER and GTS-Monaco Access ventures, GTS is building a new network for
transporting voice, data and multimedia/image traffic for other carriers
throughout Western and Central Europe and for worldwide international voice,
data and multimedia/image traffic that either originates or terminates in, or
transits through, Western and Central Europe. For more information on
developments in Western Europe, see "-- Western Europe."
    
 
   
     In Central Europe, GTS' objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary and the Czech Republic, Slovakia and Romania. In the Czech Republic, GTS
provides outgoing voice services and operates an international gateway and a
data services network. In Hungary, GTS operates a nationwide microwave network
and a VSAT network, which GTS believes is the largest VSAT network in Central
Europe as measured by number of VSAT sites. In Slovakia and Romania, GTS
provides VSAT services using its VSAT hub in Hungary. Subject to certain
regulatory approvals, GTS has also obtained a license to provide international
data services in Poland and expects to begin operations during the first quarter
of 1999. GTS' strategy is to expand its service offerings as the regulatory
environment permits, leverage its existing VSAT and international gateway
infrastructure where possible and provide a broad range of services to its
target markets. For more information on developments in Central Europe, see
"-- Central Europe."
    
 
   
     In Russia and the CIS, GTS' objective is to become the premier alternative
telecommunications operator. To attain its objective, GTS has partnered with
regional telephone companies and with Rostelecom, the national long distance
carrier in Russia. GTS currently operates in 34 regions and the city of Moscow
in Russia, as well as in 14 additional cities in the CIS, and believes it is
well-positioned to become the leading independent telecommunications service
provider in Russia. These businesses include: (i) EDN Sovintel, which provides
Moscow and St. Petersburg with international long distance and local telephone
services and access to the major domestic long distance carriers; (ii)
TeleCommunications of Moscow, which provides local access services in Moscow;
(iii) TeleRoss (as defined below), which provides domestic long distance
    
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<PAGE>   100
 
   
services in fifteen cities in Russia, including Moscow, as well as VSAT service
to customers outside its primary long distance satellite network; (iv) Sovam
Teleport, 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 operations, which
operate cellular networks in 14 regions in Russia and also in Kiev, Ukraine,
with licenses covering regions with an aggregate population of approximately 42
million people at September 30, 1998. Whenever practical, GTS' businesses
integrate and co-market their service offerings in Russia and the other
independent republics of 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' Russian
and other CIS ventures carried approximately 442 million and 462 million minutes
of traffic for the year ended December 31, 1997 and the nine months ended
September 30, 1998, respectively, and had approximately 34,100 customers,
including approximately 25,200 cellular subscribers, as of September 30, 1998.
For more information on developments in Russia and the other independent
countries of the CIS, see "-- Russia and the CIS."
    
 
     GTS does not currently own or operate significant telecommunication assets
in Asia. See "-- Asia."
 
RESTRUCTURING
 
     In October 1998, GTS announced it would restructure its business operations
into five primary lines of business as follows:
 
     - GTS Carrier Services, which will include HER's cross-border transport
       carrier services in Europe, Ebone Internet transit services, transoceanic
       infrastructure and services, and Internet service units;
 
     - GTS Access Services, which will pursue GTS's entry into the Western
       European CLEC market;
 
     - GTS Business Services -- Western Europe, which will offer voice, data,
       Internet and other telecommunications services to businesses in Western
       Europe, principally in locations not served by GTS Access Services;
 
     - GTS Business Services -- CIS, which will incorporate all of GTS's CIS
       "wireline" assets, including Sovintel, Sovam, TeleRoss and TCM; and
 
     - GTS Mobile Services, which will operate all of GTS's cellular businesses
       in Russia and the Ukraine.
 
RECENT DEVELOPMENTS
 
  NETSOURCE ACQUISITION
 
   
     On November 30, 1998, GTS completed the acquisition of NetSource for an
initial purchase price consisting of 4,037,500 newly issued shares of GTS common
stock that has a value of $99.3 million and $46.1 million in cash. In addition
to the initial consideration paid at the closing, GTS has agreed to make
additional payments of up to $35 million in either cash or shares of GTS common
stock (up to a maximum of 1.4 million shares), contingent on NetSource's
achieving certain performance targets during the first two quarters of 1999.
NetSource is a pan-European provider of long distance telecommunications
services focusing primarily on small- to medium-sized businesses, with
operations in Norway, Sweden, Germany and Ireland, as well as in The
Netherlands, Belgium and Denmark. At June 30, 1998, NetSource had 27,900
business customers throughout Europe and 61,400 residential customers in Germany
and The Netherlands. NetSource will become part of GTS Business
Services -- Western Europe. The acquisition of NetSource provides the GTS
Business Services -- Western Europe line of business with a customer and revenue
base in several key Western European countries, a portfolio of licenses and
interconnection agreements and an entrepreneurial management team.
    
 
  ESPRIT TELECOM ACQUISITION
 
     On December 8, 1998, GTS and Esprit Telecom announced in a joint press
announcement that they had agreed on the terms of a proposed offer by GTS to
purchase all of the outstanding ordinary shares and ADSs
 
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<PAGE>   101
 
   
of Esprit Telecom and that holders of 65% of the voting ordinary shares of
Esprit Telecom have agreed to accept the offer. Under the proposed offer, GTS
will offer to purchase all issued and to be issued Esprit Telecom ADSs and
shares on the following basis:
    
 
   
     - for each Esprit Telecom ordinary share, 0.1271 of a share of GTS common
       stock; and
    
 
   
     - for each Esprit Telecom ADS, 0.89 of a share of GTS common stock.
    
 
   
     Based on the Nasdaq closing price of $41.75 per share of Common Stock on
December 7, 1998, the Offer values each Esprit Telecom ordinary share at $5.31
(L3.21), each Esprit Telecom ADS at $37.16 (L22.48) and the entire issued share
capital of Esprit Telecom, on a fully diluted basis, at approximately $757.3
million (L458.2 million). This represents a premium of approximately 22.8% over
the middle market price of an Esprit Telecom ADS on Nasdaq at the close of
business on December 7, 1998, being the last trading day before the announcement
of the offer (based on an exchange rate of L1 = $1.6530 being the Noon Buying
Rate on December 7, 1998).
    
 
   
     The making of the offer is subject to certain pre-conditions, including
that GTS obtain waivers by the holders of Esprit Telecom 11.5% Senior Notes due
2007 and 10.875% Senior Notes due 2008 of their rights under the applicable
indentures to require Esprit Telecom to repurchase these Notes at 101% of the
principal amount of the debt in connection with the change of control of Esprit
Telecom resulting from the consummation of the offer. This pre-condition was
satisfied on December 23, 1998 through a successful consent solicitation. The
results of the consent solicitation are binding on all holders of these Notes.
    
 
     GTS's obligation to complete the offer is subject to the satisfaction or
waiver of several conditions. These conditions include, among others, that:
 
   
     - GTS has received valid acceptances representing not less than 90% (or
       such lesser percentage above 50% as GTS may decide) of Esprit Telecom
       ADSs and ordinary shares;
    
 
     - the GTS shareholders have approved resolutions authorizing the issuance
       of GTS shares in the offer; and
 
     - there has been no material adverse change in the business, assets or
       prospects of Esprit Telecom.
 
     The transaction is expected to close in the first half of 1999. GTS expects
that the transaction will be accounted for as a pooling of interests.
 
     Esprit Telecom is a rapidly growing European telecommunications company,
providing high quality, competitively priced, international and national long
distance telecommunications services to retail customers and other
telecommunications service providers. Esprit Telecom has a network and sales
office infrastructure in 31 locations in eight countries in Europe generating a
run rate of over one billion minutes of traffic per annum. Esprit Telecom
Networks Limited, an independent operations subsidiary of Esprit Telecom, is
currently building a 9,500 route kilometer SDH and DWDM fiber optic network
through six European countries. Esprit Telecom also has links to Washington and
New York via a transatlantic circuit owned by other carriers
 
     GTS believes that the businesses of GTS and Esprit Telecom are
complementary and that benefits will result from combining them. In particular,
the combined group expects to have:
 
     - a presence in 19 countries through Europe;
 
     - increased network capacity and resilience;
 
     - a 500 person sales force, one of the largest among independent
       telecommunications companies in Europe;
 
     - the ability to provide a wide array of service offerings;
 
     - increased management depth;
 
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<PAGE>   102
 
     - reduced network operations and administrative costs;
 
     - capital expenditure savings.
 
     GTS expects the combination will assist the companies in realizing their
mutual goals of becoming the pre-eminent providers of carrier's carrier and
business communications services throughout Europe.
 
   
     GTS is in the process of developing its business plan and strategy for
Esprit Telecom, including the manner in which Esprit Telecom will be integrated
into the overall GTS business and corporate structure. GTS may elect to
contribute one or more GTS businesses to Esprit Telecom as part of its strategy,
including NetSource. GTS also may have one or more other GTS entities purchase
assets from Esprit Telecom as part of its strategy. Any such transaction will be
effected in accordance with the applicable covenants in the indentures governing
the Esprit Telecom 11.5% and 10.875% Senior Notes due 2007 and 2008,
respectively. GTS may also decide in the future to effect a tender or exchange
offer or consent solicitations with respect to these Notes, if it were advisable
to better integrate Esprit Telecom into the overall GTS corporate structure.
    
 
  HER DEBT OFFERING
 
   
     On January 4, 1999, HER issued in a private placement $200 million
principal amount of 10 3/8% Senior Notes due 2009 and Euro 85 million principal
amount of 10 3/8% Senior Notes due 2006. The net proceeds of this offering,
approximately $289.7 million, will be used to finance the cost of HER network
assets, to expand the HER network beyond the currently contemplated scope,
including by adding transatlantic capacity, enhancing the speed of the HER
network and continuing the buildout of the HER network.
    
 
   
  FLAG ATLANTIC-LIMITED JOINT VENTURE
    
 
   
     On January 13, 1999, GTS, though its subsidiary GTS Transatlantic Holdings
Ltd., entered into an agreement with FLAG Telecom to form a 50/50 joint venture
company in Bermuda, to be known as FLAG Atlantic-Limited, that will build and
operate a transoceanic fiber optic link between Europe and the United States.
FLAG Atlantic-Limited's link is designed to carry voice, high-speed data video
traffic at speeds of 1.28 terabits per second, a 25-fold increase over current
transatlantic cable systems. The joint venture will also provide backhaul links
from the European landing points of the transatlantic link to Paris and London.
By interconnecting to FLAG Atlantic-Limited, GTS Carrier Services and its
subsidiary HER will be able to provide their carrier and Internet service
provider customers with high-capacity cable access from major European cities to
New York City. GTS's investment in FLAG Atlantic-Limited is designed to enable
it to participate in the growth opportunity represented by the rapid increase in
demand by business customers for Internet Protocol-based telecommunications
services. The high-capacity fiber optic link will be based on synchronous
digital hierarchy and use dense wave division multiplexing technology. Flag
Atlantic-Limited is expected to be offering service by the end of the year 2000.
The project is subject to financing, the execution of related agreements and
other conditions.
    
 
BUSINESS STRATEGY
 
   
     GTS seeks to develop businesses to meet the rapidly expanding market demand
for telecommunications services. GTS seeks to position itself as the leading
independent telecommunication service provider in Europe through the development
of a pan-European fiber optic network and an international gateway in Monaco. In
addition, GTS has introduced a business plan to offer a broad range of
integrated telecommunications services to businesses and other high-usage
customers in certain metropolitan markets throughout Europe. For a more
comprehensive discussion of these strategic plans, see "-- Western Europe" and
"-- European Services Strategy." GTS' 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.
    
 
     GTS has developed market strategies to achieve its goals in both emerging
markets and Western Europe. It has developed and is implementing a business plan
to offer comprehensive telecommunications services to business end users
throughout Europe.
 
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<PAGE>   103
 
   
     Western Europe. GTS believes it is well-positioned to establish itself as
the leading independent carriers' carrier within Western Europe through the
development of HER's pan-European fiber optic network and the operation by GTS
of international gateway switching capacity. HER and the international gateway
switching capacity are complementary and enhance the services provided by PTOs
and new entrants to the telecommunications market such as alternative carriers,
global consortia of telecommunications operators and other service providers, in
a way that helps them to more successfully meet the needs of their end-user
customers. HER has been able 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, HER 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.
    
 
   
     European Services Strategy. In June 1998, GTS introduced a business plan to
offer, through several new subsidiaries, a broad range of integrated
telecommunications services to businesses and other high usage customers in
certain metropolitan markets throughout Europe. GTS believes that the size and
growth potential of the European market combined with increasing liberalization
of European telecommunications regulations provides GTS with the opportunity to
successfully develop local networks and other end-user services. Through GTS
Business Services -- Western Europe, GTS intends to enter up to 50 metropolitan
markets as a reseller of services to end-users. Through GTS Access Services, GTS
proposes to develop CLECs in up to 12 European cities. Implementation of the
European services strategy may involve one or more of the following: (i) the
construction of fiber loop networks, (ii) the purchase or lease of dark fiber,
(iii) obtaining high frequency microwave licenses for "wireless fiber," or (iv)
partnership with, or acquisition of, resellers or facilities-based CLECs. In
evaluating potential markets GTS will consider among others the following
characteristics of each market: (i) its business concentration, (ii) the
national and local regulatory environment, (iii) the technical difficulties of
local network construction and (iv) the extent of existing competition. For a
thorough discussion of these considerations, see "Risk Factors -- Risks Relating
to European Services Strategy," "-- Recent Developments," "-- Western Europe"
and " -- European Services Strategy."
    
 
     Emerging Markets. GTS 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 are expected 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, GTS 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, GTS 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'
       strategy is to provide its customers with service of higher quality than
       that provided by incumbents.
 
     - 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 and providing a bundled service
       offering, GTS expects to both expand its customer base and increase GTS'
       share of each customer's telecommunications spending. GTS also expects to
       achieve increased economies of scale through the common use of
       administrative and operating functions already in place. GTS also seeks
       to expand its targeted geographic market by forming new partnerships and
       installing infrastructure and offering services in additional geographic
       regions,
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<PAGE>   104
 
       allowing GTS 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. GTS
       believes such integration will enable it to enhance its operating
       efficiency by leveraging its distribution channels, infrastructure,
       networks and management information systems. As customers develop a need
       for a broader variety of telecommunications services, GTS believes that
       GTS' integrated operations will represent an attractive service
       alternative for customers seeking a single provider that can meet all
       their telecommunications needs.
 
WESTERN EUROPE
 
  OVERVIEW
 
     GTS seeks to position itself as the leading independent carriers' carrier
within Western Europe through the development of two ventures, HER and
GTS-Monaco Access. HER is one of the leading carriers' carriers providing
centrally managed cross-border telecommunications transmission capacity in
Europe. Its high capacity fiber optic network, when completed by the end of
2000, will extend approximately 25,000 kilometers, with points of presence in
approximately 50 cities in 20 European countries. 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 HER and GTS-Monaco Access ventures, GTS is building a new network for
transporting voice, data and multimedia/image traffic for other carriers
throughout Western and Central Europe and for worldwide international voice,
data and multimedia/image traffic that either originates or terminates in, or
transits through, Western and Central Europe.
 
     GTS believes that the international segment of the Western and Central
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 requiring the full liberalization of all
telecommunications services in most EU member states by January 1, 1998. GTS
expects that full liberalization in these European countries will lead to the
emergence of new entrants to the telecommunications market with new and
competitive service offerings. HER 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. HER 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 HER network will offer PTOs and new entrants to the telecommunications
market 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
single PTO therefore owns or controls end-to-end circuits for cross-border
calls. The alternative for carriers of this traffic will be to build their own
transport capacity or use IPLCs which are provisioned by combining half-circuits
on the networks of two or more PTOs. GTS believes that there are a number of
problems with these options that result in HER being well-positioned to become
the leading independent carriers' carrier in Western and Central Europe. In
particular, building their 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,
    
 
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<PAGE>   105
 
   
particularly in obtaining the rights of way across national borders. 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. For a discussion of the risks facing GTS
in the development of this network, see "Risk Factors -- Risks Specific to
GTS -- HER Network Roll-out" and "Risk Factors -- Risks Specific to GTS --
Competition."
    
 
  HER
 
   
     HER is one of the leading carriers' carriers providing centrally managed
cross-border telecommunications transmission capacity in Europe. Its network,
when completed by the end of 2000, will extend approximately 25,000 kilometers,
with points of presence in approximately 50 cities in 20 European countries.
HER's customers include traditional PTOs and new entrants to the
telecommunications market such as alternative carriers, global consortium of
telecommunications operators, international carriers, Internet backbone
networks, resellers, value-added networks and other service providers. HER
offers these customers a superior transport system than is currently available
in Europe through PTOs with a higher and more consistent level of transmission
quality, redundancy, network functionality and service at lower prices. HER
currently operates in Belgium, The Netherlands, the UK, France, Germany,
Switzerland, Italy, Denmark and Sweden. At present, the network links 17 cities:
Brussels, Antwerp, Rotterdam, Amsterdam, London, Paris, Frankfurt, Strasbourg,
Zurich, Geneva, Stuttgart, Dusseldorf, Munich, Milan, Berlin, Copenhagen and
Stockholm. In November 1998, HER leased capacity on a transatlantic cable
linking the HER network with North America and is exploring various
interconnectivity options to Russia. Although HER 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 the completion of the HER network could
have a material adverse effect on HER and GTS.
    
 
   
     HER intends to continue to build the network using an accessible and
cost-efficient infrastructure of railways, motorways, pipeline companies,
waterways and power companies. HER has 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. GTS cannot assure you that
HER 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) timely performance by
various third parties of their contractual obligations to engineer, design and
construct portions of the network and (ii) HER's ability to obtain and maintain
applicable licenses and authorizations.
    
 
   
     HER has entered into agreements for the construction and/or lease of fiber
optic routes for the network in Belgium, The Netherlands, the UK, France,
Germany, Switzerland, Italy, Denmark, Sweden and Spain. HER continues to
negotiate rights-of-way and other infrastructure arrangements in order to extend
its network in Western Europe and will need to negotiate similar agreements to
complete the network in four Central European countries. Buildout of the HER
network is subject to numerous risks and uncertainties that could delay
deployment or increase the costs of the network, or make the network
commercially infeasible. These risks are discussed in the section "Risk
Factors -- Risks Relating to HER Network Roll-out."
    
 
     On June 24, 1998, HER completed the acquisition of a 75% interest in Ebone
for ECU 90 million (approximately $99.5 million based on the ECU/U.S. dollar
exchange rate in effect on that date). Headquartered in Copenhagen, Denmark,
Ebone is a Tier 1 Internet backbone provider focused on connecting Internet
service providers in Europe to the Internet. As of September 30, 1998, Ebone
served more than 89 customers in 23 cities. As part of the transaction, Ebone
purchased under a transmission capacity agreement long-term capacity rights on
the HER network valued at ECU 90 million. The transmission capacity agreement is
expected to provide for the majority of Ebone's current and forecasted capacity
requirements. HER will provide Ebone with capacity of up to 622 megabits per
second between the majority of European cities that Ebone serves. In addition to
the majority interest held by HER, Ebone's new
 
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<PAGE>   106
 
ownership structure will continue to include many of Ebone's existing customers,
which own the balance of Ebone's shares through an association.
 
   
     HIT Rail B.V., which is referred to as HIT Rail formed HER on July 6, 1993.
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-Carrier Services, Inc.
(formerly GTS-Hermes, Inc.), a Delaware corporation, which is referred to as
GTS-CSI, purchased a 34.4% interest in HER in 1994 and increased its interest to
50% in 1995 and to 79.1% in 1997. In March 1998, GTS-CSI increased its ownership
of HER to approximately 89.4% by purchasing a portion of HIT Rail's ownership
interest in HER. GTS-CSI currently owns an 89.9% equity interest in HER. GTS-CSI
is a wholly owned subsidiary of GTS. In an effort to expand its presence in
Europe, HER has formed wholly owned subsidiaries in The Netherlands, Ireland,
the UK, Germany, France, Italy and Spain to conduct marketing and other
activities. In Belgium, the activities of the Network Operations Center have
been transferred to HER Network Services B.V.B.A. (formerly Hermes Europe
Railtel N.V.), a wholly owned subsidiary of HER. Following the development of
its corporate structure, HER will be a holding company with limited assets and
will operate its business through subsidiaries.
    
 
     Business and Marketing Strategy
 
   
     The overall strategy of HER is to offer PTOs and new entrants to the market
pan-European cross-border telecommunications transport services to help them, in
turn, more successfully meet the needs of their end-user customers. The HER
network also provides a vehicle through which a carrier can compete in markets
where it does not own infrastructure. HER's primary service offerings are
large-capacity circuits for "wholesale" customers such as PTOs and new entrants.
HER designed its focus on carriers to complement and not compete with carriers'
own business objectives in providing services to end-users.
    
 
     Following the acquisition of Ebone and given the increased market demand
for transatlantic low cost city-to-city services, HER now plans to expand its
objective to become a leading player in the provision of seamless transatlantic
city-to-city services. In November 1998 HER leased capacity on a transatlantic
cable linking the European network to North America. To meet its objective it
now needs to further augment its transatlantic capacity and invest further in
extending its network, as well as increasing the capacity of the network.
 
     To establish HER as the leading carriers' carrier for international
telecommunications within Europe, HER offers its customers significantly higher
quality transmission and extended/advanced network capabilities at a competitive
price by focusing on the following:
 
     High Capacity Cross Border Network Facilities. The HER 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. With DWDM upgrades, HER's fiber deployment plan
provides for a minimum of 800 Gigabits on all major routes. Options are in place
to expand fiber capacity further on a number of routes.
 
     Uniform Network Architecture. The HER 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 HER network's uniform technology enhances service by providing
quality and reliability as well as uniformity of features throughout the
network.
 
     Diverse Routing. The HER network architecture includes diverse, redundant
routes that are designed to provide high levels of reliability. The network is
designed to provide availability of over 99.9% 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
HER network, HER believes that carrier customers would need to purchase
additional dedicated circuits to provide for redundancy.
 
     Rapid Provisioning. Customers can quickly obtain additional capacity on the
HER network. This access provides a level of capabilities that HER believes is
unavailable in Europe today. This ability to rapidly provide
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<PAGE>   107
 
service is largely due to HER's development of capacity substantially in excess
of HER's forecasted requirements.
 
     Flexibility. HER 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. HER is deploying SDH and DWDM technology which 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 IP Services.
 
     Innovative Pricing. Currently the price of high-bandwidth circuits on
transborder European routes is artificially high and not necessarily related to
the cost of such circuits. HER offers competitive pricing. HER also offers
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.
 
   
     GTS intends to offer comprehensive, facilities-based telecommunications
products and services to business and other high-usage customers in certain
metropolitan markets in Europe. GTS' intention is described in the section
"-- European Services Strategy." Many of GTS' planned service offerings will
compete directly with services offered by HER's customers, which may affect the
perception of HER as an independent carrier's carrier. There can be no assurance
that GTS' European Services Strategy will not negatively impact HER's ability to
attract and retain customers which would have a material adverse affect on HER
and GTS.
    
 
     Managed Bandwidth Services
 
     HER's primary service is large capacity cross-border European circuits and
transatlantic services provided to carriers and service providers over an
integrated, managed pan-European network structure for wholesale customers such
as PTOs and New Entrants. The HER network, based on SDH and DWDM technology,
provides 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 and
Central 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-16 Standard (2-S Gigabits) (equivalent to 155 Mbps).
 
     Point-to-Point Transmission Capacity. The current market for cross-border
transport is served by IPLCs provided by PTOs. Traditionally, 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. GTS
believes that its Point-to-Point Transmission Capacity is a major improvement to
the PTO-based approach because it provides a greater range of bandwidths (from 2
Mbps (E1 or VC-12) to multiple 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 Transmission Capacity consists of two services, "Integrated"
and "Node-to-Node." The HER "Integrated" service provides an end-to-end service
between customer-specified locations where the customer can request for HER to
arrange for "last mile" services from the HER node location to the customer's
location. The "Node-to-Node" service can be selected when the customer prefers
to provide its own services to reach the local HER node location. In
Node-to-Node Service, HER guarantees service only on its portion of the network
between HER nodes. Both services are competitively priced relative to current
 
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service offerings. The customer can choose flexible contract terms from one to
ten or more years' duration, with discount schemes designed to ensure that HER
remains a cost-effective solution.
 
   
     Virtual Network Transmission Services. 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. Such service providers have traditionally obtained
international transport service by leasing IPLCs. 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. For a discussion
of the risks involved, see "Risk Factors -- Risks Specific to
GTS -- Competition."
    
 
     HER's Network Transmission Service will offer a new solution and an
attractive alternative to leasing IPLCs or building infrastructure. This service
enables HER's 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 HER network at a pricing structure based on the overall amount
of leased capacity for the customer's entire network.
 
     Ring Service. Most medium to large carriers and operators purchase network
capacity in excess of actual requirements, and prefer to have physical
configuration control over their networks. The HER Ring Service connects
multiple customer locations with multiple VC-4 paths in a ring configuration.
All VC-4 paths within a ring are routed via physically diverse fibers to allow
the customer to have reliable and direct control over the configuration of its
VC-3 and VC-12 paths within the ring, and have exclusive control over the
routing. Additional ring capacity can be added with no service interruption and
additional customer locations may be added to the ring with minimal service
interruption. Because HER is not required to configure "idle" bandwidth or to
manage the "SDH subnet" this service can be provided at a very competitive rate
vis-a-vis other point-to-point services.
 
     Internet-Based Services
 
     Ebone Internet Services. ISPs have been buying Internet access from Ebone
since 1991. Building on the expertise developed since these early days of the
Internet in Europe, Ebone now offers ISPs a carriers' grade Internet access
service with the following significant features:
 
     - Reliable access to Internet service throughout the European and American
       backbone of Ebone, which is made possible by always oversizing the
       bandwidth capacity on HER's backbone that is allocated to Ebone's
       Internet network;
 
     - Access to one of the largest installed bases of ISP customers in Europe;
 
   
     - Access to the other Internet networks with multi-point high speed
       peerings with major Tier 1 Internet backbone providers in Europe and in
       the U.S.; and
    
 
     - Access speeds ranging up to 140 Mbps.
 
     IP Services. This new line of HER services is being developed for service
providers that focus on Internet, Intranet or voice over IP services. This IP
traffic has been traditionally supported by a combination of managed bandwidth
services (like the ring or the point-to-point services of HER) and Internet
backbone services (like the Ebone Internet services).
 
     Today, service providers building their IP backbones demand the speed
offered by fiber infrastructure, the reliability of HER managed bandwidth
services and the flexibility of Internet backbone services.
 
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<PAGE>   109
 
     The IP services will carry the international Internet traffic of service
providers between their private points of presence and/or Internet exchange
points. These services combine the quality of a carrier class transmission
service with the easy bandwidth upgrades that are the strength of large Internet
backbone providers.
 
     Pricing and Distribution
 
     Sales of HER's services are conducted through its subsidiary Hermes Europe
Railtel (Ireland) Limited. HER accesses additional distribution channels using
local or regional network access providers.
 
     Currently, the price of cross-border pan-European calls is 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 HER
to attractively and competitively price services in the face of declining
overall tariffs for telecommunication services. HER's 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 currently ranges from one to three
years in length. The customer agrees to purchase, and HER agrees to provide,
cross-border transmission services. In general, the customer agrees to pay
certain non-recurring charges up front 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 HER
a cancellation charge equal to three months' service for each of the twelve
months remaining in the contract term. HER guarantees transmission services to a
certain service level. If such levels are not met or HER 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
 
     HER's high capacity, SDH and DWDM-based fiber optic network is designed to
enable PTOs and New Entrants to integrate high quality, cross-border capacity
into their end user offerings. As of September 30, 1998, 48 customers contracted
for service on the HER network including PTOs, global consortia of PTOs, ISPs,
alternative carriers, an international carrier, VANs and resellers. For the
three months ended September 30, 1998, HER installed and sold capacity of
approximately 1,209 and 5,157 E1 equivalents, respectively. As of September 30,
1998, the HER backlog, cumulative contractually obligated future revenues, was
$257.3 million. The type and quality of HER's customers validates the concept of
the HER network and illustrates the type of customers who will be attracted to
the full network. The success of the existing network also demonstrates the
demand for cross-border transport services. In total, HER is targeting seven
major market segments or customer groups, which can be characterized as follows:
 
   
     Existing PTOs. This customer segment consists of the traditional European
PTOs that generally participate in the standard bilateral agreements for
cross-border connectivity. HER provides a vehicle for PTOs to compete in
non-domestic markets. As of January 1, 1998, both reserved and non-reserved
traffic could be transported by alternative infrastructure providers, thus
vastly expanding the available PTO market for HER.
    
 
   
     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
pan-European services to multinational business customers, including X.25/frame
relay (high speed data network) service and closed-user group voice services
which is a CCITT standard governing the interface between data terminals and
data circuit termination equipment for terminals on packet-switched data
networks. Under the current regulatory framework, consortia would otherwise be
required to purchase leased lines at negotiated retail rates, even within their
home countries. HER believes that it provides an attractive alternative at
better pricing in those environments where such a
    
 
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<PAGE>   110
 
consortium does not already own its infrastructure. Furthermore, HER believes
that it is well positioned to provide cross-border connectivity between
different domestic infrastructures of these alliances.
 
   
     International Carriers. This customer segment consists of non-European
carriers with traffic between European and other international gateways.
Existing customers in this segment include Teleglobe and GTS-Monaco Access.
Targeted future customers include the U.S. Regional Bell Operating Companies.
HER can provide these customers a pan-European distribution network to gather
and deliver traffic to and from their own and other hubs.
    
 
     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 GTS
believes that they would look favorably to an alternative such as HER. HER
believes that this segment will sustain the largest growth as competition
emerges in Europe. HER also believes that non-PTO competitors in Europe will
prefer to use a non-PTO alternative like HER to meet their cross-border
telecommunication transport needs.
 
     Internet Backbone Networks. Internet backbone networks are a fast emerging
segment and are expected to generate significant requirements for the services
HER 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. On June 24, 1998, HER
entered into an agreement with Ebone, a Tier 1 Internet backbone provider which
at September 30, 1998 served 89 ISPs in 23 European countries, to provide long-
term transmission capacity of up to 622 megabits per second across the majority
of European cities that Ebone serves. As part of the transaction, HER purchased
a majority interest in Ebone.
 
   
     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.
    
 
     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. HER will allow them to meet these needs cost-effectively and to
extend their services to new markets or customers without substantial capital
investment.
 
     HER 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.
 
     Network Design
 
     The network design is based on a layered architecture separating physical,
optical and telecom layers of the HER network with standard interfaces in order
to optimize design and operation and provide flexibility for introducing new
technologies such as IP.
 
     The physical layer of the HER network is based on a mesh of dark fiber
routes interconnecting cities on the network via at least two or three
physically diverse paths for maximum resilience against fiber or facilities
failures. In each major city there will additionally be two customer access
sites for resilience.
 
     The optical layer of the HER network, which is expected to be extended
during 1999 to cover ten countries, representing the core of the HER network, is
based on DWDM. This layer supports the provision of optical services direct to
customers at 2.5 Gbps and provides for the operation of multiple SDH and/or IP
 
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<PAGE>   111
 
systems to run concurrently on a single fiber pair in a highly cost efficient
manner. The HER network, currently in seven countries, is based on Ciena 40
wavelength systems with a capacity of 100 Gbps on a fiber pair.
 
     The SDH layer of the HER network, running via DWDM channels in the core of
the network, and directly on the fiber elsewhere supports the provision of
point-to-point services to customers at speeds of E1/VC-12 (2 Mbps) up to STM-1
(155 Mbps). The SDH layer is itself a multilayered architecture consisting of
multiple SDH rings optimized for different traffic characteristics. Each SDH
ring supports full automatic re-routing of traffic in the case of a break in the
ring. This layer is based on Alcatel STM-16 (2.5 Gbps) systems which are
installed throughout the operational HER network.
 
     An IP layer is expected to be added to the HER network starting in the
second quarter of 1999. This layer will support high capacity IP routers, which
can deliver IP services to customers at speeds from 1 Mbps to 622 Mbps. These
routers will be supported on the DWDM layer of the network directly and/or via
ATM in the core of the HER network, and on top of the SDH layer elsewhere. HER
plans to extend IP service delivery capabilities to all cities on the network by
the end of the year 2000. This layer will be able to handle failures
independently of the lower layers via re-routing at the IP level.
 
     The HER network is controlled by a single active Network Operations Center
in Brussels, Belgium, with a backup center, with equivalent management systems
continuously synchronized with the primary center, being maintained in
Amsterdam.
 
     The Network Operations Center can pinpoint potential service impacting
problems and deal with service re-routing if required much more effectively than
in networks controlled by multiple operators in different countries. HER's
advanced operational support systems also provide comprehensive capabilities for
managing the large number of network components and local repair organizations
required in an extensive international network of this size, as well as for
advanced customer care in managing the large number of network components and
local repair organizations required in an extensive international network of
this size, as well as for advanced customer care in managing customer
operational activities.
 
     Overall the combination of high levels of redundancy of physical and
management components and the ability to recover from individual failures at the
optical, SDH and IP layers provides for a high degree of network performance. As
a result, HER is able to enter into strong performance commitments with its
customers and services on most routes of its network has performed at above
99.9% availability.
 
   
     HER expects to operate the 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 HER because they reduce the capital expense burden
of building large quantities of capacity before they can be used. Where HER
leases dark fiber, the infrastructure provider will generally be responsible for
maintaining such fiber optic cable. HER will enter into agreements with
equipment vendors and infrastructure providers and other third parties to supply
and/or maintain the equipment for the HER network. For a discussion of the risks
relating to HER's network operations, see "Risk Factors -- Risks Specific to
GTS -- HER Network Roll-out."
    
 
     Network Capacity
 
     The HER network is being built to include 40 wavelength DWDM systems on all
routes. This allows for incremental SDH and IP systems of 2.5 Gbps to be
installed when and only when required, thus providing for efficient management
of capital investment.
 
     Should capacity be required beyond the initial 100 Gbps on the first fiber
pair, additional fiber pair(s) can be brought into operation utilizing either
higher capacity DWDM systems at 2.5 Gbps or at 10 Gbps. Such systems will be
available from 1999. HER plans to have a minimum of two fiber pairs on all
routes and to extend capacity both via additional routes providing further
resilience, as well as on selecting existing routes where available over time.
This approach to fiber utilization again provides for an optimal management of
fiber investment.
 
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<PAGE>   112
 
     Network Agreements. HER has entered into agreements and letters of intent
with various infrastructure providers for construction and/or dark fiber lease
of portions of the HER network. HER's agreements for leases of portions of the
network typically require the infrastructure provider to provide a certain
number of pairs of dark fiber and in some cases, facilities along the network
route commencing on certain dates provided by HER. The term of a lease agreement
typically ranges from 10 to 18 years. An agreement typically contains optical
specification standards for the fiber and methods of testing. HER is allowed to
use the cable for the transmission of messages and in other ways, including
increasing capacity. The infrastructure provider may also provide space for the
location of HER equipment and related maintenance. The infrastructure provider
is responsible for maintenance of the cable facilities. 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 minimum cure period. The agreements
typically contain a transition period after termination of the agreement to
allow HER to continue to serve its customers until it can reach agreement with
an alternative infrastructure provider. In certain areas of the network, where
it is not possible to lease dark fiber, HER has signed agreements or letters of
intent for indefeasible right of use to managed bandwidth. The terms of these
agreements typically range from 10 to 25 years.
 
     Local Access. Access to the HER network will be primarily 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 HER
network for optical service STM-16 level. In each city, as a HER point of
presence is deployed, HER may contract with one or more local access network
suppliers for "last mile" services to customer locations. HER 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,
HER has contracted with a number of local access providers to connect the HER
network to intra-city networks. Pursuant to such agreements, HER can offer its
carrier customers local connectivity in those cities. Various local access
network suppliers may also be interested in HER for the purpose of linking the
business centers in which they are active. Therefore, GTS believes that the
relationships between HER and local access network suppliers can benefit both
parties. Set forth below is an illustration of the connection between the HER
network and local access providers.
 
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<PAGE>   113
 
                            [SDH/WDM NETWORK CHART]
 
     The portion of the HER network currently in operation extends approximately
9,200 kilometers. When completed by the end of 2000, the network will extend
approximately 25,000 kilometers. In November 1998, HER also leased capacity on a
transatlantic cable linking the European network with North America. During the
first quarter of 1999, the network is planned to be expanded through France,
Madrid and Barcelona in Spain, and in the second quarter of 1999, extended
further in Italy and to Luxembourg. By the end of 1999, the HER network will be
further extended to Austria, the Czech Republic and Portugal.
 
   
     The routes to be completed by the first half of 1999 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) HER has contracted to build or is contracting to build the fiber optic cable
segment, and (ii) HER has leased or will lease such segment of dark fiber optic
cable from a third party who has built or is currently building such segment.
The dates set forth above may be subject to delays due to a variety of factors,
many of which are beyond the control of GTS and described in the section of the
prospectus. "Risk Factors -- Risks Specific to GTS -- HER Network Roll-Out."
    
 
   
     HER is deploying the network along the rights-of-way of a variety of
alternative sources, including railways, motorways, waterways, pipelines and
utilities. The rights-of-way of HER-built portions of the network will be
provided pursuant to long-term leases or other arrangements entered into with
railways, highway commissions, pipeline owners, utilities or others. It is the
policy of HER to evaluate multiple alternative infrastructure suppliers in order
to maximize flexibility. As a result of its network development activities to
date, HER has gained access to infrastructure for its network routes which, in
certain cases, HER believes will be difficult for its competitors to duplicate
and described in the section of the prospectus "Risk Factors -- Risks Specific
to GTS -- HER Network Roll-Out."
    
 
     Competition
 
     The European and international telecommunications industries are
competitive. HER's 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 HER
operates, (ii) global
 
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<PAGE>   114
 
alliances among some of the world's largest telecommunications carriers; and
(iii) global operators. HER expects that some of these potential competitors may
also become its customers. HER believes that the ongoing liberalization of the
European telecommunications market will attract additional entrants to the
market and increase the intensity of competition. Competitors in the market
compete primarily on the basis of price and quality. HER intends to focus on
these factors and on service innovation as well. HER's business plan anticipates
substantial head-to-head competition as well as indirect competition.
 
     Various telecommunications companies, including MCI WorldCom, Inc., Viatel,
Inc., KPN N.V., Deutsche Telekom AG, France Telecom S.A., Global Crossing Ltd.,
British Telecommunications plc and Esprit plc, have announced plans to
construct, have begun to construct or are operating fiber optic networks across
various European countries. Some of these networks include, or their promoters
have expressed their intentions to include, transatlantic connectivity. The
Company also competes with respect to its "point-to-point" transborder service
offering against circuits currently provided by PTOs through IPLCs.
 
   
     If HER's competitors, many of whom possess greater technical, financial and
other resources than HER, 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 HER's business, financial
condition and results of operations. GTS cannot assure you that HER will be able
to compete successfully against such new or existing competitors. For the risks
involved in HER's operations, see "Risk Factors -- Risks Specific to
GTS -- Competition."
    
 
     Licenses and Regulatory Issues
 
     A summary discussion of the regulatory framework in certain countries where
HER has developed and is developing the HER network is set forth below. This
discussion is intended to provide a general outline, rather than a comprehensive
discussion, of the more relevant regulations and current regulatory posture of
the various jurisdictions.
 
   
     National authorities in individual member states of the EU are responsible
for regulating the construction and operation of telecommunications
infrastructure. HER 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 construction and operation of telecommunications infrastructure in the
countries of the EU and Switzerland where HER currently has operations.
    
 
   
     HER requires licenses, authorizations or registrations in all countries to
operate the network. GTS cannot assure you that HER will be able to obtain such
licenses, authorizations or registrations or that HER's operations will not
become subject to other regulatory, authorization or registration requirements
in the countries in which it operates or plans to operate. Licenses,
authorizations or registrations have been obtained in Belgium, Denmark, France,
Germany, Italy, The Netherlands, Spain, Sweden, Switzerland, the UK and the
United States. HER intends to file applications in other countries in
anticipation of service launch in accordance with the network roll-out plan.
    
 
   
     EU. On June 28, 1990, the European Commission, in an effort to promote
competition and efficiency in the EU, issued 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 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. Deferrals
of the obligations to liberalize were 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, is eligible
for a special transitional period of up to two years.
    
 
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<PAGE>   115
 
   
     On November 5, 1997, the European Commission initiated several infringement
proceedings against those Member States which had not implemented the relevant
transposition measures of the 1990 directive and other liberalization
directives. The member states concerned were Denmark, Greece, Italy, Luxembourg,
Germany, Portugal and Belgium. The European Commission also decided to continue
the infringement procedure it had already opened against Spain. Subsequently, in
March 1998, it was reported in the press that several of these infringement
proceedings had been closed because the member states concerned had properly
implemented the relevant provisions.
    
 
     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 be restricted only 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.
 
   
     On June 11, 1997, the European Parliament and the Council of Ministers
adopted a directive on interconnection with regard to ensuring universal service
and interoperability through application of ONP principles; among other things
this requires member states to ensure that PTOs with significant market power
should provide interconnection on the basis of cost-oriented charges.
    
 
     On February 26, 1998, the European Parliament and the Council of Ministers
adopted a directive on the application of ONP to voice telephony and on
universal service.
 
   
     The European Commission has also recently initiated several infringement
proceedings for incomplete or wrong transposition into national law of the April
1997 licensing directive (against Austria, Italy, Belgium, France and
Luxembourg) and the June 1997 ONP interconnection directive (against Belgium,
France and Luxembourg).
    
 
   
     Notwithstanding the above-mentioned infringement proceedings, HER 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 HER's ability to obtain other necessary regulatory
approvals for its operations.
    
 
   
     As a multinational telecommunications company, HER 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 HER operates.
GTS cannot assure you that future regulatory, judicial and legislative changes
will not have a material adverse effect on HER, that domestic or international
regulators or third parties will not raise material issues with regard to HER's
compliance or noncompliance with applicable regulations or that regulatory
activities will not have a material adverse effect on HER. See "Risk
Factors -- Risks Specific to GTS -- Government Regulation." The regulatory
framework in certain jurisdictions in which HER provides its services is briefly
described below.
    
 
   
     Belgium. Belgium has implemented the "alternative infrastructure" provider
provision of the full competition directive. Most of the EC telecommunications
liberalization package was adopted at the end of December 1997. The implementing
legislation (Royal Decrees) regarding the licensing regimes for the provision of
voice telephony services and the establishment of public network infrastructure
was approved by the Council of Ministers at the end of June 1998. The official
publication and the entry into force of that implementing legislation took place
in July 1998. Until such entry into force, the Belgian Telecommunication
Authority will continue to work with the system of provisional licenses. HER has
already obtained, through a wholly owned subsidiary, a license in February 1997
from the Belgian regulatory authority to build infrastructure between major
Belgian population centers and the relevant border crossings. HER also has an
authorization to provide liberalized services using alternative infrastructure.
The liberalization legislation requires all previously licenced operators to
apply for new licenses or authorizations. HER applied for a new license in
October 1998. HER expects that its existing license will be renewed in due
course although there can be no assurance that this will be the case or that
such license will be granted on terms acceptable to HER.
    
 
                                       112
<PAGE>   116
 
   
     Denmark. With the liberalization of infrastructure as of July 1, 1997,
Denmark has fully liberalized its telecommunications markets in accordance with
the requirements of the relevant EC directives. According to the Danish rules,
HER will not require any regulatory approval in order to install or operate the
network in Denmark.
    
 
     France. A new regulatory agency, the Autorite de Regulation des
Telecommunications, was established in France effective January 1, 1997. In
1996, France approved legislation to implement the Full Competition Directive
and to remove all remaining restrictions on competition from January 1998. In
October 1997, HER obtained authorization to operate its network in specific
regions of France. In August 1998, HER was granted an extension of its license
in order to extend its network in France to reach Italy and Spain. Such
authorization requires prior notification to and approval of the Autorite de
Regulation des Telecommunications of any substantial changes in the capital of
HER or its controlling shareholder.
 
   
     Germany. Germany has approved legislation to implement the full competition
directive and remove all remaining restrictions on competition from August 1996.
HER was granted a license by the German regulatory authorities on July 18, 1997.
The license permits HER to operate the portions of the network in Germany
connecting Dusseldorf, Frankfurt and Stuttgart; Dusseldorf to the Dutch border;
and Stuttgart to the French border. In 1998, HER was granted extensions to its
license to include operation of routes linking Hamburg, Hanover, Munich and
Berlin and of routes to Denmark.
    
 
     Italy. Although in the past Italy has been dilatory in implementing EC
liberalization measures, Italy enacted legislation on July 31, 1997 creating an
independent national regulatory authority for the telecommunications and
audiovisual sectors. On September 19, 1997, Italy enacted a regulation
implementing all EC directives in the telecommunications sector and since then
specific laws relating to licensing and interconnection have been approved. HER
was granted a license by the Italian authorities in August 1998, enabling the
development of its network in the northwest region of Italy, including Milan.
 
   
     Luxembourg. A new Telecommunication Act entered into force in April 1997,
and a Royal Decree on licensing conditions entered into force in July 1998. HER
applied to the Luxembourg regulatory authority for a license to build and
operate its network in Luxembourg in October 1998. HER expects to be granted a
license in Luxembourg by the first quarter of 1999. GTS cannot assure you,
however, that such license will be granted on terms acceptable to HER.
    
 
   
     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, HER was granted an
authorization for the installation, maintenance and use of a fixed
telecommunications infrastructure.
    
 
   
     A new Telecommunications Act was adopted on October 13, 1998, and is now in
force. The new Act confirms the full liberalization of the telecommunications
market according to EC standards. It is not expected that the new
Telecommunications Act will detrimentally affect the conduct of business by HER.
HER's existing authorization will lapse in June 1999. HER intends to register as
a public telecommunications network operator under the new Act before that time.
This will allow it to install, maintain and use a fixed telecommunications
infrastructure.
    
 
   
     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. In April 1998, Spain adopted the LGT, its new telecommunications law.
The LGT was implemented through the use of secondary legislation. The LGT and
the secondary legislation resulted in the full liberalization of the Spanish
telecommunications market on December 1, 1998. On December 3, 1998, the Spanish
regulatory authority began to issue licenses under the new regime. HER was
granted a license to install and operate a telecommunications network in Spain
on January 14, 1999.
    
 
   
     Sweden. Full liberalization of the Swedish telecommunications market
occurred in 1993. A new Telecommunications Act was passed in 1997 to reinforce
the powers of the national regulatory authority, to ensure conformity with EC
directives and to supplement the pre-existing licensing regime with a general
    
 
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<PAGE>   117
 
authorization regime for certain services. HER registered with Swedish
authorities has been able to provide service in Sweden since July 1998.
 
   
     Switzerland. The Swiss Parliament has passed a Telecommunications Law which
entered into force on January 1, 1998. Although Switzerland is not a member
state of the EU, the effect of the law is largely to mirror the EC
telecommunications liberalization directives. From that date, voice telephony
monopoly was abolished and services fully liberalized. In September 1998, the
Swiss regulatory authority granted HER a definitive concession (replacing an
earlier provisional concession) to build and operate its network in Switzerland.
    
 
   
     United Kingdom. Since the elimination in 1991 of the UK telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of Oftel, the UK telecommunications regulatory authority, to create
a competitive marketplace from which detailed regulation could eventually be
withdrawn. The UK has already liberalized its market beyond the requirements of
the full competition directive, and most restrictions on competition have been
removed in practice as well as in law. HER has received a license from the
Secretary of State for Trade and Industry dated December 18, 1996 which grants
it the right to run a telecommunications system or systems in the UK connected
to an overseas telecommunications system and to provide international services
over such systems. Like the licenses granted to other providers of international
facilities-based services, the license granted to HER was for an initial six
months' duration and thereafter is subject to revocation on one month's notice
in writing. The short duration of these initial licenses was adopted for
administrative convenience to facilitate reforms to the licensing regime which
are expected in 1999. The Department of Trade and Industry has confirmed that it
intends to replace the initial licenses with new licenses and that it would not
revoke an initial license without replacing it with another license giving an
equivalent authorization. The Department of Trade and Industry is currently
discussing with license holders the arrangements to put these new licenses into
effect. Although the Department of Trade and Industry has indicated that the new
licenses are expected to be of 25 years' duration, there can be no certainty
that this will be the case or that the new licenses will not contain terms or
conditions unfavorable to HER.
    
 
   
     United States. HER was granted a license by the FCC pursuant to section 214
of the Communications Act of 1934 authorizing it to provide limited global
facilities-based and global resale services (except U.S. services, subject to
items and conditions imposed by law and the authorization, to and from Hungary,
Poland, the Czech Republic, Romania, Monaco, Russia, Ukraine, Kazakhstan,
Uzbekistan, Azerbaijan, China and India) effective October 23, 1998.
    
 
     In addition to the discussion above, HER intends to file applications in
other countries in anticipation of service launch in accordance with the HER
network roll-out plan. The terms and conditions of HER's licenses,
authorizations or registrations may limit or otherwise affect HER's scope of
operations. There can be no assurance that HER 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 HER. 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 HER.
 
  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 an international gateway
hub for transport of international traffic to European and overseas
destinations. The Principality has constructed and operates a sophisticated
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 through its network. GTS believes that
this partnership provides it with the opportunity to build a strong
international gateway presence in lucrative Western European markets.
 
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<PAGE>   118
 
     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.
 
   
     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 operators 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' 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. GTS exercises operational control of the joint
venture, and provides managerial and financial support, international
telecommunications expertise and strategic planning. Neither GTS nor its partner
is obligated to fund operations or capital expenditures of GTS-Monaco Access.
Losses and profits of GTS-Monaco Access are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
As of September 30, 1998, GTS and its partner had each made equity contributions
of $0.8 million to GTS-Monaco Access. In addition, GTS-Monaco Access had
outstanding loans of $2.9 million to GTS as of September 30, 1998. See "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting Methodology -- Profit and Loss Accounting." The
agreement between GTS-Monaco Access and MT, by its terms, continues in operation
until 2020. MT, 50% partner in GTS-Monaco Access and the local telephone
operator for the Principality of Monaco, is presently seeking a partner to
purchase a minority stake in MT. The sale of such stake, if undertaken, should
not be dilutive to the economic interest of GTS in GTS-Monaco Access although
the impact of such sale on the strategic view of MT toward GTS-Monaco Access
cannot be determined at this time.
 
     Business and Marketing Strategy
 
     GTS' strategy for developing GTS-Monaco Access into an international
gateway hub includes the following:
 
     Develop Advanced Carrier Services Offerings. GTS-Monaco Access may 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 may
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' 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 competitive cost operations.
 
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<PAGE>   119
 
     Leverage Non-Aligned Position. Because GTS' Western European activities are
not allied with any of the major consortia or large Western European
telecommunications companies, GTS-Monaco Access may be considered an attractive
service provider for Western European carriers who may otherwise be reluctant to
obtain services from the larger operators of international gateways that are
often their competitors in the retail market.
 
     Exploit GTS Synergies. GTS-Monaco Access may ally 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 HER,
Sovintel and C-Datacom International, Inc., GTS' Indian venture, already route
international traffic through GTS-Monaco Access's gateway.
 
     Customers
 
     Targeted customers for GTS-Monaco Access include:
 
          Non-Aligned PTOs. GTS believes that various large American and Western
     European PTOs that lack adequate international switching and transport
     facilities of their own may be persuaded to purchase international services
     from GTS-Monaco Access, rather than from competing PTOs or consortia.
 
          Mobile Carriers. GTS believes that some of the non-PTO mobile
     carriers, which currently provide only a small percentage of Western
     European mobile telecommunications traffic, may 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 ISPs will be in direct competition with
     PTO-owned services in large European markets.
 
          Second Carriers/Resellers. GTS believes that many second carriers 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. As markets are deregulated and carriers
     become increasingly competitive, traditional friendly correspondent
     relations may become strained, and opportunities may emerge to leverage
     GTS' 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 indirectly to Sovintel, CDI and other GTS companies that aggregate
     traffic or provide international long distance services. It may also
     provide these services to HER.
 
     In January 1998, GTS-Monaco Access terminated its relationship with a major
traffic partner as a result of which GTS expected that the venture would lose
approximately $6 million of revenues in 1998. GTS-Monaco Access has put in place
plans to replace such revenues from other sources.
 
     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.
 
     The network infrastructure of GTS-Monaco Access is complementary with that
of HER, with each serving the carriers' carrier market from different
perspectives; HER for bandwidth services and GTS-Monaco Access for switched call
terminations and other carrier services.
 
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<PAGE>   120
 
     Licenses and Regulatory Issues
 
     Because it operates in coordination with MT, the licenced 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 directly
subject to EC law. However, GTS-Monaco Access will have to comply with EU
regulation to the extent it does business in EU member states or its business
has an effect on trade between EU member states. The regulatory requirements
established by the EU create general guidelines under which the national
agencies of EU member states regulate. Accordingly, local laws and regulations
may differ significantly among these jurisdictions, and the interpretation and
enforcement of such laws and regulations may vary. In certain of GTS' existing
and target markets, there are laws and regulations which affect the number and
types of customers which GTS 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 country of termination 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.
 
     With the advent of deregulation in the Western European telecommunications
markets in 1998, opportunities for the establishment of international gateways
will likely develop in Europe and as a result competition in the market for
GTS-Monaco Access's services will increase. GTS-Monaco Access intends to
evaluate additional locations in Europe for the establishment of international
hubs based upon prospective costs and the availability of call routing at these
locations. GTS-Monaco Access plans to locate these prospective points of
presence in cities served by HER and to allow the termination of traffic through
HER. GTS-Monaco Access may benefit from the establishment of these points of
presence by incurring reduced transmission expenses.
 
     While GTS believes 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 HER and an "independent" status that allows it
to service a worldwide range of potential customers, GTS intends continually to
review the competitiveness of GTS-Monaco Access with respect to its competitors.
 
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<PAGE>   121
 
EUROPEAN SERVICES STRATEGY
 
   
     General. In order to capitalize on the increasing liberalization of
telecommunications regulation in Europe, GTS intends to become a leading
provider of a broad range of integrated telecommunications services to business
and other high-usage customers in certain metropolitan markets throughout
Europe. GTS presently provides end user services in Russia, the CIS and Central
Europe and carriers' carrier services in Western Europe and has experience in
developing cross-border networks in Western Europe through HER. Through GTS
Business Services -- Western Europe, GTS intends to establish service
capabilities as a reseller in up to 50 additional European metropolitan markets.
In furtherance of its European services strategy, in October 1998 GTS hired Les
Harris and Philip Blanchette as President and Vice President, Network Operations
and Engineering, respectively, of GTS Access Services. Since such date, GTS
Access Services has hired certain other key management and technical personnel.
Through GTS Access Services, GTS intends to leverage its experience in
developing and operating local, national and international telecommunications
networks by building, acquiring or leasing technologically advanced fiber optic
networks and establishing CLEC service capabilities in up to 12 metropolitan
markets throughout Europe, as regulatory conditions permit, within three years
after GTS commences implementing its European services strategy. Currently, the
regulatory regimes in Europe vary from country to country and some countries do
not permit competitive local exchange carriers to operate. For a comprehensive
discussion of the risks facing GTS in its implementation of the European
services strategy, see "Risk Factors -- Risks Specific to GTS -- Risks Relating
to European Services Strategy."
    
 
     Recent Developments.  On November 30, 1998, GTS completed the acquisition
of NetSource. NetSource is a pan-European provider of long-distance
telecommunications services focusing primarily on small-to medium-sized
businesses, with operations in Norway, Sweden, Germany and Ireland, as well as
in The Netherlands, Belgium and Denmark. The acquisition of NetSource provides
the GTS Business Services -- Western Europe line of business with a customer and
revenue base in several key Western European countries, a portfolio of licenses
and interconnection agreements and an entrepreneurial management team.
 
     If the acquisition of Esprit Telecom is consummated, the combined business
will have (i) presence in 19 countries throughout Europe, (ii) increased network
capacity and resilience; (iii) a 500-person sales force, one of the largest
among independent telecommunications providers in Europe, (iv) the ability to
provide a wide array of services, and (v) increased management depth.
Furthermore, the combined business is expected to benefit from reduced network
operations costs, reduced administrative costs and capital expenditure savings.
 
     Market and Business Strategy. GTS believes that the size and growth
potential of the European telecommunications market, and the increasing
liberalization of telecommunications regulations in Europe, offer considerable
opportunities to expand into end-user services into metropolitan markets
throughout Europe.
 
     The size of the European telecommunications services market is estimated to
be approximately $188 billion in 1998. GTS estimates that the total European
addressable market (defined as non-residential core voice, enhanced voice,
non-residential international voice, data, leased line voice and internet) in
1998 is approximately $96.5 billion, which is estimated to grow at a compound
annual growth rate of approximately 13.7% to approximately $306.7 billion by
2007.
 
     Through construction of owned facilities or acquisition or partnership with
other providers, GTS intends to enter up to 12 European metropolitan markets as
a CLEC. GTS' strategy with respect to entry into a specific market will be
determined through an analysis of a number of demographic, economic and
telecommunications demand and spending characteristics, including business
concentration; presence of governmental, financial and business end-user
customers; local economic trends and prospects; demand for switched and
non-switched telecommunications services; feasibility of construction; presence
of existing and potential competitors; the regulatory environment; the market's
proximity to HER's network; and the presence of potential CLEC or reseller
acquisition candidates. In targeting cities in which its entry strategy will be
the construction of a fiber network, GTS, through GTS Access Services, will
initially focus on cities in which there are no CLEC competitors or only one
other such competitor. GTS Access Services' current intention is
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<PAGE>   122
 
   
to enter six metropolitan markets by the end of 1999 and to provide services in
up to 12 target metropolitan markets within three years after it initiates
implementing the European services strategy. GTS Business Services -- Western
Europe's current intention is to enter 50 metropolitan markets as a reseller of
retail services over the same time period.
    
 
   
     GTS expects to use one or more of the following strategies to enter a
market: (i) construction of a fiber-loop network; (ii) purchase or long-term
lease of dark fiber; (iii) obtaining of high frequency microwave licenses for
"wireless fiber," (iv) partnership with or acquisition of a local
facilities-based CLEC or (v) acquisition or development of a local reseller. In
the case of market entry through a reseller, it is GTS' objective to build or
acquire facilities when economically justifiable. There are a number of risks
attendant with each of these strategies and GTS cannot assure you that it will
be successful in pursuing any of these strategies. These risks are discussed in
the section "Risk Factors -- Risks Specific to GTS -- Risks Relating to European
Services Strategy."
    
 
     Customers. GTS plans to offer its products and services primarily to
telecommunications-intensive businesses for which reliable telecommunications
services are critical, using GTS' facilities where available and/or reselling
other carriers' facilities as needed. These business segments include financial
services companies, multi-national companies, governmental agencies, resellers,
ISPs, disaster recovery service providers and wireless communications companies.
 
   
     Products and Services. GTS intends to offer a broad array of competitively
priced, comprehensive services to meet customer telecommunications service
requirements, including private line services, local, national and international
switched telephony services, high-speed LAN interconnection services, virtual
private network services, video transmission services and IP-based services,
including IP telephony, Web hosting and data transmission services. According to
industry sources, bandwidth demand for data in the U.S. is currently growing
significantly faster than voice, and GTS expects that this trend will develop in
Europe as competitively priced capacity becomes available. Additionally, GTS
intends to develop competitively priced value-added telecommunications services
that are tailored to the specific needs of individual customers. The types of
services that GTS intends to offer include:
    
 
     Switched Services. Switched services involve the transmission of voice,
data or video to locations specified by end-users or carriers. GTS expects to
have the technological capability to offer a full range of switched service,
including local, national and international calls as well as enhanced services.
GTS intends to own and operate switches and enter into interconnection
agreements with other telecommunication service providers, including HER, in
order to offer to customers cost- effective local, national and international
calling services. Switched service features are expected to include, as allowed
by local regulations, enhanced services such as conference calling, call
forwarding, analog or digital connectivity, desk-to-desk calling, four digit
dialing full network monitoring and maintenance, caller ID, voice mail/messaging
and E-mail to voice-mail conversion.
 
     Non-Switched Services. Non-switched services involve a fixed, dedicated
communications link between two or more specific locations. Commonly this
service is utilized by an end-user to provide a private communications medium
between multiple business facilities or to another end-user/carrier. GTS expects
to provide high capacity, advanced technology to deliver customer traffic with a
lower cost and higher reliability as compared to the local PTO. Through its high
capacity, high reliability and cost-efficient network, GTS intends to provide
non-switched voice, data and video transmission between (i) end users, (ii) end
users and carriers and (iii) multiple carriers, allowing its customers the
option to bypass the older, less efficient technology and higher-priced services
of the incumbent PTOs.
 
     Other Services. GTS also intends to develop service offerings to take
advantage of emerging market opportunities. Such services are expected to
involve one or more of the following: frame relay, ISDN and ATM services;
IP-based services, including intranet and extranet services, high capacity
internet for multi-media applications, Web hosting, voice over IP and the
establishment of a pan-European IP backbone in alliance with others; calling
card services; and enhanced voice services. These products are expected to be
developed and offered as customer demand dictates and as the relevant regulatory
environment permits. GTS believes that there will be substantial demand for data
and internet services by large business and other high-
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<PAGE>   123
 
usage customers, and that a bundled service offering of national and
international data and voice services will be attractive to this targeted
customer base.
 
   
     Regulatory. GTS' European services strategy will subject GTS to significant
additional regulation at the EU, national and local level. GTS Access Services
has applied for licenses to operate as a CLEC in seven major cities in Germany
and has submitted a draft application to the French regulatory authorities,
pursuant to which informal discussions have been conducted with respect to the
greater Paris metropolitan area. GTS' determination as to which markets it may
enter will depend in part on GTS' evaluation of the regulatory regime in such
market. The detailed regulation varies from country to country. Delays in
receiving required regulatory approvals and licenses, or the enactment of
adverse regulations or regulatory requirements, may delay or prevent GTS from
entering a particular market or offering its services in any European market,
restrict the types of services offered by GTS, constrain GTS' deployment of its
networks or otherwise adversely affect GTS' operations. GTS cannot assure you
that it will be able to obtain the necessary regulatory approvals on a timely
basis or that GTS will not otherwise be affected by regulatory developments,
either of which may have a material adverse affect on GTS. These risks are
discussed in the section "Risk Factors -- Risks Specific to GTS -- Risks
Relating to European Services Strategy."
    
 
     Competition. The telecommunications industry is highly competitive.
Competition in the telecommunications industry is based largely on price,
customer service, network quality, value-added services and customer
relationships. Competition for the provision of local services in Europe is in
its early stages of development. Generally, PTOs offer both local and long
distance services and benefit greatly from their position as sole historic
provider in the markets they serve. PTOs generally have a number of competitive
advantages over emerging competitors, such as GTS and other CLECs, due to
substantially greater economic and human resources, close ties to local and
national regulatory authorities and control over virtually all local
telecommunications connectivity. Additionally, GTS believes that the market for
the provision of local services is sufficiently attractive to cause additional
CLECs, including multi-national carriers, to enter the market to offer products
and services which would compete with GTS.
 
   
     GTS will compete with PTOs and, in certain markets, CLECs in the provision
of high quality, integrated telecommunications services to end-users and
resellers. CLEC competitors include, among others, COLT TeleCom Group plc, which
is providing service through networks in London, Frankfurt, Munich, Hamburg,
Berlin, Paris, Zurich, Amsterdam, Brussels, Madrid and Dusseldorf and MCI
WorldCom, whose pan-European fiber network connects London, Amsterdam, Brussels,
Frankfurt and Paris. Reseller competitors include RSL Communications, Viatel and
Facilicom. GTS believes, based on its experience in providing end-user services
in Russia, the CIS and Central Europe and carrier's services in Western Europe
and in developing cross-border networks in Western Europe through HER, that it
has the knowledge and ability to develop products and services which will be
competitive with other CLECs and resellers in terms of content, quality and
price. However, GTS cannot assure you that it will be able to translate such
experience in other markets in order to compete effectively with PTOs, CLECs or
resellers in the European markets it has targeted. These risks are discussed in
the section "Risk Factors -- Risks Specific to GTS -- Risks Relating to European
Services Strategy."
    
 
     Network. In those markets which GTS determines to enter as a
facilities-based CLEC, GTS intends to construct, acquire or lease facilities to
operate advanced, competitive local telecommunications networks employing
current transmission technology with dual ring architecture and central system
monitoring and maintenance. GTS believes that a base of uniform, reliable
networks, which employ the most current technology and support a broad array of
high quality services, will allow GTS to compete cost-effectively against
products and services offered by PTOs and, in certain markets, other CLECs.
 
     GTS' plan for its basic transmission platform is optical fiber deployed in
rings, equipped with high-capacity SDH equipment. Such rings will provide
redundancy by using dual paths for telecommunications transmissions and will
extend to a customer facility either directly or on a point-to-point link from
the rings. Such rings will finally connect to the customer through
customer-dedicated or shared electronics on or near the customer premises.
 
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<PAGE>   124
 
     Network Construction. Prior to undertaking acquisition or construction of a
network in a particular market, GTS will undertake an analysis of a number of
factors, as discussed above, to determine whether such acquisition or
construction is economically justifiable. Wherever appropriate, GTS will seek to
purchase or lease dark fiber or utilize high-frequency short-haul microwave as a
method of accelerated entry into a selected market.
 
     GTS expects that construction and installation services will be provided by
independent contractors selected through a competitive bidding process. GTS
personnel are expected to provide project management services, including
contract negotiation, construction supervision, testing and certification of
installed facilities. The construction period of a network is expected to vary
greatly, depending on such factors as network route kilometers, number of
buildings involved in the initial installation and local construction
regulations. Upon completion of the first phase of construction, or the initial
loop, GTS expects to commence generating revenue. Further expansion of the
network will be dictated by customer growth and customers' relative proximity to
the initial loop.
 
   
     The initial capital requirement for GTS Access Services and GTS Business
Services -- Western Europe to implement the European services strategy will be
financed with a majority of the proceeds of the July 1998 stock offerings
received by GTS. In addition, GTS contemplates that it will raise additional
financing through a newly formed subsidiary of GTS, the proceeds of which will
be applied toward the implementation of GTS' European services strategy. The
size and timing of such financing has not yet been determined by GTS. GTS cannot
estimate with any degree of certainty the amount and timing of GTS' future
capital requirements for implementing the European services strategy, which will
be dependent on many factors, including the success of GTS' European services
business, the rate at which GTS expands its networks and develops new networks,
the types of services GTS offers, staffing levels, acquisitions and customer
growth, as well as other factors that are not within GTS' control including
competitive conditions, regulatory developments and capital costs. GTS believes,
however, that if the European services strategy is implemented, it is likely
that GTS will need to raise additional capital. For a comprehensive discussion
of the expected impact to GTS in implementing the European services strategy,
see "Risk Factors -- Risks Specific to GTS -- Additional Capital Requirements"
and "GTS Management's Discussion and Analysis of Financial Condition and Results
of Operations -- European Services Strategy."
    
 
     Sales and Marketing. In each of its target markets, GTS intends to
establish its own direct sales force. As GTS will be targeting large financial,
corporate and governmental customers with demanding telecommunications service
requirements, GTS expects that its internal sales force will include dedicated
sales and customer service representatives. The acquisition of NetSource
provides GTS with a sales force for its retail services business of 40 direct
sales personnel and 182 sales agents throughout Europe. If consummated, the
acquisition of Esprit Telecom will add an additional 230 direct sales personnel,
which is expected to grow to 350 in 1999.
 
     Billing and Information Systems. Sophisticated information and processing
systems will be vital to GTS' success. Specifically, GTS will need to develop
systems to enter, schedule, provision, and track a customer's order from the
point of sale to the initiation of service and such systems will need to
include, or interface with, trouble-shooting systems, management, billing,
collection and customer service systems. GTS expects the development of its
systems to require substantial capital and management resources.
 
CENTRAL EUROPE
 
     In Central Europe, GTS' objective is to become one of the leading
alternative telecommunications providers in the region. GTS currently provides
private data communications services to government and commercial customers in
Hungary, the Czech Republic, Slovakia and Romania. In the Czech Republic, GTS
provides outgoing voice services and operates an international gateway and a
data services network. In Hungary, GTS operates a nationwide microwave network
and a VSAT network, which GTS believes is the largest VSAT network in Central
Europe as measured by number of VSAT sites. In Slovakia and Romania, GTS
provides VSAT services using its VSAT hub in Hungary. Subject to certain
regulatory approvals, GTS has also obtained a license to provide international
data services in Poland and expects to begin operations
 
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<PAGE>   125
 
during the first quarter of 1999. GTS' 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 and in Hungary's 18 county capitals. 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) an excellent 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 September 30, 1998, GTS-Hungary's VSAT network consisted of
approximately 993 owned and operated VSAT sites which GTS 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, GTS 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
has recently completed a nationwide expansion of its microwave-based Budapest
overlay network and plans to develop two fiber loops in Budapest. 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 this development will be completed on a timely and commercially
feasible basis.
 
   
     The Hungarian state lottery is GTS-Hungary's largest customer, accounting
for more than 50% of GTS-Hungary's total revenue for the year ended December 31,
1997 and 48% of GTS-Hungary's total revenue for the nine months ended September
30, 1998. 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 U.S.
dollars) on a monthly basis. 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. Additionally, at least three new joint
ventures, all with international partners, have announced their intentions to
compete in the Hungarian telecommunications industry by leveraging existing
assets from the utility (electric, oil and gas), railway and cable industries.
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 a good reputation for
customer service.
 
CZECH REPUBLIC
 
     Czechnet. Czechnet, a wholly owned subsidiary of GTS, offers 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 and an international satellite gateway in Prague and
GTS-Hungary's VSAT network. Through an intercompany arrangement with
GTS-Hungary, Czechnet provides all
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<PAGE>   126
 
of the same VSAT services offered by GTS-Hungary. In addition, Czechnet offers
high-speed Internet access service. Czechnet 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' 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
September 30, 1998, Czechnet had connected 35 buildings in Prague to its private
voice network. International voice services are offered at prices similar to
those of the Czech PTO. Czechnet plans to pursue customers who require
value-added services which may be offered at higher prices and better margins.
 
     Czechnet is licenced to provide international satellite services, leased
line services and data services. It received its operating licenses in 1994 and
1995 and began offering services in 1995. The licenses grant permission to
install and operate up to 150 earth stations and, upon application, an
additional 150 earth stations. The licenses currently prohibit 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 licenced
in the Czech Republic. As such, its only licenced competitor is SPT Telecom, the
Czech PTO. Should SPT Telecom decide to compete aggressively with Czechnet, it
has the ability to discount prices below those which could be easily sustained
by Czechnet. Czechnet's international telephony business is also subject to
competition from unlicenced callback services, Internet telephony services and
services provided by unlicenced operators. In data services, Telenor, GITY and
Nextel (a subsidiary of SPT Telecom) are Czechnet's three major competitors for
data services in the Czech Republic. 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' transmission facilities and infrastructure in Hungary and Monaco provide
them with a relatively low cost infrastructure and, as a consequence, greater
pricing flexibility than their competitors.
 
  NEW VENTURES
 
     In September 1998 certain affiliates of GTS acquired 100% of the ownership
interests in Datanet kft., one of the leading Internet service providers in
Hungary. This acquisition has substantially increased GTS' market share in the
residential and business Internet markets in Hungary.
 
     In July 1998, GTS became the largest single shareholder of Dattel, a.s., a
competitive local exchange carrier in the Czech Republic providing portions of
downtown Prague with telephony and leased line services. Dattel is also the
leading member of a consortium of Czech companies operating a fiber optic ring
in Prague.
 
   
     In September 1998, GTS acquired a substantial minority stake in Catalina
Sp. z.o.o., a Polish company holding an international data services license.
This acquisition is subject to certain regulatory approvals. Catalina, however,
expects to begin operations in the first quarter of 1999.
    
 
   
     In January 1999, GTS entered into two transactions to enter the market for
Internet services in Poland. GTS purchased a minority interest in ATOM S.A., an
Internet service provider in Poland. By the end of 1999, GTS contemplates that
it will increase its ownership in this company. In addition, GTS entered into an
agreement to purchase Internet Technologies S.A., a company that owns 100% of
Internet Technologies
    
 
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<PAGE>   127
 
   
Polska Sp. z.o.o., which provides Internet-related services in Poland. Subject
to satisfaction of certain conditions, the acquisition of this company is
expected to occur in February 1999.
    
 
RUSSIA AND THE CIS
 
   
  BACKGROUND ON THE POLITICAL, ECONOMIC AND TAX ENVIRONMENT IN RUSSIA
    
 
   
     Political. In recent years, Russia has been undergoing a substantial
political transformation. During this transformation, the Russian parliament
enacted legislation to protect private property against expropriation and
nationalization. However, due to the lack of experience in enforcing these
provisions during the period they have been in effect and due to potential
political changes in the future, we cannot assure you that such protections
would be enforced.
    
 
   
     The various government institutions in Russia and the other independent
countries of the CIS and the relations between them, as well as the government's
policies and the political leaders who formulate and implement them, are subject
to rapid and potentially violent change. Any major changes in, or rejection of,
previous policies favoring political and economic reform by the President may
have a material adverse effect on our operations and the market price of GTS
common stock.
    
 
   
     In 1998, Russia experienced three governmental shake-ups resulting in the
nomination by President Yeltsin and the approval by Parliament of Yevgeny
Primakov as the current prime minister of the Russian government.
    
 
   
     Primakov has been following a mixed economic policy, recommending lower
value-added and profit taxes, greater government intervention in the economy,
and deficit spending. He has succeeded in lobbying the Parliament to adopt
stricter currency controls and, of particular interest to foreign investors, oil
and gas production sharing legislation. Although Prime Minister Primakov has
advocated increased foreign direct investment in the Russian economy, it is too
soon to determine what impact his policies will have on our business in Russia.
The political situation remains very unsettled, especially in view of President
Yeltsin's deteriorating health and erratic stewardship of the country. In
addition, it is uncertain whether the resolution of these and other issues could
have a material adverse effect on our operations.
    
 
   
     Furthermore, the political and economic changes in Russia have resulted in
significant dislocations of authority. As a result of the turmoil at the federal
government level and the continuing absence of a strong central government, the
regions of Russia are exercising more independence in both political and
economic policies. Significant organized criminal activity and high levels of
corruption among government officials exist where we operate. While we do not
believe we have been adversely affected by these factors to date, organized or
other crime could in the future have a material adverse effect on our operations
and the market price of our common stock. For a description of political risks
on operations in Russia and the CIS forces, see "Risk Factors -- Risks Specific
to GTS -- Our Operations in Russia and the CIS Face Significant Political,
Economic, Regulatory, Legal and Tax Risks -- Political Risks."
    
 
   
     Economic. In May and early June 1998, the Russian Central Bank and other
Russian governmental authorities adopted a number of measures, including
increasing the inter-bank lending rate charged by the Russian Central Bank and
the rate offered on sovereign debt obligations, in order to maintain the value
of the ruble and reduce the risk of the flight of foreign capital from the
Russian economy. On July 13, 1998, the International Monetary Fund, the World
Bank and the Japanese government announced a plan to lend Russia $22.6 billion
by the end of 1999. Since its disbursement of a first tranche of $4.8 billion at
the end of July 1998, the International Monetary Fund has refused to release
additional funds until the Russian government implements a number of economic
reforms, including measures to enhance tax collections and narrow the budget
deficit. The World Bank and the Japanese government appear to be following the
International Monetary Fund's lead with respect to their remaining commitments
under the $22.6 billion loan. The measures taken in May, June and July 1998
failed to stabilize the economy and to provide adequate liquidity.
    
 
   
     On August 17, 1998, the Russian government and the Central Bank of Russia
announced emergency steps to improve liquidity. Pursuant to this decision, the
ruble's value was allowed to float between 6.0 and 9.5
    
 
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<PAGE>   128
 
   
rubles to the U.S. Dollar. Also, a 90-day moratorium was placed on the payment
of foreign exchange to meet certain obligations of Russian entities. Finally,
the Russian government announced that it intended to restructure the payment
terms of certain treasury bills. Since the decision on August 17th, the ruble's
value has declined substantially below the 9.5 ruble/U.S. Dollar floor set on
that date. As a result, our financial performance has been negatively affected.
We recorded a $13.1 million pre-tax charge for the quarter ended September 30,
1998, which consisted primarily of foreign currency exchange losses for
ruble-denominated net monetary assets. The remainder of the charge consists of
estimates for uncollectible accounts receivable and unrecoverable cash deposits
in certain Russian banks.
    
 
     In addition, the Russian government has defaulted on payments, and proposed
a restructuring, of certain commercial and sovereign debt obligations which has
been criticized by Western holders of such obligations. As a result, it is
likely that the Russian government and Russian businesses will have difficulty
accessing Western financial markets for the foreseeable future.
 
   
     Although the 90-day moratorium has not been extended, the consequences of
the August 17 Decision and its aftermath remain unclear. The International
Monetary Fund and the G-7 have thus far refused to advance emergency funds to
Russia to address the recent liquidity crisis. In addition, the International
Monetary Fund has decided not to disburse the remaining portions of the $22.6
billion loan referenced above, and in considering the disbursement of a $1
billion to $1.5 billion loan, subject to the adoption of an appropriate budget
for 1999, among other conditions of such loan. This underscores the extent to
which Russia, the CIS and other emerging countries in which we operate are
dependent upon substantial financial assistance from several foreign governments
and international organizations. If any of this financial assistance is reduced
or eliminated, economic development in Russia and such other countries of the
CIS 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 lack of
liquidity. 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 expected to disappear over
the next several years as a result of bank failure and anticipated consolidation
in the industry.
    
 
   
     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. In addition,
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 that they are
paid. Currently, dividends are taxed at 15% and the payor is required to
withhold the tax when paying the dividend, except with respect to dividends to
foreign entities that qualify for an exemption under treaties on the avoidance
of double taxation. To date, the system of tax collection has been relatively
ineffective, resulting in the continual imposition of new taxes in an attempt to
raise government revenues. This history, plus the existence of large government
budget deficits, raises the risk of a sudden imposition of arbitrary or onerous
taxes, which could adversely affect us.
    
 
   
     In various foreign jurisdictions, we are obligated to pay value-added tax
on the purchase or importation of assets, and for certain other transactions. In
many instances, value-added tax liabilities can be offset against value-added
tax which we collect 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 we are obligated to pay additional amounts of
value-added tax. In our opinion, any additional value-added tax which we may be
obligated to pay would be immaterial.
    
 
   
  OVERVIEW OF RUSSIAN TELECOMMUNICATIONS MARKET
    
 
     GTS is a leading provider of a broad range of telecommunications services
in Russia. GTS' 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 former Soviet Union, where it began offering
data links to the United States in 1986,
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<PAGE>   129
 
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.
 
     GTS 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 Sovtelecom 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 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 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 other independent republics of 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 Russian telecommunications industry.
In 1998, Goskomsvyaz was established as the successor to the MOC. As a result,
Goskomsvyaz succeeded to the MOC's role as the government's representative for
its ownership share of the 88 regional operating companies, the assets currently
held by Svyazinvest (then the monopoly international and domestic long distance
service provider), and the principal regulatory authority for national radio,
television and satellite operating companies. This enabled first the MOC and
later Goskomsvyaz 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 other
independent republics of 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 Goskomsvyaz to a growing
number of customers throughout Russia. Judging from the sequential numbering of
licenses issued since 1992 more than 10,000 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,
among other reasons.
    
 
     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
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<PAGE>   130
 
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 Ekaterinburg City Telephone Network and
Giprosvyaz (a telecommunications research institute), to Svyazinvest. On July
30, 1997, Mustcom Limited, a Cyprus-based company that represents the interests
of a consortium which includes ICFI Cyprus, Renaissance International Limited,
Deutsche Morgan Grenfell, Morgan Stanley, and certain entities affiliated with
an affiliate of George Soros, purchased a 25% stake in Svyazinvest for $1.87
billion. The President had also authorized the sale of another 24% of
Svyazinvest at a future date. This sale was scheduled to occur in the second
half of 1998 and was subsequently opened to foreign investors. However, this
sale was first cancelled and then rescheduled to take place by July 1999 because
of the overall decline in the Russian economy. For a discussion on economic
risks our operations face in Russia and the CIS, see "Risk Factors -- Risks
Specific to GTS -- Our Operations in Russia and the CIS Face Serious Political,
Economic, Regulatory, Legal and Tax Risks -- Economic Risks." The Russian
government has announced that it will retain a controlling 51% interest in
Svyazinvest.
    
 
   
     Goskomsvyaz votes the Russian government's interest in Svyazinvest, which
was reclassified as the State Committee on Telecommunications and Information
Technology during a recent government reorganization. Goskomsvyaz 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 Systems. Its subordinated body, Gossvyaznador, is directly
responsible for supervising the proper operation and maintenance of such
systems.
    
 
     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 benefited from significant capital investment. By
1995, there were approximately 16 lines per 100 persons in Russia and 45 lines
per 100 persons 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 and
leasing, in order to upgrade the infrastructure.
    
 
     Businesses in Moscow requiring international and domestic long distance
voice and data services and consumers using mobile telephony have principally
driven growth in the Russian telecommunications industry. This growth has been
most significant as multinational corporations have established a presence in
Moscow and Russian businesses have begun to expand beyond the country's
political and financial capital. 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. 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
 
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and the normalization of tariffs for business services. It is unclear, however,
what the effects of the August 17 Decision and its consequences will be on the
Russian economy. For a description of economic risks our operations face in
Russia and the CIS face, see "Risk Factors -- Risks Specific to GTS -- Our
Operations in Russia at the CIS Face Significant Political, Economic,
Regulatory, and Legal and Tax Risks -- Economic Risks."
    
 
     GTS 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.
 
  STRATEGY
 
     GTS' objective is to become the premier alternative carrier in Russia and
other key growth markets of the CIS. To attain this objective, GTS has developed
and implemented the following strategy:
 
   
     Develop Strong Local Partnerships. GTS has developed and continues to
develop its Russian and other CIS business through alliances with experienced
local partners. 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. GTS 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 they have established a presence in a market,
GTS' 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, GTS 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. Subject
to stabilization of the political and economic situation in Russia, GTS will
continue to invest in and build sophisticated high-speed digital networks and
other infrastructure through which customers can gain local access to GTS'
services. In addition to providing advanced, high quality network
infrastructure, GTS emphasizes and offers its customers a level of customer
service which GTS believes cannot be found elsewhere in the market.
 
   
     To date, GTS has made substantial progress employing this strategy. GTS
provides digital voice, data, Internet and local services in Moscow through its
Sovintel, Sovam and TCM ventures and provides these same services to fourteen
additional Russian cities through its TeleRoss long distance network. GTS
believes that attractive acquisition opportunities currently exist in the
markets in which it operates in Russia and the other independent countries of
the CIS. GTS continuously considers a number of potential transactions, some of
which may involve the contribution of certain of its Russian businesses in
exchange for an interest of equivalent or greater value in the surviving entity
and, if consummated, may be material to GTS' operations and financial condition.
    
 
  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' investment in advanced switching, data collection and processing equipment.
GTS also provides customized systems integration, including PABXs, key systems,
wiring and interconnectivity. Dedicated and leased capacity supplements GTS' own
infrastruc-
 
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ture, allowing GTS to bypass the severely congested and poorly maintained local,
domestic and long distance circuits of the Russian and Ukrainian carriers.
    
 
   
     Whenever practical, GTS' 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. This integrated marketing approach enables GTS to provide
comprehensive telecommunications solutions to multinational corporations
operating throughout Russia and the other independent countries of the CIS.
Several of the TeleRoss Ventures and the cellular joint ventures were not
operational, or had just commenced operating, in 1995. As a result, TeleRoss and
GTS Cellular did not generate significant revenues in 1995.
    
 
   
     The following table sets forth certain operating data related to GTS'
operating ventures in Russia and the Ukraine.
    
 
<TABLE>
<CAPTION>
                                                                        AT AND FOR THE
                                                      AT AND FOR THE     NINE MONTHS
                                                        YEAR ENDED          ENDED
                                                       DECEMBER 31,     SEPTEMBER 30,
                                                      --------------    --------------
                                                      1996     1997     1997     1998
                                                      -----    -----    -----    -----
<S>                                                   <C>      <C>      <C>      <C>
Cities In Service...................................     33       40       40       58
Total Voice Minutes (millions)
  Inter-city........................................   15.8     57.1     35.8     73.4
  Local.............................................  133.0    269.1    174.4    306.5
  International Outgoing............................   20.5     46.0     31.8     46.8
  Incoming..........................................   33.2     69.9     50.0     35.1
Total Data Customers (thousands)....................    6.2      9.9      8.3      9.0
Total Active Paying Subscribers (thousands).........    9.8     20.4     14.9     25.2
</TABLE>
 
  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 180 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
Private Automatic Branch Exchanges (PABXs), which are switches on customer
premises used to connect customer telephones to the network and to switch
internal calls within the customer's telephone system, 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
continues construction of its St. Petersburg network which is interconnected to
Sovintel's Moscow network and is intended to support Sovintel's Moscow clients
which have a presence in St. Petersburg. Sovintel serviced over 51,410 Moscow
telephone numbers, or "ports," for business customers and cellular providers and
had over 350 employees as of September 30, 1998.
    
 
                                       129
<PAGE>   133
 
     Sovintel has constructed and operates a fully-digital overlay network in
and around Moscow which consists of (i) an approximately 600-Kilometer fiber
optic ring, (ii) over 430 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 430 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 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 CHART]
 
     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 local
telephone network, which is operated by 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. The Sovintel international
gateway primarily provides international service, transmitting 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. Sovintel has obtained a license to
provide large business customers in Moscow and St. Petersburg high speed data
services and Internet access through private line channels, thus complementing
Sovam's regional offering and supporting its customer base in Moscow and St.
Petersburg. Accordingly, from a customer's perspective, Sovintel offers a broad
range of telecommunication services.
 
                                       130
<PAGE>   134
 
     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     NINE MONTHS ENDED
                                              DECEMBER 31,             SEPTEMBER 30,
                                      ----------------------------   -----------------
                                       1995      1996       1997      1997      1998
                                      -------   -------   --------   -------   -------
<S>                                   <C>       <C>       <C>        <C>       <C>
Minutes Of Use(1)
  International
     Number of Minutes..............   10,516    20,839     43,664    30,628    43,400
     Average Rate Per Minute........  $  2.06   $  1.55   $   1.12   $  1.19   $  0.96
  Domestic Long Distance
     Number of Minutes..............    2,047    10,098     26,606    16,946    35,663
     Average Rate Per Minute........  $  0.86   $  0.65   $   0.52   $  0.55   $  0.45
  Moscow (Local) Fixed Line
     Number of Minutes..............       --        --      3,501     2,302     5,113
     Average Rate Per Minute........       --        --   $   0.05   $  0.06   $  0.03
  Moscow (Local) Cellular
     Number of Minutes..............   21,478    83,673    118,447    82,333    76,835
     Average Rate Per Minute........  $  0.06   $  0.08   $   0.08   $  0.08   $  0.08
  Incoming
     Number of Minutes..............    3,839    24,306     43,626    34,571    20,841
     Average Rate Per Minute........  $  0.58   $  0.28   $   0.30   $  0.29   $  0.29
Ports
  Approximate Number of Ports
     (cumulative)...................    6,079    29,646     43,976    40,563    51,410
Approximate Number Of Private Line
  Channels (cumulative)
  International.....................       26        89        201       162       306
  Inter- and Intra-City.............       26       103        243       184       438
Approximate Equipment Sales
  (thousands).......................  $ 1,400   $ 2,200   $  3,400   $ 2,500   $ 3,651
</TABLE>
 
- ---------------
 
(1) Minutes in thousands. Amounts include minutes among affiliates.
 
     Services. Sovintel markets a broad range of high quality telecommunications
services by (i) directly providing international direct dial access to over 180
countries and private line dedicated voice 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, GTS believes that Sovintel's services are
distinguished by a higher level of quality than those of its competitors,
particularly with respect to call completion rates for its domestic long
distance and local call services. In addition, GTS trains its employees to
provide customer service at a level which is comparable to that provided by
Western telecommunications companies.
 
     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
optic line or channel leased by Sovintel, in each case benefitting from
Sovintel's high quality infrastructure. Private line domestic long distance
service is
 
                                       131
<PAGE>   135
 
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 18 Russian
cities, including Moscow and St. Petersburg, and 25 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,
including 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 (Bee-Line), MTS and Moscow Cellular. Sovintel's
customers typically demand a higher level of service than generally available in
the market. Sovintel further provides to its large corporate customers data
services such as frame relay and Internet access contracted from Sovam in order
to offer an "one-stop shopping" telecommunications solution to these customers,
who increasingly require this type of service.
    
 
     The pricing structure for international and domestic long distance calls is
based upon traffic volume and overall market rates, with Sovintel's rates
varying on the duration 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 MGTS begins to charge for completion of such calls. Sovintel prices its
international long distance services competitively with those of its principal
competitors. 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 $0.96 per minute for the nine
months ended September 30, 1998. Sovintel is experiencing increased pricing
pressure from competitors. Sovintel prices domestic long distance services in
line with those of its principal competitors. Due to its obligations under
certain agreements with affiliated entities, however, Sovintel's margins for
these services had been declining, though Sovintel recently succeeded in
reversing this trend by achieving lower settlements through least-cost routing.
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. Sovintel
leases the lines from Rostelecom at wholesale rates and to its customers at
prices in line with Rostelecom's retail rate. In addition, Sovintel provides
private line channels through "one-stop shopping" arrangements with
international carriers, such as AT&T, British Telecom and Cable & Wireless.
 
   
     Customers are billed monthly, with larger-volume customers receiving
discounts of up to 25%. GTS bills customers using Sovintel services, either in
U.S. Dollars or Russian rubles. All underlying pricing is based on U.S. Dollar
tariffs. For customers invoiced in rubles, Sovintel has the contractual ability
to recover devaluation losses that exceed 3% by re-invoicing the customer. 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. To the extent
Sovintel receives remittances in rubles, Sovintel will have higher ruble cash
and receivable balances which will expose it to correspondingly greater exchange
risk. See "Risk Factors -- Risks Specific to GTS -- Risks of Conducting Business
in Foreign Currencies." In addition, due to the ruble devaluation that was part
of the decision on August 17, 1998 and the attendant scarcity of U.S. Dollars,
there may be a lower general level of remittances to Sovintel in U.S. Dollars.
Sovintel currently bills on an invoicing system that was internally developed.
Currently, the system is
    
 
                                       132
<PAGE>   136
 
adequate for Sovintel's present customer base; however, GTS 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 17 account managers, all of whom
specialize in serving specific targeted industries. Dedicated marketing, project
management and customer support comprised of 23 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. Neither GTS
nor Rostelecom are obligated to fund Sovintel's operations or capital
expenditures. Losses and profits of Sovintel are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
As of September 30, 1998, GTS and Rostelecom have each made equity contributions
of $1.0 million to Sovintel. The Sovintel joint venture agreement does not have
an expiration date. For risks relating to our joint ventures, see "Risk
Factors -- Risks Specific to GTS -- Dependence on Certain Local Parties; Absence
of Control" and "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Accounting Methodology -- Profit and Loss
Accounting."
    
 
  TCM
 
     Subsequent to June 30, 1998, GTS increased its beneficial ownership of TCM
to 95%. TCM, a joint venture founded in 1994, provides a licensed numbering plan
and interconnection to the Moscow city telephone network for carriers needing
basic local access service in Moscow. GTS' partner in TCM is MTU-Inform, a
Russian telecom operator. TCM is currently licensed to provide 100,000 numbers
in Moscow, of which over 78,000 have been leased. However, TCM was unable to
lease an additional 22,000 numbers to VimpelCom, TCM's primary customer, during
1998 as it had previously expected it would. TCM is seeking alternative lessees
for these numbers, but there can be no assurance that these numbers will be
leased in a timely manner. TCM has completed agreements required to construct
and provide an additional 50,000 numbers. The construction started in 1998 and
is expected to be completed in the third quarter of 1999. 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, 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."
 
                                       133
<PAGE>   137
 
     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. Hence the loss of VimpelCom as a customer
would have a material adverse effect on GTS. TCM also provides ports to Sovintel
and to other network operators. TCM's ports are leased principally to carriers
in Moscow. 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 $360 installation fee and a $15 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 pursuant to which Sovintel bills and collects for
TCM-Sovintel joint customers, 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' indirect interest in TCM is represented by its
100% interest in a holding company, which owns 95% of TCM. This structure
provides GTS with 95% beneficial ownership interest in TCM. At both the holding
company and TCM level, losses and profits are allocated to the partners in
accordance with their ownership percentages, in consideration of funds at risk.
None of the operative charters and agreements relating to the holding company or
TCM have expiration dates. For a discussion of risks faced by TCM, see "Risk
Factors -- Risks Specific to GTS -- Dependence on Certain Local Parties; Absence
of Control" and "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Accounting Methodology -- Profit and Loss
Accounting."
    
 
  TELEROSS
 
   
     TeleRoss, which began operations in 1995, consists of a wholly owned
subsidiary of GTS that operates a domestic long distance network and 14 joint
ventures that are 50% beneficially-owned by GTS that originate traffic and
provide local termination of calls. The TeleRoss domestic long distance network
serves 15 major Russian cities, including Moscow and, through VSAT technology,
21 customers located outside these cities. TeleRoss provides digital domestic
long distance services and other value-added services through its own
infrastructure as well as access to Sovintel's international gateway services
and access to the Moscow city telephone network through 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 September
30, 1998, TeleRoss employed approximately 231 persons of which approximately 98
people were based in Moscow and approximately 133 people were deployed in the
regions in which TeleRoss operates.
    
 
   
     TeleRoss's licenses cover the city of Moscow and a total of 38 regions
throughout Russia. Most of the 14 cities in which TeleRoss primarily operates
are regional capitals, with an aggregate population of approximately 13 million.
TeleRoss's licenses cover the entire region surrounding these cities, with
populations totaling approximately 41 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: Arkhangelsk, Ekaterinburg, Irkutsk, Khabarovsk, Krasnodar,
Nizhny Novgorod, Novosibirsk, Samara, Syktyvkar, Tyumen, Ufa, Vladivostok,
Volgograd and Voronezh.
    
 
     The TeleRoss network architecture involves local city switches connected to
remote earth stations which communicate via satellite or satellite connection 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.
Outside of Moscow, TeleRoss's local joint venture partners provide
interconnection to the local public telephone networks in each of the cities it
serves. In addition to providing services through its network, TeleRoss
currently serves 21 customers in additional sites through VSAT technology which
links the customers via satellite to the Moscow hub.
                                       134
<PAGE>   138
 
     The following table sets forth certain operating data related to TeleRoss's
operations:
 
<TABLE>
<CAPTION>
                                                   AT AND FOR THE     AT AND FOR THE
                                                     YEAR ENDED      NINE MONTHS ENDED
                                                    DECEMBER 31,       SEPTEMBER 30,
                                                  ----------------   -----------------
                                                   1996     1997      1997      1998
                                                  ------   -------   -------   -------
<S>                                               <C>      <C>       <C>       <C>
Minutes of Use(1)
  Domestic Minutes (thousands)..................   4,035    23,233    14,440    31,244
  Average Rate Per Domestic Minute..............  $ 0.99   $  0.63   $  0.66   $  0.51
  International Minutes (thousands).............     272       744       486       806
  Average Rate Per International Minute.........  $ 2.76   $  2.47   $  2.56   $  2.01
Number of Cities Served(2)......................      13        14        14        15
World Connect Dial/Russia
  Number of Connect Dial Ports..................     472     1,112       961     2,106
  Average Revenue Per Port Per Month............  $  767   $   370   $   378   $   339
Moscow Connect
  Number of Ports...............................      49        78        56        66
  Average Revenue Per Port Per Month............  $1,165   $ 1,358   $ 1,513   $ 1,295
Dedicated Circuits
  Number of Dedicated Channels..................      33        60        43       109
  Average Price Per Channel.....................  $4,553   $ 4,140   $ 4,264   $ 2,816
World Access Service
  Number of World Access Card Users.............   3,929     4,595     4,360     3,675
  Average Revenue Per Card Per Month............  $   52   $    48   $    45   $    57
VSAT Services
  Number of VSATs...............................      12        24        20        21
</TABLE>
 
- ---------------
 
(1) Includes minutes among affiliates.
 
(2) Includes connection to Moscow.
 
     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 sites 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 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 and 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.
 
                                       135
<PAGE>   139
 
     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 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 18 Russian cities,
including Moscow and St. Petersburg, and 25 countries. TeleRoss provides this
service through Sovintel's infrastructure.
 
     VSAT Services. For customers that are located outside the cities serviced
by TeleRoss 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. TeleRoss provides both dedicated and switched services 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. As of September 30, 1998,
TeleRoss, in conjunction with regional joint venture partners, has installed
approximately 30 kilometers of fiber optic cable in three cities and had plans
to install an aggregate of approximately 100 kilometers of additional fiber
optic cable in up to an additional six cities over the next 21 to 27 months.
Because of the economic crisis in Russia, GTS is reconsidering the advisability
of proceeding with such plans. Customers who obtain local phone numbers from
TeleRoss's venture partners are directly interconnected to the local telephone
company and to GTS' long distance network and Sovintel's international gateway
and may obtain a broad range of value-added services offered by GTS.
 
   
     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 years. During the
first nine months of 1998, TeleRoss increased sales to carriers, which sales
were made at wholesale rates, resulting in a decrease in the average rate per
minute for TeleRoss. The financial crisis and consequent ruble devaluation
versus the U.S. Dollar has affected the competitiveness of TeleRoss's business.
The regional operations, whose prices are defined in rubles need local
government approval for price increases. It is uncertain that substantial
increases will be granted soon, implying that TeleRoss may have to reduce its
tariffs substantially to remain competitive. Rostelecom may be more able to
raise its prices to higher levels. TeleRoss, however, also anticipates that to
remain competitive, it may have to reduce its wholesale tariffs for the
carriers' carrier business.
    
 
   
     Although its tariffs are set in U.S. Dollars, TeleRoss historically has
billed its customers in rubles. Since August 17, 1998, TeleRoss has signed new
contracts with the majority of customers to return to U.S. Dollar invoicing. 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. To the extent
it receives remittances in rubles, TeleRoss will have higher ruble cash and
receivable balances which will expose it to correspondingly greater exchange
risks. See "Risk Factors -- Risks
    
 
                                       136
<PAGE>   140
 
   
Specific to GTS -- Currency and Exchange Risks." In addition, due to the ruble
devaluation that was part of the August 17 Decision and the attendant scarcity
of U.S. Dollars, there may be a lower general level of remittances to TeleRoss
in U.S. Dollars.
    
 
     Sales and Marketing. TeleRoss markets its services to carriers and
businesses through direct sales channels. As of September 30, 1998, TeleRoss
employed 42 sales and marketing personnel, approximately 15 of whom are based in
Moscow with the remainder 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. One or two sales representatives typically serve each region. 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'
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' 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). The foundation
agreements and charters do not have expiration dates. While GTS has significant
influence within these ventures, decisions, including the decision to declare
and pay dividends, are generally subject to GTS' partner's approval. See "Risk
Factors -- Risks Specific to GTS -- Dependence on Certain Local Parties; Absence
of Control." Neither GTS nor its respective joint venture partners are obligated
to fund operations or capital expenditures of the TeleRoss Ventures. Losses and
profits are allocated to the partners in accordance with their ownership
percentages, in consideration of funds at risk. As of September 30, 1998, GTS
and its partners had each made equity contributions aggregating $1.9 million to
the various TeleRoss Ventures. Contributions made by the partners include
contributions of cash and intangible assets, such as local support and
assistance with respect to the issuance of licenses in the name of the TeleRoss
Operating Company. In addition, the various TeleRoss Ventures had outstanding
loans and interest of $0.44 million to GTS and $2.3 million to Citibank as of
September 30, 1998. In addition, as of September 30, 1998, GTS had made equity
contributions of $5.8 million to the TeleRoss Operating Company and the TeleRoss
Operating Company had outstanding loans and interest of $34.0 million to GTS and
$7.0 million to Citibank. For a discussion of the impact of these contributions
and outstanding loans on GTS' operations, see "GTS Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Accounting
Methodology -- Profit and Loss Accounting."
    
 
  SOVAM
 
     Sovam is a venture that is wholly owned by GTS. Sovam was founded in 1990
as a venture equally owned by GTS and the IAS. In 1992, Cable & Wireless
acquired a 33% ownership interest in Sovam, which interest was subsequently
acquired by GTS in 1994, bringing GTS' ownership interest to 66.7%. GTS
purchased IAS's interest in Sovam in February 1998, thereby making Sovam a
wholly owned subsidiary of GTS. Sovam provides high-speed data communications
services, electronic mail and database access over a high-speed packet/frame
relay network in 47 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. (Russia On Line(TM) is a trademark of GTS.)
As of September 30, 1998, Sovam had approximately 1,500 data service customers
and approximately 3,914 Russia On Line customers (which includes approximately
345 trial subscribers). Sovam employed approximately 158 persons in Moscow and
other regions of the CIS as of September 30, 1998. Sovam provides
 
                                       137
<PAGE>   141
 
equipment and maintains marketing and technical support personnel at each
location either through its own infrastructure or through the infrastructure of
partners, including 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 TeleRoss cities, and also serves 32 additional cities in Russia and the CIS.
Sovam operates under its own license within Russia while applicable local
partner licenses provide services elsewhere in the CIS. 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.
 
     The following table sets forth certain operating data related to Sovam's
operations:
 
<TABLE>
<CAPTION>
                                                                          AT AND FOR THE
                                                                            NINE MONTHS
                                             AT AND FOR THE YEAR ENDED         ENDED
                                                   DECEMBER 31,            SEPTEMBER 30,
                                            ---------------------------   ---------------
                                             1995      1996      1997      1997     1998
                                            -------   -------   -------   ------   ------
<S>                                         <C>       <C>       <C>       <C>      <C>
Basic Data Service
  Percentage of Total Sovam Revenue.......      91%       79%       81%       80%      83%
  Number of Customers.....................   1,587     1,726     1,571     1,667    1,500
  Average Revenue Per Month Per
     Customer.............................  $  201    $  446    $  728    $  675   $1,077
  Number of Cities in Service.............      11        25        30        30       47
Equipment and Hardware Sales Percentage of
  Total Sovam Revenue.....................       8%       14%        8%       10%       6%
Russia on Line Service Percentage of Total
  Sovam Revenue...........................       1%        7%       11%       10%      11%
  Number of Subscribers(1)................     407     1,854     3,159     2,606    3,569
  Average Revenue Per Month Per
     Subscriber...........................  $   49    $   52    $   64    $   67   $   65
</TABLE>
 
- ---------------
 
(1) In addition to the subscribers included above, Sovam frequently connects
    potential Russia On Line subscribers on a complimentary one-month trial
    basis. As of September 30, 1998, there were approximately 345 such potential
    subscribers.
 
     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 1,500 customers as of
September 30, 1998, 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 electronic 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 47 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.
 
                                       138
<PAGE>   142
 
     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' 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 3,914 Russia On Line subscribers (which includes
approximately 345 trial subscribers) as of September 30, 1998. 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 also
entered into agreements with equipment manufacturers, including an affiliate of
Motorola, to include Russia On Line software with their products.
 
   
     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. Continued deterioration in the political
and economic environment in Russia may adversely affect Sovam's customer base.
See "Risk Factors -- Risks Specific to GTS -- Our Operations in Russia and the
CIS Face Significant Political, Economic, Regulatory, Legal and Tax Risks."
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. Sovam prices data
services on a two-tier structure with high volume users generally negotiating a
flat-rate fee and lower volume users paying a volume-based fee which on average
was $446 and $728 per subscriber in 1996 and 1997, respectively. Russia On Line
customers pay a fixed monthly access charge plus an additional volume-based fee.
Sovam bills customers in U.S. dollars and, customers remit payment in rubles
and, to the extent permitted by law, in dollars, with a 2% to 5% conversion fee
added to ruble-denominated payments. To the extent it receives remittances in
rubles, Sovam will have higher ruble cash balances which will expose it to
correspondingly greater exchange risks. See "Risk Factors -- Risks Specific to
GTS -- Risks of Conducting Business in Foreign Currencies." In addition, the
ruble devaluation that was part of the decision on August 17, 1998 to devalue
the ruble and the attendant scarcity of U.S. Dollars may cause a lower general
level of remittances to Sovam in U.S. Dollars.
    
 
     Sales and Marketing. Sovam employs a dedicated sales and marketing force
comprised of three non-Russian nationals and 33 Russian nationals, 28 of which
are based in Moscow with the remainder deployed in the other Russian and CIS
regions. Sovam pays salespersons a fixed salary supplemented by sales
commissions and performance-based bonuses. Sovam's sales 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. At December 31, 1997, GTS owned 66.7% of Sovam and
IAS owned the remaining 33.3%. GTS purchased IAS's interest in Sovam in February
1998, thereby making Sovam a wholly owned subsidiary of GTS. See "GTS
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Accounting Methodology -- Profit and Loss Accounting."
 
  GTS CELLULAR
 
   
     GTS Cellular operates cellular businesses in Russia and Ukraine. In Russia,
GTS has a wholly owned subsidiary Vostok Mobile (which is organized in The
Netherlands), which currently operates AMPS cellular companies in Russian
regions located primarily west of the Urals under the trade name Unicel. Vostok
Mobile owns between 50% and 100% of the Unicel cellular joint ventures in
Russia. In addition, through Vostok Mobile, GTS participates in PrimTelefone, a
50%-owned joint venture that operates an NMT network in Vladivostok and other
cities in the Primorsky region of Russia. In April 1998, PrimTelefone was also
awarded
    
                                       139
<PAGE>   143
 
a license to operate GSM-1800 in 14 regions of the Russian Far East, including
Vladivostok, Khabarovsk and Irkutsk. In Ukraine, GTS has an approximately 57%
beneficial interest in Golden Telecom which operates a GSM-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 1997 population of approximately 42
million people.
 
     GTS currently offers cellular services in the following regions as of
September 30, 1998:
 
<TABLE>
<CAPTION>
                                                      GTS'                       NUMBER OF
                                                    ECONOMIC                      ACTIVE
               OPERATING COMPANY                 INTEREST(1)(2)      CITY       SUBSCRIBERS
               -----------------                 --------------      ----       -----------
<S>                                              <C>              <C>           <C>
Russia
  Vostok Mobile(2)
     Arkhangelsk Mobile Networks...............      50.0%        Arkhangelsk        646
     Astrakhan Mobile..........................      50.0%        Astrakhan          871
     Altaisvyaz(3).............................      50.0%        Barnaul            330
     Chuvashia Mobile..........................      70.0%        Cheboksary         785
     Lipetsk Mobile............................      70.0%        Lipetsk            809
     Murmansk Mobile Network...................      50.0%        Murmansk           859
     Penza Mobile..............................      60.0%        Penza              517
     Saratov Mobile............................      50.0%        Saratov          1,638
     Parma Mobile..............................      50.0%        Syktyvkar          476
     Volgograd Mobile..........................      50.0%        Volgograd        1,724
     Votec Mobile..............................      50.0%        Voronezh         2,055
     Mar Mobile................................      50.0%        Yoshkar-ola        339
     Novotel(4)................................       100%        Novgorod           169
  PrimTelefone.................................      50.0%        Vladivostok(5)    5,112
Ukraine
  Golden Telecom...............................      56.8%(6)     Kiev             8,836
                                                                                  ------
          Total................................                                   25,166
                                                                                  ======
</TABLE>
 
- ---------------
 
(1) Represents the indirect economic interest of GTS in each entity.
 
   
(2) Prior to September 26, 1997, GTS owned 62% of Vostok Mobile. On September
    26, 1997, GTS acquired the minority interest in Vostok Mobile, making Vostok
    Mobile a wholly owned subsidiary of GTS. Vostok Mobile owns between 50% and
    100% of a series of 14 operational cellular joint ventures in various
    regions in Russia. As of June 30, 1998, GTS' Vostok Mobile had established
    new joint ventures which had received additional licenses to operate AMPS
    networks in the regions of Ufa, Yaroslavl, Bryansk and Kostroma. Because of
    the current Russian economic crisis, GTS has decided not to pursue operating
    under these licenses.
    
 
(3) Joint venture acquired in October 1997; cellular operations commenced in
    February 1998.
 
(4) Acquired and started commercial service in April 1998.
 
(5) Includes Vladivostok and other cities in the Primorsky region.
 
(6) GTS has completed a restructuring of the capital and ownership of Golden
    Telecom, which gives GTS an approximately 57% beneficial ownership.
 
                                       140
<PAGE>   144
 
     The following table sets forth certain operating data related to GTS
Cellular's operations:
 
   
<TABLE>
<CAPTION>
                                                                      AT AND FOR THE
                                                  AT AND FOR THE        NINE MONTHS
                                                    YEAR ENDED             ENDED
                                                   DECEMBER 31,        SEPTEMBER 30,
                                                 -----------------   -----------------
                                                  1996      1997      1997      1998
                                                 -------   -------   -------   -------
<S>                                              <C>       <C>       <C>       <C>
Vostok Mobile
  Total Active Paying Subscribers..............    6,884    11,527     9,562    11,218
  Average Service Revenue Per Subscriber Per
     Month.....................................  $   128   $   159   $   158   $   144
  Minutes of Use(1)(thousands).................   10,561    27,771    18,800    26,262
  Population Covered by Licenses (thousands)...   18,400    18,400    18,400    30,192
  Population Covered by Networks (thousands)...    6,500     6,500     6,500     8,198
  Subscriber Penetration of Population Covered
     by Networks...............................     0.11%     0.18%     0.15%     0.14%
PrimTelefone
  Total Active Paying Subscribers..............    2,822     5,162     3,907     5,112
  Average Service Revenue Per Subscriber Per
     Month(2)..................................  $   236   $   201   $   199   $   186
  Minutes of Use(1)(thousands).................    6,919    14,270     9,108    16,204
  Population Covered by Licenses (thousands)...    2,200     2,270     2,200    13,334
  Population Covered by Networks (thousands)...    1,175     1,175     1,175     1,170
  Subscriber Penetration of Population Covered
     by Networks(2)............................     0.24%     0.44%     0.39%     0.44%
Golden Telecom Cellular Network Total Active
  Paying Subscribers...........................      121     3,664     1,438     8,836
  Average Service Revenue Per Subscriber Per
     Month.....................................  $    62   $   160   $   185   $   143
  Minutes of Use(1)(thousands).................        9     5,085     2,261    23,214
  Population Covered by Licenses (thousands)...    4,500     4,536     4,500     4,536
  Population Covered by Networks (thousands)...    1,669     2,507     1,669     2,507
  Subscriber Penetration of Population Covered
     by Networks...............................     0.01%     0.15%     0.09%     0.35%
Overlay Network Minutes of Use(1)(thousands)...       --     4,909     2,232    13,381
  Number of Ports..............................       --       751       555     1,566
  Average Revenue Per Minute...................       --   $  0.34   $  0.36   $  0.25
</TABLE>
    
 
- ---------------
 
(1) Includes minutes among affiliates.
 
(2) Active Paying Subscribers differ from previously reported totals, which
    included blocked subscribers. Active Paying Subscribers is the more accurate
    portrayal of true revenue base. Vostok Mobile and PrimTelefone 1997 numbers
    have been adjusted to reflect this difference.
 
   
     Vostok Mobile. Through Vostok Mobile, GTS currently operates 14 cellular
joint ventures in Russia. Vostok Mobile owns between 50% and 100% interests in
each of the 14 Unicel joint ventures with, in most cases, regional telephone
companies owning the remaining ownership interest. The Unicel Ventures, except
PrimTelefone, each operate an AMPS-based cellular network, which was chosen
principally because of the lower licensing fees.
    
 
   
     AMPS technology is widely used by other cellular networks throughout
Russia, making roaming commercially feasible. The Unicel joint 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 in order to receive roaming capability.
In the first quarter of 1998, Vostok Mobile, Vimpelcom and
    
 
                                       141
<PAGE>   145
 
   
Millicom entered into an agreement in principle to cooperate in the
establishment of a clearing center to support nationwide automatic AMPS roaming.
Since executing the agreement, such operators, in conjunction with other AMPS
operators, have been cooperating with Goskomsvyaz to define the terms and
conditions under which AMPS operators may offer automated roaming services under
their current licenses. GTS is unable to predict the final terms and conditions
under which AMPS operators will be allowed to offer automated roaming, but
believes that the clearing center will be established and that AMPS operators
will be permitted to introduce automated roaming in the first half of 1999.
    
 
   
     Each region in which the Unicel joint ventures operate has the potential
for at least five licensed operators, including one operator for each of the
AMPS, NMT and GSM cellular standards and two operators in the DCS cellular
standard, and GTS is experiencing increased competition and expects such
competition to increase further. Each of the Unicel joint ventures operates
independently within uniform guidelines established by Vostok Mobile. They
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 approximately 448 persons as of
September 30, 1998, with 390 persons employed regionally.
    
 
     PrimTelefone. PrimTelefone, a 50% owned GTS subsidiary, conducts GTS'
cellular operations in Vladivostok with the local electrosvyaz which owns the
remaining 50%. PrimTelefone began operations in 1995 and operates an NMT-450
network in Vladivostok and four other cities in the Primorsky region.
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 active subscriber base was 5,112 as of September 30,
1998, capturing approximately half of the Vladivostok cellular market.
PrimTelefone has also updated its switch and billing systems, which allows it to
offer automated roaming. PrimTelefone competes with a GSM operator and an AMPS
operator, both of which are fully interconnected to the city telephone network
and provide wide city coverage. PrimTelefone employs approximately 65 persons
which include dedicated sales, marketing and customer service personnel.
 
   
     PrimTelefone holds licenses for NMT-450 and GSM-1800 to provide cellular
service to regions having populations of approximately 2.2 and 11.1 million
people and, as of September 30, 1998, its cellular network covered an area with
a population of approximately 1.2 million people. PrimTelefone received the
GSM-1800 license for the Russian Far East in April 1998. PrimTelefone has plans
to expand its NMT network's coverage and to deploy a GSM-1800 network to include
all major population centers in the Russian Far East over the next five years,
but is reconsidering them in light of the current economic crisis in Russia.
    
 
   
     On April 27, 1998, the PKGCN issued the PKGCN Letters. As requested in the
PKGCN Letters, on April 28, 1998, PrimTelefone's management submitted a
compliance plan to the PKGCN specifying measures to be undertaken to bring
PrimTelefone's network into compliance with Gossvyaznadzor requirements and a
timetable for doing so. On April 29, 1998 the PKGCN agreed to the compliance
plan. To date, PrimTelefone's management has continued to timely perform its
obligations under the compliance plan and believes that the plan will be
completed on schedule. PrimTelefone's management has obtained approvals for new
frequency plans for certain base stations cited in the PKGCN orders. For a
comprehensive discussion of risks in the regions where PrimTelefone operates,
see "Risk Factors -- Risks Specific to GTS -- Our Operations in Russia and the
CIS Face Significant Political, Economic, Regulatory, Legal and Tax Risks."
    
 
     On May 13, 1998, a local division of the Ministry for Internal Affairs
opened the PKMIA Investigation, a criminal investigation under Article 327 of
the Russian Federation Criminal Code against certain employees of PrimTelefone
concerning the use of forged state documents in connection with an application
for a frequency plan submitted (and subsequently abandoned) by PrimTelefone. On
June 22, 1998, several employees of PrimTelefone, among others, were interviewed
by a militia investigator in connection with this matter. On November 15, 1998
the investigator decided to suspend the investigation for lack of a person to be
charged and recommended that the matter be closed, subject to the concurrence of
the local prosecutor. PrimTelefone's management intends to cooperate fully in
this investigation until the matter is closed.
 
                                       142
<PAGE>   146
 
     Although no assurance can be provided, GTS does not believe that either the
PKGCN Letters or the PKMIA Investigation will have a material adverse effect on
GTS' business, results of operations or financial condition.
 
     Golden Telecom. GTS owns 75% of an intermediate holding company which holds
an approximately 49% interest in Golden Telecom, giving GTS an indirect
approximately 37% economic interest in Golden Telecom. The remaining
approximately 52% interest in Golden Telecom is owned by three Ukrainian
companies and a Ukranian national. One of the Ukrainian companies, which is a
wholly owned indirect subsidiary of GTS, owns 20% of Golden Telecom. As a
result, GTS' total economic interest in Golden Telecom is approximately 57%.
Golden Telecom is co-managed by GTS and its Ukrainian partners, with such
partners 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 Golden Telecom, GTS participates in the operation
of a cellular network and an international overlay network. With approximately
153 employees, Golden Telecom markets its services and closely monitors
technical and quality-related issues.
 
     Cellular network. Golden Telecom operates a cellular network in Kiev under
the trade name Golden Telecom GSM. The operation utilizes DCS-1800 cellular
technology and operates under a cellular license that covers Kiev City and Kiev
Oblast. Golden Telecom began cellular operations in 1996 by covering the city
center of Kiev and expanded its coverage to include the entire city in 1997.
Golden Telecom provides GSM cellular roaming with 25 cellular operators
worldwide, with the majority of roaming traffic coming from European countries.
Roaming agreements have also been signed with another nine operators and the
Iridium consortium.
 
   
     Golden Telecom holds a license to provide cellular service to a region
having a population of approximately 4.5 million people and, as of September 30,
1998, its cellular network covered an area with approximately 2.5 million
people.
    
 
     Overlay network. Golden Telecom provides local exchange carrier services
and international gateway services through its overlay network in Kiev. Golden
Telecom currently owns and operates a partitioned mobile switch for both its
cellular and overlay businesses. A second switch has been ordered and was
commissioned in 1998.
 
     Golden Telecom has 14 central offices in the city and also provides last
mile connections (both copper and fiber optic) from the central offices to
customers. A 50-Kilometer fiber optic ring consisting of a main loop and two
sub-rings has been constructed in Kiev. Golden Telecom plans to extend the total
fiber optic network. Local traffic is routed to the local telephone network.
International outgoing and incoming traffic is routed via fiber optic cable to
the GTS-Monaco Access international gateway, Sovintel in Moscow and several
other international operators. Golden Telecom emphasizes its high quality
service and markets primarily to multinational companies, real estate developers
and hotels.
 
   
     Sales and Marketing. The GTS Cellular entities have direct sales teams and
have also 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 joint ventures. By promoting the Unicel trade name, local ventures
can emphasize their relationships with Vostok Mobile and the other Unicel joint
ventures, allowing customers to view these ventures as integrated parts of a
larger cellular organization rather than as lone, regional operators. Golden
Telecom operates under the trade name Golden Telecom.
    
 
   
     Customers and Pricing. The customers of the various GTS Cellular Ventures
are primarily large, mid-sized and start-up businesses and wealthy individuals.
Increases in the number of customers for GTS Cellular's ventures are typically
linked to the economic health of the region in which such ventures operate.
Cellular service is generally a premium service in the cities in which GTS
Cellular operates and is priced as such. All GTS Cellular Ventures price their
service in U.S. dollars and accept payment in local currency. Each venture
begins with at least two tariff plans, a "standard" tariff plan and a "premium"
tariff plan, which
    
 
                                       143
<PAGE>   147
 
   
includes a fixed amount of airtime at a discounted per-minute rate. Each plan
prices late night and weekend calls at off-peak rates. GTS 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. The
GTS Russian and Ukrainian cellular ventures record cellular accounts in U.S.
dollars, and customers remit payment in rubles and hryvnas, respectively, at the
exchange rate on the date of the bill and, in instances permitted by law, in
U.S. dollars. Payments in hryvnas are applied at the rate of exchange on the
date of payment. In order to lessen risks to its receivables, GTS and its
cellular ventures typically require advance payment from customers with
prepayments averaging approximately six to eight weeks of service per customer.
To the extent remittance is made by customers in rubles and hryvnas, the GTS
Cellular Ventures will have higher local currency cash and receivables balances
which will expose them to correspondingly greater exchange risks. See "Risk
Factors -- Risks Specific to GTS -- Risks of Conducting Business in Foreign
Currencies." In addition, the ruble devaluation that was part of the August 17,
1998 decision by the Russian government and the attendant scarcity of U.S.
Dollars may cause a lower general level of remittances to GTS Cellular in U.S.
Dollars. The subsequent ruble devaluation in Russia also caused a significant
price increase in ruble terms (prices are recorded in dollars and paid in
rubles) and a resulting adverse effect on the customer base development.
    
 
   
     Ownership and Control. GTS Cellular's Russian and Ukrainian operations are
conducted through ventures which require partner approval for most decisions.
The applicable foundation agreements and charters do not have expiration dates.
See "Risk Factors -- Risks Specific to GTS -- Dependence on Certain Local
Parties; Absence of Control." Neither GTS nor any of its respective partners in
its Russian or Ukrainian operations are obligated to fund operations or capital
expenditures. Losses and profits of all such ventures are allocated to the
partners in accordance with their ownership percentages, in consideration of
funds at risk. As of September 30, 1998, GTS and its partners had made equity
contributions aggregating $13.5 million and $10.2 million, respectively, to the
various GTS cellular ventures. Contributions made by the partners include
contributions of cash and intangible assets, such as local support and
assistance with respect to the issuance of licenses in the names of each of the
GTS cellular ventures. In addition, the various GTS cellular ventures had
outstanding loans of $17.8 million to GTS as of September 30, 1998 which are
discussed in greater detail in the section, "GTS Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Accounting
Methodology -- Profit and Loss Accounting."
    
 
  LICENSES AND REGULATORY ISSUES
 
     Telecommunications operators in Russia are nominally subject to the
regulations of Goskomsvyaz, the successor of the Russian Ministry of
Communications, and its subordinated bodies, Gossvyaznadzor and the State Radio
Frequency Commission. As a practical matter, these national telecommunications
authorities as well as certain regional and local authorities generally regulate
telecommunications operators in their jurisdictions through their power to issue
licenses and permits.
 
     The Communications Law sets out a comprehensive legal and regulatory
framework for the sector. It also sets forth general principles for the right to
carry on telecommunications activities, describes government involvement in
telecommunications regulation and operation, establishes the institutional
framework involved in regulation and administration of telecommunications, and
deals with various operational matters, such as ownership of networks,
protection of fair competition, interconnection, privacy and liability. Separate
legislation implements this institutional framework.
 
   
     Goskomsvyaz issues licenses to provide telecommunications services on the
basis of a decision by the Licensing Commission at Goskomsvyaz. Goskomsvyaz has
generally issued no new licensing regulations since the enactment of the
Communications Law, and in practice Goskomsvyaz continues to issue licenses
based on the pre-existing licensing regulations licensing regulations, except to
the extent such regulations have been modified by licensing regulations with
respect to cellular services. According to the general licensing regulations,
licenses for rendering telecommunications services may be issued and renewed for
periods which range from 5 to 15 years and several different licenses may be
issued to one person. Under the cellular licensing regulations, licenses for
rendering cellular services may be issued only on the basis of a competitive
tender for longer periods ranging from five to 15 years. Once the licenses are
received, the licensee is required
    
                                       144
<PAGE>   148
 
   
to register its right to hold and operate under the license with Gossvyaznadzor,
the national authority responsible for monitoring compliance with regulatory and
technical norms. Renewals may be obtained upon application to Goskomsvyaz and
verification by appropriate government authorities that the licensee has
conducted its activities in accordance with the licenses. Officials of
Goskomsvyaz have fairly broad discretion with respect to both the issuance and
renewal procedures. The Communications Law as well as the general and cellular
licensing regulations provide that a license may not be transferred or assigned
to another holder. Regional authorities also exercise some influence especially
in directly influence the issuance of AMPS licenses because AMPS has been
designated a "regional standard." In August 1995, the Russian government created
Svyazinvest, a holding company, to hold the federal government's interests in
the majority of Russian local telecommunications operators. In addition,
entities such as Svyazinvest at the federal level, as well as other entities at
the oblast and krai levels (administrative regions within Russia) and Moscow and
St. Petersburg exercise significant control over their respective local
telephone networks and may therefore affect the licensing process.
    
 
   
     License procedures for GTS' cellular services include frequency licensing
from Goskomsvyaz through a two step process. A license must first be obtained
from Goskomsvyaz 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. Both the General and the Cellular Licensing Regulations require GTS
to obtain additional 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 directly owning more than
49% of any telecommunications operating company. GTS' Ukrainian joint venture
agreements provide it with the option of purchasing an additional 1% of the
cellular network if these rules are liberalized. The Ukrainian government has
imposed substantial frequency permit fees in connection with providing GSM
service in Ukraine, and Golden Telecom has paid a $2.9 million frequency license
fee on Golden Telecom's license. GTS cannot assure you that additional fees will
not be imposed in the future upon the reissuance and/or renewal of such license.
For a comprehensive discussion of these regulatory risks, see also "Risk
Factors -- Risks Specific to GTS -- Our Operations in Russia and the CIS Face
Significant Political, Economic, Regulatory, Legal and Tax Risks."
    
 
   
     GTS' subsidiaries and ventures hold the following licenses in Russia and
Ukraine which are materially significant to their operations:
    
 
   
     Switched Services. In Russia, GTS indirectly holds two licenses for
switched services. 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 PSTN. This
license ultimately requires Sovintel to provide service to at least 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 TeleRoss, a wholly
owned subsidiary of GTS in October 1998, for provision of intercity services in
40 regions including the city of Moscow with ability to interconnect with the
PSTN. In Kiev, Ukraine, GTS holds a license for provision of overlay network
services, including international services, in the name of its affiliate, Golden
Telecom. In addition, Sovintel is an ITU 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.
    
 
     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, the Moscow region and St. Petersburg, valid until September 2001. The
total number of circuits leased is in excess of 500 and may be increased up to a
total authorized capacity of 2,500.
 
   
     Data Services. In November 1998, Goskomsvyaz reissued to Sovam a 5 1/2-year
license to provide data transmission services via a dedicated network to a
number of regions covering a large portion of Russia. The
    
 
                                       145
<PAGE>   149
 
   
license permits a network capacity of not less than 14,000 customers and allows
it to interconnect with other data transfer networks in Russia.
    
 
     Local Access Services. In January 1997, the MOC 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 received authorization
from Goskomsvyaz to construct an additional 50,000 numbers. TCM has also
completed negotiations with MGTS to interconnect these numbers with the Moscow
city telephone network. TCM is currently discussing with Goskomsvyaz whether an
amendment to its license is necessary to add these numbers to its license.
 
     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. However, AMPS licenses are issued by the MOC based on
the recommendations of regional administrations. 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. It is unclear whether the competitive tender
requirement in the new Cellular Licensing Regulations will apply to all cellular
operators or only those utilizing the GSM and NMT-450 standards.
 
   
     GTS' 14 Russian cellular companies have licenses which expire between 2005
and 2007. One of the companies initially received an operating license in 1994,
five companies initially received an operating license in 1995, five companies
initially received an operating license in 1996 and one company initially
received an operating license in 1997, and one company has renewed its license
in 1999 for an extended term of more than eight years. Additionally, Vostok
Mobile has received licenses for five cities where it intends to begin
operations later this year, if economic conditions improve.
    
 
     Golden Telecom 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 GTS' competitors and
potential competitors, which include large multinational telecommunications
companies, have substantially greater financial and technical resources than GTS
and have the ability to operate independently or with global or local partners
and to obtain a dominant position in these markets. GTS believes that it has
certain competitive advantages 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. GTS 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 "Combellga" 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 GTS, TelMos, a joint venture between AT&T, MGTS,
Global One, through its Moscow based ventures, and Peterstar, in Petersburg,
which is part of the PLD Telekom group. Several smaller companies, such as
DirectNet and Aerocom, provide high-volume and carrier's carrier services in
Moscow. Golden Telecom competes in the switched international traffic market
with the Kiev electrosvyaz and UTel, a joint venture that includes Western
partners with
 
                                       146
<PAGE>   150
 
substantial capital and technical resources who together hold a dominant share
of the Kiev market. GTS expects that market consolidation will take place among
the competitive field in international services.
 
     Domestic Long Distance Services. GTS believes its major competitors in the
Russian domestic long distance market consist of Rostelecom, the electrosvyazs,
including those which are partners in GTS' TeleRoss Ventures, and a variety of
ventures that include foreign 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
electrosvyazs, 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 electrosvyazs 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 electrosvyazs, 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. GTS 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.
 
     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.
Several voice operators including Sovintel have also announced the intention to
provide Internet access and other data services. Although Sovam's business has
grown quickly, GTS 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 GTS faces significant competition in this market, it believes that
it enjoys certain competitive advantages, including the ability to reach a wide
area throughout Russia, 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.
 
     Local Access Services. GTS 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 Combellga. However, since TCM has obtained an allocation of up to
150,000 numbers, GTS believes that TCM will account for a substantial proportion
of the new capacity to come onto the market within the next five years.
 
                                       147
<PAGE>   151
 
   
     Cellular Services. Most Russian cellular markets have the potential for at
least five licenced operators, including one operator for each of the GSM and
NMT-450 cellular standards, which Russia has adopted as national standards, one
operator using the AMPS cellular standard, which has been set as a regional
standard and two operators in the DCS Cellular 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 recently occurred which could result in one or more
CDMA "fixed wireless" providers entering the markets, where GTS has cellular
operations. In Ukraine, Golden Telecom competes primarily with an NMT-450 and
GSM-900 operator, a D-Amps operator, a national DCS cellular standard operator
and a CDMA operator.
    
 
   
 MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN RUSSIA AND THE CIS
    
 
   
     We have a policy worldwide of complying with all applicable laws and
ensuring that all of our employees understand and comply with such laws. The
application of the laws of any particular country, however, is not always clear
or consistent. Emerging market countries often have commercial practices and
less developed legal and regulatory frameworks that differ significantly from
practices in the United States and other Western countries. In addition, some
practices, such as the payment of fees for the purpose of obtaining expedited
customs clearance and other commercial benefits that may be common methods of
doing business in these markets, might be unlawful under the laws of the United
States and other western countries.
    
 
   
     In light of these circumstances, in the second half of 1996 we increased
our efforts to improve our management and financial controls and business
practices. We recruited a more experienced financial and legal team, including a
new Chief Financial Officer for GTS, a senior finance officer overseeing all of
the regions in which we operate, a senior finance officer for the CIS region,
and a senior legal officer for the CIS region. We also established a treasury
group and adopted a more rigorous Foreign Corrupt Practices Act compliance
program. We have developed and implemented an expanded training program for
employees regarding U.S. legal and foreign local law compliance. We also
appointed a Compliance Officer responsible for monitoring compliance with such
laws and training our personnel around the world. In connection with these
developments, we expanded our corporate business practices policy to include, in
addition to compliance with U.S. laws such as the Foreign Corrupt Practices Act,
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 addition, in early 1997, we retained special outside counsel to conduct
a thorough review of certain of our business practices in the emerging markets
in which we operate to determine whether deficiencies existed that needed to be
remedied. In the course of this review, we replaced certain senior employees in
Russia and instituted additional and more stringent management and financial
controls. The review did not identify any violations of law that we believe
would have a material adverse effect on our financial condition. However, if we
were found by government authorities to have violated any law, depending on the
penalties assessed and the timing of any unfavorable resolution, future results
of operations and cash flows could be materially adversely affected in a
particular period.
    
 
   
     Although we believe that the special counsel review was properly conducted
and was sufficient in scope, we cannot assure you that all potential
deficiencies have been identified or that the control procedures and compliance
programs initiated by us will be effective. We believe, however, that the
actions taken since the review to strengthen our management, financial controls
and legal compliance will be adequate to address any past possible deficiencies.
    
 
ASIA
 
     GTS does not currently own or operate significant telecommunications assets
in Asia.
 
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<PAGE>   152
 
  CHINA
 
   
     Through Shanghai V-Tech Telecommunications Systems Co., Limited, which we
refer to as V-Tech, a venture in which GTS holds a 75% interest, GTS provides
financing, operational consulting, technical and engineering services to a
Shanghai-based VSAT network operator. With respect to V-Tech, in addition to
GTS' initial equity contribution of $3.75 million, GTS committed to fund up to
an additional $3.0 million (all of which has been funded by the end of the third
quarter of 1997). The joint venture expires in April 2015, and profits and
losses are allocated according to ownership interests in consideration of funds
at risk. See "GTS Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Accounting Methodology -- Profit and Loss
Accounting." GTS currently is evaluating adding additional partners to V-Tech
which may reduce GTS' ownership interest in V-Tech. GTS has reached an agreement
to sell its ownership interest in V-Tech in consideration of an equity interest
in the purchaser of GTS' interest in such venture. Consummation of such sale is
subject to certain conditions precedent.
    
 
   
     GTS China Investments LLC, a company in which GTS holds a 75% interest and
in which an affiliate of a shareholder of GTS owns a 25% interest, holds an
indirect 63% interest in Bejing Tianmu Satellite Communications Technology Co.
Limited, which we refer to as Bejing Tianmu, which has provided technical,
operational and financial support for a tourist industry VSAT network operated
by the minority holder in Bejing Tianmu. The VSAT license of that partner was
revoked in December 1998. Accordingly, Bejing Tianmu no longer provides the
support for the network described above and GTS has no plans to make additional
investments or to arrange additional investments in Bejing Tianmu. GTS China
Investments LLC had made an initial equity contribution of $8.75 million in
Bejing Tianmu. See "GTS Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Accounting Methodology -- Profit and Loss
Accounting."
    
 
  INDIA
 
     GTS' operations in India are conducted through C-Datacom International,
Inc., a wholly owned subsidiary which provides digital international private
line communications to targeted business customers to and from India for
multiple applications, including data and voice.
 
EMPLOYEES
 
     On September 30, 1998, GTS, its consolidated subsidiaries and joint
ventures in which GTS participates, employed approximately 1,935 persons. GTS
believes its future success will depend on its continued ability to attract and
retain highly skilled and qualified employees. GTS believes that its relations
with its employees are good.
 
     Although GTS' employees are not unionized, unions represent employees of
GTS' railroad partners in HER. Under the agreements contemplated between HER and
its railroad partners, some of these employees will be required to construct and
maintain certain portions of the HER network. There can be no assurances that
unionized employees of HER's partners will not experience labor unrest.
 
PROPERTIES
 
   
     GTS leases, under long-term leases, office space to serve as sales office
and/or administrative facilities, including its 15,000 square-foot headquarters
in McLean, Virginia with a five year lease expiring December, 2000. GTS has
entered into a new lease for its headquarters in McLean covering 33,000 square
feet, which lease will expire September, 2005. GTS expects to relocate to the
new space in 1999 and plans to sublease its current offices. GTS maintains
regional headquarters offices in Moscow and Budapest, as well as facilities in
McLean, Virginia and London. HER is headquartered just outside of Brussels,
Belgium.
    
 
   
     HER leases, under long-term leases, portions of railroad, utility and other
rights-of-way for its fiber-optic routes. HER is creating a fiber optic network
consisting of optical fiber pairs, which are leased under long-term leases, and
technical sites leased under long-term leases. For a comprehensive discussion of
HER's network development, see "Business -- Western Europe -- HER."
    
 
                                       149
<PAGE>   153
 
LITIGATION
 
     In addition to routine legal proceedings incidental to the conduct of its
business, GTS, GTS-Hungaro 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. On May 21, 1998, the Superior Court of the State
of Delaware denied GTS' motion to dismiss the claim. 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,
GTS does not believe that the outcome of this litigation will have a material
adverse effect upon the financial condition of GTS.
 
     On March 27, 1998, V-Tech brought a claim for approximately $1.1 million
against Gilat Satellite Networks, Limited, the vendor of a Ku-band VSAT hub and
system which V-Tech purchased in 1996, in an arbitration proceeding under the
Rules of Arbitration of the ICC International Court of Arbitration. V-Tech has
demanded in the request for arbitration that Gilat accept return of the
equipment, which V-Tech has not accepted or commissioned because it has failed
to meet contract specifications, and refund purchase amounts already paid under
the contract, plus other sums. On June 2, 1998 Gilat filed a counterclaim
against V-Tech seeking the balance due under the contract and other alleged
damages, in the aggregate amount of $685,000. Gilat has stated its intention to
join GTS as a third-party respondent to its counterclaim. Although it is not
possible at this time to make an assessment of the outcome of the arbitration
proceeding, GTS does not believe that Gilat's counterclaim, even if successfully
asserted against GTS, would have a material adverse effect upon GTS' financial
condition.
 
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<PAGE>   154
 
                                   MANAGEMENT
 
     The following table sets forth the name, current business address,
citizenship and present principal occupation or employment, and material
occupations, positions, offices or employments and business addresses thereof
for the past five years of each director and executive officer of the Company.
Unless otherwise indicated, the current business address of each person is 1751
Pinnacle Drive, North Tower -- 12th floor, McLean, VA 22102. Unless otherwise
indicated, each such person is a citizen of the U.S.
 
DIRECTORS
 
<TABLE>
<CAPTION>
                                                   PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
          NAME, CITIZENSHIP                          MATERIAL POSITIONS HELD DURING THE PAST
    AND CURRENT BUSINESS ADDRESS       AGE          FIVE YEARS AND BUSINESS ADDRESSES THEREOF
    ----------------------------       ---         -------------------------------------------
<S>                                    <C>   <C>
Robert J. Amman......................  60    Mr. Amman was elected to the Company's Board of
                                             Directors in May 1998. Mr. Amman was Chairman, President
                                             and Chief Executive Officer of John H. Harland Company,
                                             a printing firm, from 1995 to 1998. Previously, from
                                             1994 to 1995, he served as Vice Chairman of First
                                             Financial Management Corporation, where he was
                                             responsible for the merchant services businesses
                                             consisting of Western Union, NaBanco, Telecheck,
                                             Nationwide Credit and International Banking
                                             Technologies. From 1988 to 1994, Mr. Amman served as
                                             President and Chief Executive Officer of Western Union
                                             Corporation, where he oversaw the transformation of the
                                             firm from a telecommunications to a financial services
                                             company. Mr. Amman is a member of the Executive and
                                             Governance Committees of the Board of Directors.
David Dey............................  60    Mr. Dey was elected to the Company's Board of Directors
                                             in May 1998. Since 1995, Mr. Dey has served as an
                                             independent consultant, particularly to high technology
                                             start-up companies in Europe. In that capacity, he
                                             serves as Chairman of World Telecom and as Chairman of
                                             STARTECH Scotland. From 1992 to 1995, Mr. Dey served as
                                             Chief Executive Officer of Energis Communications, which
                                             grew from a start-up company to become the United
                                             Kingdom's third national telecommunications operation
                                             during his tenure. Mr. Dey was employed by British
                                             Telecom plc from 1987 to 1991, most recently as Managing
                                             Director of its Business Communications Division, and he
                                             held various management positions at IBM Corporation
                                             where he was employed from 1961 to 1985. Mr. Dey is a
                                             member of the Audit and Budget, and Compensation
                                             Committees of the Board of Directors. Mr. Dey is a
                                             citizen of the United Kingdom.
</TABLE>
 
                                       151
<PAGE>   155
 
<TABLE>
<CAPTION>
                                                   PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
          NAME, CITIZENSHIP                          MATERIAL POSITIONS HELD DURING THE PAST
    AND CURRENT BUSINESS ADDRESS       AGE          FIVE YEARS AND BUSINESS ADDRESSES THEREOF
    ----------------------------       ---         -------------------------------------------
<S>                                    <C>   <C>
Michael A. Greeley...................  35    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 American
                                             Capital Access Holdings, LLC, Crescent Communications,
                                             Fuelman, Inc. and Teletrac, Inc. By contractual
                                             arrangement, GCC Investments, Inc. has the right to
                                             designate one person for nomination to the Board of
                                             Directors as long 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. Mr. Greeley is a member of the Audit and
                                             Budget and Compensation Committees of the Board of
                                             Directors.
Roger W. Hale........................  54    Mr. Hale was elected to the Company's Board of Directors
                                             in May 1998. Mr. Hale is Chairman, President and Chief
                                             Executive Officer of LG&E Energy Corp., a diversified
                                             energy services company with businesses in retail gas
                                             and electric utility services, energy marketing and
                                             power generation and project development. Mr. Hale has
                                             served in that capacity since August 1990. Previously,
                                             Mr. Hale served as Executive Vice President of Bell
                                             South Corp. and Bell South Enterprises, Inc. from 1986
                                             to 1989 and with AT&T Corporation from 1966 to 1986,
                                             serving in various management positions including Vice
                                             President of Marketing, Southern Region. Mr. Hale is a
                                             Director of H&R Block, Inc. Mr. Hale is a member of the
                                             Executive and Governance Committees of the Board of
                                             Directors.
Bernard McFadden.....................  64    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 HER. Mr.
                                             McFadden's career in international telecommunications
                                             includes 32 years with ITT Corporation, where he served
                                             as President and Chief Executive Officer of ITT's
                                             Telecom International Group, and a four and one-half
                                             year assignment as President and Chief Operating Officer
                                             of Alcatel Trade International, S.A. Mr. McFadden is a
                                             member of the Executive, Compensation, and Governance
                                             Committees of the Board of Directors.
</TABLE>
 
                                       152
<PAGE>   156
 
<TABLE>
<CAPTION>
                                                   PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
          NAME, CITIZENSHIP                          MATERIAL POSITIONS HELD DURING THE PAST
    AND CURRENT BUSINESS ADDRESS       AGE          FIVE YEARS AND BUSINESS ADDRESSES THEREOF
    ----------------------------       ---         -------------------------------------------
<S>                                    <C>   <C>
Stewart J. Paperin...................  50    Mr. Paperin has served as a director of GTS since March
                                             1997. Mr. Paperin serves as Chief Financial Officer of
                                             the Soros Foundations. In addition, he has served as the
                                             President of Capital Resource East since October 1993.
                                             Prior to that, Mr. Paperin was President of Brooke Group
                                             International from 1990 to 1993 where he was responsible
                                             for investments in the former Soviet Union. Mr. Paperin
                                             also served as Chief Financial Officer of Western Union
                                             Corporation from 1989 to 1990. Mr. Paperin serves as a
                                             director of the Board of Penn Octane Corporation. Mr.
                                             Paperin is a member of the Audit and Budget,
                                             Compensation, and Governance Committees of the Board of
                                             Directors.
W. James Peet........................  43    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 Hainan Airlines and of Phoenix Information
                                             Systems Corporation. Mr. Peet served as director of
                                             Viatel, Inc. from November 1995 until June 1998.
                                             Immediately prior to joining The Chatterjee Group, Mr.
                                             Peet spent six years with McKinsey & Company. By
                                             contractual arrangement, The Chatterjee Group has the
                                             right to designate one person for nomination to the
                                             Board of Directors to serve a term of five years. Mr.
                                             Peet is the designee of The Chatterjee Group to the
                                             Board of Directors. Mr. Peet is a member of the
                                             Executive Committee of the Board of Directors.
Jean Salmona.........................  62    Mr. Salmona has served as a director of GTS since March
                                             1996. Between December 1989 and November 1998, Mr.
                                             Salmona was Chairman and C.E.O. of CESIA Consulting
                                             Group ("CESIA"), of which he is now Honorary Chairman
                                             and member of the Board. He is President and C.E.O. of
                                             J&P Partners, a consulting concern for high-tech
                                             companies which invest in Europe, India and China. Mr.
                                             Salmona is also Chairman and Director General, Data for
                                             Development International Association, a nongovernmental
                                             organization with consultative status to the United
                                             Nations Economic and Social Council. Mr. Salmona is a
                                             graduate of Ecole Polytechnique, Paris, Institut
                                             d'Etudes Politiques, Paris, and Ecole Nationale de la
                                             Statistique et de l'Administration Economique, Paris.
                                             Mr. Salmona is a member of the Audit and Budget
                                             Committee of the Board of Directors. Mr. Salmona is a
                                             citizen of France.
Joel Schatz..........................  61    Mr. Schatz has served as a director of GTS since the
                                             inception of the Company. Mr. Schatz was a founder of
                                             the Company and served as its President from 1985 to
                                             1991. Mr. Schatz is presently the Chairman and Chief
                                             Executive Officer of Datafusion, Inc., a company
                                             developing software to accelerate knowledge synthesis.
                                             Mr. Schatz is a member of the Audit and Budget Committee
                                             of the Board of Directors.
</TABLE>
 
                                       153
<PAGE>   157
 
<TABLE>
<CAPTION>
                                                   PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
          NAME, CITIZENSHIP                          MATERIAL POSITIONS HELD DURING THE PAST
    AND CURRENT BUSINESS ADDRESS       AGE          FIVE YEARS AND BUSINESS ADDRESSES THEREOF
    ----------------------------       ---         -------------------------------------------
<S>                                    <C>   <C>
Alan B. Slifka.......................  68    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 Management
                                             Company LLC, an equity asset management firm
                                             specializing in nontraditional investments, specifically
                                             corporate event investing. Previously, Mr. Slifka was a
                                             partner of L.F. Rothschild, Unterberg, Towbin from 1961
                                             to 1982. He is a director of Pall Corporation and is
                                             active in other business, civic and philanthropic
                                             affairs as founder, director or officer of numerous
                                             for-profit and not-for-profit corporations and
                                             foundations. Mr. Slifka served as acting Chief Executive
                                             Officer of GTS during most of 1993. Mr. Slifka is a
                                             member of the Executive and Governance Committees of the
                                             Board of Directors.
Adam Solomon.........................  45    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 Properties International, L.P., a
                                             venture/development firm whose initial focus is
                                             redeveloping existing residential/golf communities, and
                                             a member of the board of directors of MetaSolv Software,
                                             Inc. Prior to that, Mr. Solomon spent eleven years with
                                             E.M. Warburg, Pincus & Co., Inc., where he was Managing
                                             Director from 1988 to 1992. While at E.M. Warburg,
                                             Pincus & Co., Inc., Mr. Solomon served as a member of
                                             the board of directors of LCI International, Inc., a
                                             regional long-distance carrier. Mr. Solomon is a member
                                             of the Executive and Compensation Committees of the
                                             Board of Directors.
Gerald W. Thames.....................  51    Mr. Thames joined GTS as Chief Executive Officer in
                                             February 1994, and has served as a director of GTS since
                                             February 1994. He was elected Vice Chairman of the Board
                                             of Directors in 1998. From 1990 to 1994, Mr. Thames was
                                             President and Chief Executive Officer for British
                                             Telecom North America and Syncordia, a joint venture
                                             company focused on the international outsourcing market.
                                             Mr. Thames has spent over 18 years in senior positions
                                             with telecommunications companies, where he was
                                             responsible for developing start-up telecommunications
                                             companies, including 15 years with AT&T, where he rose
                                             to the position of General Manager of Network Services
                                             for the Northeast Region of AT&T Communications. Mr.
                                             Thames is a member of the Executive Committee of the
                                             Board of Directors.
</TABLE>
 
                                       154
<PAGE>   158
 
EXECUTIVE OFFICERS
 
<TABLE>
<CAPTION>
                                                   PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
          NAME, CITIZENSHIP                          MATERIAL POSITIONS HELD DURING THE PAST
    AND CURRENT BUSINESS ADDRESS       AGE          FIVE YEARS AND BUSINESS ADDRESSES THEREOF
    ----------------------------       ---         -------------------------------------------
<S>                                    <C>   <C>
Bruno d'Avanzo.......................  56    Mr. d'Avanzo joined GTS as Executive Vice President and
                                             Chief Operating Officer in August 1996. From 1994 to
                                             1996, Mr. d'Avanzo was Executive Vice President and
                                             Chief Operating Officer of Intelsat, the largest
                                             telecommunications satellite operator in the world. From
                                             1992 to 1994, Mr. d'Avanzo was a senior executive with
                                             Olivetti Corporation, serving as Vice President and
                                             General Manager -- Europe and as Vice President -- 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. Mr. d'Avanzo
                                             is a citizen of Italy.
Gerard Essing........................  35    Mr. Essing is the Chief Executive Officer -- GTS Mobile
                                             Services (CIS). Mr. Essing has been general director of
                                             Vostok Mobile, a GTS subsidiary, since 1994. Prior to
                                             that, Mr. Essing held a variety of management positions
                                             with what is now Lucent Technologies from 1989 to 1994.
                                             Mr. Essing holds a Master's Degree in International
                                             Management from American Graduate School of
                                             International Management in the United States. He has
                                             also received post-graduate telecommunications training
                                             at Technical University Delft in the Netherlands.
Leslie M. Harris.....................  49    Mr. Harris joined GTS in October 1998 as President of
                                             GTS Access Services, which is based in London. Since
                                             1995, he was President and Chief Executive Officer of
                                             New T&T (Hong Kong) Ltd., the leading competitive local
                                             exchange carrier in Hong Kong. From September 1992 to
                                             December 1994, Mr. Harris was Joint Managing Director of
                                             BT. Australasia Ltd. Prior to that, Mr. Harris held a
                                             variety of senior executive positions with British
                                             Telecom in the United Kingdom and Australia.
Jan Loeber...........................  54    Mr. Loeber is President, GTS Carrier Services, and
                                             Managing Director of HER. 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.
</TABLE>
 
                                       155
<PAGE>   159
 
   
<TABLE>
<CAPTION>
                                                   PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
          NAME, CITIZENSHIP                          MATERIAL POSITIONS HELD DURING THE PAST
    AND CURRENT BUSINESS ADDRESS       AGE          FIVE YEARS AND BUSINESS ADDRESSES THEREOF
    ----------------------------       ---         -------------------------------------------
<S>                                    <C>   <C>
Raymond I. Marks.....................  51    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.
Kevin Power..........................  44    Mr. Power is currently serving as Interim Head of GTS
                                             Business Services (Western Europe). Prior to joining GTS
                                             Monaco Access in October 1995, Mr. Power was Vice
                                             President, Carrier Relations for GTS beginning in
                                             November 1994, where he was responsible for assisting
                                             and coordinating the carrier activities of the GTS group
                                             of companies. In 1988, Mr. Power was one of a group of
                                             five people who started the commercial operations of
                                             Orion Network Systems and he stayed with the company
                                             until the launch of its first satellite in 1994. His
                                             last position there was Vice President of Carrier
                                             Services. Prior to that, he held positions with
                                             Intelsat, National Economic Research Associates (NERA)
                                             and the U.S. Department of Commerce.
Grier C. Raclin......................  46    Mr. Raclin joined GTS as its Senior Vice President and
                                             General Counsel in September, 1997, and was elected
                                             Corporate Secretary of the Company in December 1997.
                                             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.
Stewart P. Reich.....................  53    Mr. Reich joined GTS as President -- GTS Russia in
                                             September 1997. From September 1992 to August 1997, Mr.
                                             Reich was President of UTEL, a joint venture of AT&T,
                                             Deutsche Telekom, PTT Telecom (Netherlands), and
                                             Ukrtelecom (a Ukrainian telecommunications company)
                                             which provides international and interregional
                                             telecommunications services in Ukraine. From 1982 to
                                             1992, Mr. Reich held various positions at AT&T where his
                                             last position was Financial Manager, AT&T International
                                             Communications Switched Services. Mr. Reich was also
                                             employed for 20 years with Western Electric Company from
                                             1961 to 1981.
</TABLE>
    
 
                                       156
<PAGE>   160
 
<TABLE>
<CAPTION>
                                                   PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
          NAME, CITIZENSHIP                          MATERIAL POSITIONS HELD DURING THE PAST
    AND CURRENT BUSINESS ADDRESS       AGE          FIVE YEARS AND BUSINESS ADDRESSES THEREOF
    ----------------------------       ---         -------------------------------------------
<S>                                    <C>   <C>
William H. Seippel...................  41    Mr. Seippel joined GTS as Executive Vice President of
                                             Finance and Chief Financial Officer in October 1996.
                                             From July 1992 to October 1996, Mr. Seippel was Vice
                                             President -- Finance and Chief Financial Officer of
                                             Landmark Graphics Corporation. From August 1990 to July
                                             1992, Mr. Seippel was Director of Finance for Covia,
                                             Inc., an affiliate of United Airlines. From April 1984
                                             to August 1990, Mr. Seippel held the positions of Group
                                             Business Controller (1989 to 1990), Group Controller
                                             Sales/Marketing (1986 to 1989), and Product Line
                                             Controller (1984 to 1986) with Digital Equipment
                                             Corporation, a diversified computer manufacturer.
Eileen K. Sweeney....................  46    Ms. Sweeney joined GTS as Senior Vice President -- Human
                                             Resources in November, 1997. Prior to joining GTS, Ms.
                                             Sweeney was President of Global Resource Associates, a
                                             consulting company specializing in international human
                                             resource issues. Prior to that time, Ms. Sweeney spent
                                             10 years with ITT Corporation in a variety of human
                                             resource management positions, including eight years
                                             based in Europe and in the Middle East. Ms. Sweeney
                                             holds a Master's Degree in Business Administration from
                                             Simmons Graduate School of Management in Boston.
Gerald W. Thames.....................  51    See biographical information under "Directors" above.
Louis T. Toth........................  55    Mr. Toth joined GTS as Senior Vice President -- Central
                                             Europe in July 1993. From February 1987 to July 1991,
                                             Mr. Toth served as President of Dynaforce Inc. and as
                                             Partner and General Manager for the pan-European
                                             expansion of Andlinger & Company. Mr. Toth, who is
                                             currently based in London, has 23 years of
                                             telecommunications experience with ITT Corporation in
                                             Europe, Latin America and Asia.
</TABLE>
 
                  EXECUTIVE COMPENSATION AND OTHER INFORMATION
 
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
 
     Each Director of GTS, except Mr. Thames, receives an annual directors' fee
of $15,000. In addition, the fee paid to each Director, except for Mr. Thames,
for attending any meeting of the Board of Directors is $1,500 per meeting,
except for telephonic Board of Directors meetings of two hours or less, where
the fee is $750 for each such meeting. Each Director, except Mr. Thames, who
attends a committee meeting is entitled to a directors' fee of $1,000 per
meeting, except for telephonic committee meetings of a duration of two hours or
less, for which a fee of $500 is paid.
 
     For the year ended December 31, 1997, the aggregate compensation paid by
the Company to its directors and executive officers for services in all
capacities was approximately $4.7 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." In addition,
on February 27, 1998 the Board of Directors granted to each of certain of its
then incumbent members options to purchase 15,000 shares of Common Stock at an
exercise price of $20 per share.
 
                                       157
<PAGE>   161
 
GLOBAL TELESYSTEMS GROUP, INC. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
 
   
     The purpose of the Global TeleSystems Group, Inc. non-employee directors'
stock option plan, which we refer to as the Directors' Plan, is to permit
eligible non-employee directors of GTS 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 GTS common stock presently reserved and
available for delivery under the Directors' Plan is 1,275,000. The Directors'
Plan is administered by the compensation committee of the Board of Directors,
which we refer to as 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 to purchase 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. One-half of the
directors' options vests six months after the date of grant. An additional one
quarter 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 one quarter shares become exercisable on the date six months following
the second annual meeting of GTS's shareholders to occur after such date of
grant. An initial directors' option represents 22,250 shares of GTS common
stock. On the date of each annual meeting of GTS's shareholders, an additional
directors' option to purchase 9,000 shares will be granted each year on the date
of GTS' annual meeting to the individuals who will serve as elected non-employee
directors of GTS during the next year.
    
 
   
     Directors' options are nonqualified stock options which are subject to
certain terms and conditions including those summarized below. The exercise
price per share of GTS common stock purchasable under a directors' option will
be equal to 100% of the fair market value of GTS 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 GTS 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 GTS 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 GTS common stock may then be listed or quoted, or if
the Board of Directors determines in its discretion to seek such shareholder
approval.
    
 
                                       158
<PAGE>   162
 
   
     The following table sets forth each component of compensation paid or
awarded to, or earned by, the Chief Executive Officer and the four other most
highly compensated executive officers serving as of December 31, 1998, which we
refer to collectively, as the Named Executive Officers, for the years indicated.
    
 
   
                           SUMMARY COMPENSATION TABLE
    
 
   
<TABLE>
<CAPTION>
                                                                                 LONG-TERM COMPENSATION
                                                                               --------------------------
                                                                                         AWARDS
                                                 ANNUAL COMPENSATION           --------------------------
                                         -----------------------------------   RESTRICTED     SECURITIES
                                                                OTHER ANNUAL     STOCK        UNDERLYING     ALL OTHER
                                          SALARY    BONUS(1)    COMPENSATION    AWARD(S)     OPTIONS/SAR    COMPENSATION
  NAME AND PRINCIPAL POSITION     YEAR     ($)        ($)           ($)           ($)            (#)          ($)(11)
  ---------------------------     ----   --------   --------    ------------   ----------    ------------   ------------
<S>                               <C>    <C>        <C>         <C>            <C>           <C>            <C>
Gerald W. Thames,...............  1998   $395,000   $330,000            (2)         -0-        350,000(6)     $ 19,065
  Vice Chairman, President and    1997    375,417    140,000            (2)         -0-        141,195(6)       19,850
  Chief Executive Officer         1996    325,000    113,750            (2)         -0-        112,500(6)        9,954
Bruno d'Avanzo,.................  1998   $340,000   $173,333(3)        -0-          -0-        175,000(6)     $ 18,105
  Executive Vice President and    1997    340,000     83,313(3)        -0-          -0-        104,475(6)       21,675
  Chief Operating Officer         1996    141,667     33,333(3)        -0-          -0-         83,025(6)        5,650
Jan Loeber,.....................  1998   $310,000   $119,400      $101,840(4)       -0-        150,000(6)     $178,565
  Senior Vice President -- HER;   1997    235,000    177,308        46,598(4)       -0-          4,812(7)      179,450
  President - GTS Carrier
    Services                      1996    235,000        -0-        42,806(4)    30,000(5)         3.5(8)       12,986
William H. Seippel(12)..........  1998   $245,833   $120,000            (2)         -0-        150,000(6)     $  9,650
  Executive Vice President --     1997    200,000     11,469      $ 25,225(9)       -0-         97,500(6)       52,215
  Chief Financial Officer         1996     43,205        -0-            (2)         -0-        285,000(6)          943
Stewart P. Reich(13)............  1998   $243,750   $ 98,300      $187,008(10)      -0-        150,000(6)     $  5,197
  President -- GTS Business       1997     78,333     75,000        59,772(10)      -0-        112,500(6)          384
  Services -- CIS
</TABLE>
    
 
- ---------------
 
   
 (1) Represents cash bonus paid in the year indicated for services rendered in
     the immediately preceding year, except in the case of Mr. Loeber, whose
     bonus paid in 1997 was for services rendered in 1996 and 1995.
    
 
   
 (2) Perquisites and other personal benefits paid to the Named Executive Officer
     were less than the lesser of $50,000 and 10 percent of the total of salary
     and bonus report for the Named Executive Officer.
    
 
   
 (3) Mr. D'Avanzo's bonuses in 1998, 1997 and 1996 include the three equal
     installments of a $100,000 sign-on bonus that GTS agreed to pay in three
     equal annual installments when he was hired in 1996.
    
 
   
 (4) For 1998, the amount disclosed includes an overseas living allowance of
     $21,700 and a tax equalization payment of $58,613 that compensated Mr.
     Loeber for the higher taxes he pays because he resides in Belgium instead
     of the United States. For 1997, the amount disclosed includes an overseas
     living allowance of $16,450, a tax equalization payment of $13,953 and a
     gross-up payment of $11,648 for certain tax liabilities. For 1996, the
     amount disclosed includes an overseas living allowance of $16,450 and a
     gross-up payment of $12,778 for certain tax liabilities.
    
 
   
 (5) Shares of restricted stock that vest in an amount of one-third each year on
     the three anniversary dates of grant, beginning on January 2, 1997.
    
 
   
 (6) Shares of common stock underlying stock options awarded under the Stock
     Option Plan.
    
 
   
 (7) Stock options awarded under The Key Employee Stock Option Plan of Hermes
     Europe Railtel B.V. which we refer to as the HER Stock Option Plan.
    
 
   
 (8) Stock options awarded under the GTS-Hermes, Inc. Stock Option Plan, which
     will be terminated. The stock options granted to Mr. Loeber in 1997 and
     described in footnote (6) are in substitution for the 3.5 stock options
     granted to Mr. Loeber in 1996, which have been cancelled.
    
 
   
 (9) Amount disclosed represents a gross-up payment of $25,225 associated with
     certain tax liabilities.
    
 
   
(10) For 1998, the amount disclosed includes an overseas living allowance of
     $72,000, rent on a residence in Moscow of $90,000, and a tax equalization
     payment of $19,844 that compensated Mr. Reich for the higher taxes he pays
     because he resides in Russia instead of United States. For 1997, the amount
     disclosed includes an overseas living allowance of $24,000 and rent on a
     residence in Moscow of $30,300.
    
 
                                       159
<PAGE>   163
 
   
(11) Amounts disclosed hereunder represent the sum of premiums paid by GTS for
     $1 million in term life insurance for each Named Executive Officer and
     contributions by GTS under the 401(k) Plan, as defined below, to each Named
     Executive Officer's account, except Mr. D'Avanzo who does not participate
     in the 401(k) Plan because of his foreign citizenship and Mr. Seippel in
     1996 and Mr. Reich in 1997 because their tenure with GTS did not qualify
     them for participation in the 401(k) Plan in those years. In each case in
     which GTS paid 401(k) Plan contributions, $4,000 was paid in each of 1997
     and 1996 and $3,750 was paid in 1996 to the Named Executive Officers. In
     addition, for 1998 and 1997, the amounts disclosed for Mr. Loeber include
     $156,700 in each year, which represents the value as of December 31, 1997
     and December 31, 1998 of 10,000 shares of restricted stock which vested in
     each of 1997 and 1998.
    
 
   
(12) Mr. Seippel commenced his employment with GTS in October 1996.
    
 
   
(13) Mr. Reich commenced his employment with GTS in September 1997.
    
 
   
                        OPTION/SAR GRANTS IN LAST FISCAL YEAR
    
 
   
     The following table provides information on stock option grants to the
Named Executive Officers in 1998 under the Stock Option Plan
    
 
   
<TABLE>
<CAPTION>
                                                     % OF TOTAL
                                       NUMBER OF      OPTIONS
                                       SECURITIES    GRANTED TO      EXERCISE
                                       UNDERLYING    EMPLOYEES          OR                     GRANT DATE
                                        OPTIONS          IN            BASE       EXPIRATION     PRESENT
                NAME                   GRANTED(#)   FISCAL YEAR    PRICE($/SH.)      DATE      VALUE($)(2)
                ----                   ----------   -----------    ------------   ----------   -----------
<S>                                    <C>          <C>            <C>            <C>          <C>
Gerald W. Thames.....................  350,000(1)       9.4           $25.75       10-14-08    $6,016,500
Bruno d'Avanzo.......................  175,000(1)       4.7            25.75       10-14-08     3,008,250
Jan Loeber...........................  150,000(1)       4.0            25.75       10-14-08     2,578,500
William H. Seippel...................  150,000(1)       4.0            25.75       10-14-08     2,578,500
Stewart P. Reich.....................  150,000(1)       4.0            25.75       10-14-08     2,578,500
</TABLE>
    
 
- ---------------
 
   
(1) The options vest one-sixth on each of the first six anniversaries of the
    date of grant. However, the options may vest on an accelerated basis if GTS
    and the individual grantees meet certain performance targets. Under that
    accelerated vesting, all the options could vest by the third anniversary of
    the date of grant.
    
 
   
(2) The present value of each grant is estimated on the date of grant using the
    Black-Scholes option pricing model with the following weighted-average
    assumptions: dividend yield 0%, expected volatility of 0.75, risk-free
    interest rate of 4.23% and expected life of five years.
    
 
   
  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
    
 
   
     The following table provides information on the number and value of GTS
stock options exercised by the Named Executive Officers during 1998, the number
of options under the Stock Option Plan held by such persons at December 31,
1998, and the value of all unexercised options held by such persons as of that
date.
    
 
   
<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                               SHARES                      UNDERLYING UNEXERCISED           IN-THE-MONEY
                            ACQUIRED ON       VALUE         OPTIONS AT FY-END (#)      OPTIONS AT FY-END($)(1)
           NAME             EXERCISE (#)   REALIZED ($)   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
           ----             ------------   ------------   -------------------------   -------------------------
<S>                         <C>            <C>            <C>                         <C>
Gerald W. Thames..........    487,500      $20,048,438         354,048/512,147         $16,296,754/$17,458,263
Bruno d'Avanzo............     50,000        2,085,000          31,468/281,032             1,312,935/9,682,065
Jan Loeber................        -0-              -0-               0/150,000                   -0-/4,500,000
William H. Seippel........     50,000        2,064,750         169,375/313,125            7,162,950/11,353,950
Stewart P. Reich..........        -0-              -0-          28,125/234,375             1,127,250/7,881,750
</TABLE>
    
 
- ---------------
 
   
(1) Based on the closing price of $55.75 on the Nasdaq Stock Market of the
    Common Stock on December 31, 1998.
    
 
                                       160
<PAGE>   164
 
   
   AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
    
   
                          VALUES-HER STOCK OPTION PLAN
    
 
   
     The following table provides information on the number and value of options
exercised by one of the Named Executive Officers, Jan Loeber, during 1998 under
the HER Stock Option Plan, and the number and value of unexercised options held
by Mr. Loeber as of December 31, 1998 under such Plan. Mr. Loeber was not
granted any options in the HER Stock Option Plan in 1998.
    
 
   
<TABLE>
<CAPTION>
                               SHARES                       NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                              ACQUIRED                     UNDERLYING UNEXERCISED      IN-THE-MONEY OPTIONS AT
                            ON EXERCISE       VALUE         OPTIONS AT FY-END (#)           FY-END ($)(2)
           NAME                (1)(#)      REALIZED ($)   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
           ----             -----------    ------------   -------------------------   -------------------------
<S>                         <C>            <C>            <C>                         <C>
Jan Loeber................     3,209        $2,129,793             0/1,603                  $0/$1,292,803
</TABLE>
    
 
- ---------------
 
   
(1) The shares are beneficially owned by Mr. Loeber and are held in trust by
    Stichting Administratiekantoor HER Foundation, which in turn has issued
    depositary receipts to him representing beneficial ownership in the shares.
    
 
   
(2) Based on a valuation price of $889.61 per share of HER common stock at
    December 31, 1998. This valuation was determined by the valuation per common
    share that a wholly owned subsidiary of GTS paid to AB Swed Carrier for
    acquiring all of its minority interest in HER on October 31, 1998.
    
 
   
THE GTS 401(k) PLAN
    
 
   
     The GTS 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, subject to certain regulatory qualifications, 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. 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 is to attract,
retain and motivate key employees, officers and eligible independent contractors
of GTS and to enable such individuals to own shares of GTS 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
 
                                       161
<PAGE>   165
 
   
Committee. The Committee has full and binding authority to determine the fair
market value of the GTS 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. No restricted stock
may be granted under the Equity Compensation Plan on or after November 14, 2000.
 
     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 any shares that the participant
wishes to sell.
 
   
     The Equity Compensation Plan provides that, in the event of a change to the
GTS common stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination or 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.
 
   
     The 1992 Stock Option Plan of Global TeleSystems Group, Inc. was adopted by
the Board of Directors of GTS and approved by stockholders in 1992 and has been
subsequently amended, among other things, to increase the number of shares
available for grant. The Board of Directors of GTS adopted the Fourth Amended
and Restated Plan on April 9, 1998 subject to stockholder approval at the May
20, 1998 annual shareholders meeting: (i) to modify the provisions relating to
the number of shares with respect to which options to purchase shares of Common
Stock may be granted under the 1992 Stock Option Plan; (ii) to extend
eligibility under the 1992 Stock Option Plan to nonemployee directors and
independent contractors of the Company (as defined in the 1992 Stock Option
Plan), its subsidiaries and affiliates; (iii) to provide the Stock Option
Committee (as defined in the 1992 Stock Option Plan) with more flexibility to
specify the terms of options granted under the 1992 Stock Option Plan; (iv) to
specify that the options covering not more than
    
                                       162
<PAGE>   166
 
   
1.5 million shares of common stock may be granted to any employee during any
calendar year; (v) to extend the term of the 1992 Stock Option Plan, as amended,
to April 9, 2008 and (vi) to eliminate certain provisions that are not necessary
or desirable in an option plan of a public company. As of June 30, 1998, there
were approximately 1,800 employees, nonemployee directors and independent
contractors of GTS and its subsidiaries and affiliates who were eligible to
participate in the Amended 1992 Stock Option Plan. The Amended 1992 Stock Option
Plan received stockholder approval at the May 20, 1998 annual stockholders
meeting.
    
 
     The principal provisions of the Amended 1992 Stock Option Plan, as amended,
are summarized below. A copy of the Amended 1992 Stock Option Plan is an exhibit
to the Registration Statement in which this Prospectus is included and this
summary does not purport to be complete and is qualified in its entirety by the
terms of the Amended 1992 Stock Option Plan.
 
   
     The Amended 1992 Stock Option Plan provides for the grant of options to
employees, non-employee directors, and independent contractors of GTS and any
subsidiary or affiliate of GTS. A total of 9,568,688 shares of common stock are
reserved for issuance to employees, non-employee directors and independent
contractors under the Amended 1992 Stock Option Plan representing 18.5% of the
outstanding shares of common stock on June 30, 1998. The Amended 1992 Stock
Option Plan provides that the number of shares available for issuance under
options granted pursuant to the Amended 1992 Stock Option Plan is the greater of
9,568,688 shares or 18.5% of the outstanding shares of common stock at the time
of grant. A total of 1 million shares of common stock may be issued pursuant to
options qualifying for tax purposes as incentive options under the Amended 1992
Stock Option Plan.
    
 
   
     The Amended 1992 Stock Option Plan is administered by the stock option
committee, which consists of not less than two directors appointed by the Board
of Directors. The stock option committee selects the employees, independent
contractors and directors of GTS and its subsidiaries and affiliates to whom
options will be granted. Options covering not more than 1.5 million shares of
common stock may be granted to any employee during any calendar year.
    
 
   
     The option exercise price under the Amended 1992 Stock Option Plan may not
be less than the exercise price determined by the stock option committee (or
110% of the fair market value of the GTS common stock on the date of grant of
the option in the case of an incentive option granted to an optionee
beneficially owning more than 10% of the outstanding common stock). The maximum
option term is 10 years and one day (or five years in the case of an incentive
option granted to an optionee beneficially owning more than 10% of the
outstanding common stock). Options become vested and exercisable at the time and
to the extent provided in the option agreement related to such option. The Stock
Option Committee has the discretion to accelerate the vesting and exercisability
of options.
    
 
     There is a $100,000 limit on the value of stock (determined at the time of
grant) covered by incentive options that first become exercisable by an optionee
in any calendar year. No option may be granted more than 10 years after the
effective date of the Amended 1992 Stock Option Plan. Generally, during an
optionee's lifetime, only the optionee (or a guardian or committee if the
optionee is incapacitated) may exercise an option except that, upon approval by
the Stock Option Committee, nonqualified options may be transferred to the
spouse of the optionee and certain nonqualified options may be granted or
transferred to the GTS Employee Stock Option Plan Trust for the benefit of one
or more designated foreign employees, independent contractors or directors.
Incentive stock options are non-transferable except at death.
 
   
     Payment for shares purchased under options granted pursuant to the Amended
1992 Stock Option Plan may be made either in cash or by exchanging shares of GTS
common stock (which shares have been held by the optionee for at least six
months) with a fair market value of up to the total option exercise price and
cash for any difference. Options may be exercised by directing that certificates
for the shares purchased be delivered to a licensed broker-dealer as agent for
the optionee, provided that the broker-dealer tenders to GTS cash or cash
equivalents equal to the option exercise price plus the amount of any taxes that
GTS may be required to withhold in connection with the exercise of the option.
    
 
     If an optionee's employment or service with GTS or a subsidiary or
affiliate terminates by reason of death, retirement or permanent and total
disability, his or her vested options may be exercised within one year
 
                                       163
<PAGE>   167
 
   
after such death, retirement or disability, unless otherwise provided with
respect to a particular option (but not later than the date the option would
otherwise expire). If the optionee's employment or service with GTS or a
subsidiary or affiliate terminates for any reason other than death, retirement
or disability, options held by such optionee terminate 90 days after such
termination, unless otherwise provided with respect to a particular option (but
not later than the date the options would otherwise expire), except that options
terminate immediately upon termination of an employee or independent contractor
for "cause" (as defined), unless the stock option committee determines
otherwise. Each option would be exercisable to the extent it had become vested
before the termination of employment or service (unless otherwise provided in
the option agreement).
    
 
   
     If the outstanding shares of common stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of GTS, by reason of merger, consolidation, reorganization, recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend, spin-off or other distribution payable in capital stock, or
other increase or decrease in such shares without receipt of consideration by
GTS, an appropriate and proportionate adjustment will be made in the number and
kinds of shares subject to the Amended 1992 Stock Option Plan, and in the
number, kinds and per share exercise price of shares subject to the unexercised
portion of options granted prior to any such change, in order to preserve the
value of any granted options. Any such adjustment in an outstanding option,
however, will be made without a change in the total price applicable to the
unexercised portion of the option, but with a corresponding adjustment in the
per share option price.
    
 
   
     Upon any dissolution or liquidation of GTS, or upon a reorganization,
merger or consolidation in which GTS is not the surviving corporation, or upon
the sale of substantially all of the assets of GTS to another corporation, or
upon any transaction (including, without limitation, a merger or reorganization
in which GTS is the surviving corporation) approved by the board of directors
which results in any person or entity owning 80% or more of the total combined
voting power of all classes of stock of GTS, the Amended 1992 Stock Option Plan
and the options issued thereunder will terminate, unless provision is made in
connection with such transaction for the continuation of the Amended 1992 Stock
Option Plan, the assumption of such options or for the substitution for such
options of new options covering the stock of a successor corporation or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kinds
of shares and the per share exercise price. In the event of such termination,
all outstanding options shall be exercisable in full during such period
immediately prior to the occurrence of such termination as the Board of
Directors in its discretion shall determine.
    
 
   
     The board of directors may further amend the Amended 1992 Stock Option Plan
with respect to shares of the common stock as to which options have not been
granted. However, GTS's stockholders must approve any amendment that would (i)
change the requirements as to eligibility to receive incentive options; or (ii)
increase the maximum number of shares in the aggregate for which incentive
options may be granted (except for adjustments upon changes in capitalization);
or (iii) otherwise to the extent required by applicable law, rule or regulation.
    
 
   
     The board of directors at any time may terminate or suspend the Amended
1992 Stock Option Plan. Unless previously terminated, the Amended 1992 Stock
Option Plan will terminate automatically on April 9, 2008. No termination,
suspension or amendment of the Amended 1992 Stock Option Plan may, without the
consent of the person to whom an option has been granted, adversely affect the
rights of the holder of the option.
    
 
     No grants of options have been made under the Amended 1992 Stock Option
Plan.
 
THE GTS 1996 TOP TALENT RETENTION PROGRAM
 
   
     GTS implemented the GTS 1996 Top Talent Retention Program which, for 1996
only, alters the terms offered to certain employees under the 1992 Option Plan.
Employees who are offered participation in this 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 it will vest at a rate of
25% per year beginning on the first anniversary of the initial date of grant and
    
                                       164
<PAGE>   168
 
   
(ii) the remaining portion of any 1992 Option granted under this 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.
    
 
   
HER STOCK OPTION PLAN
    
 
   
     In the fourth quarter of 1997, HER established a stock option plan to
replace the GTS-Hermes Plan for the purpose of incentivizing HER key employees.
The aggregate number of shares of HER stock subject to this new plan is
approximately 13% of the total shares of HER stock issued and outstanding
including options. During 1997, HER issued 10,166 options in replacement of
those outstanding under a stock option plan maintained by HER's parent,
GTS-Hermes, Inc., a wholly owned subsidiary of GTS, as well as additional
options to certain employees. The issuance of these options resulted in a
non-cash charge of $3.7 million of which $2.6 million was recorded during the
fourth quarter of 1997 and the remaining $1.1 million will be recognized
principally ratably over fiscal 1998. The GTS-Hermes Plan is intended to be
terminated. GTS is considering whether to eliminate, and alternative ways of
eliminating, share option plans in subsidiaries, such as the HER Stock Option
Plan. GTS may eliminate such plans in the future while incorporating such
beneficiaries into GTS' Employee Stock Option Plan or providing them with
alternative equivalent value.
    
 
EMPLOYMENT AGREEMENTS
 
   
     GTS has executed employment agreements with all the named executive
officers. The agreements with Messrs. Thames, and Marks include a three-year
term of employment commencing on February 1, 1997 and April 1, 1996,
respectively. Mr. D'Avanzo's employment agreement has a three-year term
commencing on March 1, 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 of the employment agreements, except for Mr. Thames' and Mr.
D'Avanzo's 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 days and six months prior to the renewal date. Mr. Thames' agreement
provides for an automatic renewal each year for a new three-year period. Mr.
D'Avanzo's agreement terminates on March 1, 2000, unless either GTS or Mr.
D'Avanzo requests an extension 180 days prior to such termination and the
parties agree upon an extension. 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 stock option plan (with
the exception of Mr. Loeber whose employment agreement provides him with an
option grant under the HER Stock Option Plan), to receive standard health and
insurance benefits that are provided to executives of GTS, to receive certain
other fringe benefits 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 30,000 shares
of restricted stock that vest in an amount of one-third each year for three
years beginning on January 2, 1997.
    
 
   
     The employment agreements provide for severance payments in the event of
(a) termination without cause, as defined, or (b) resignation for good reason,
as defined, following a change of control event, as defined. Mr. Thames would be
eligible for severance payments of base salary for the greater of 24 months or
the remaining term of his agreement. Severance arrangements with other named
officers are for a period of six to eighteen months of base salary. If the named
executive officer is terminated for cause or if he voluntarily terminates his
employment other than for good reason after a change of control event, he shall
not be entitled to any salary, bonus or severance payments (other than accrued
salary).
    
 
   
     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
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.
    
                                       165
<PAGE>   169
 
   
                       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. Until
April 1, 1998, GTS retained a small office space in New York City that it leased
from Mr. Slifka on a monthly basis, and the annual expense for 1997 was $30,690.
Mr. Slifka also has a consulting agreement with GTS pursuant to which he is paid
consulting fees of $100,000 per year.
    
 
   
     Halcyon/Alan B. Slifka Management Company LLC (formerly Alan B. Slifka and
Company), a company principally owned by Mr. Slifka, holds 225,000 stock options
to purchase shares of GTS common stock that were granted in 1991 pursuant to a
stock option agreement that is not subject to any stock option plan. The options
have an exercise price of $0.533 per share and are fully vested. Any of the
stock options that remain unexercised after November 30, 2001 shall lapse and
become void. Generally, in the event that Mr. Slifka ceases to be an employee or
nonemployee director of GTS, any of such unexercised stock options shall lapse
thirty days after such termination. The shares of common stock underlying such
options have been registered under a registration statement that has been
declared effective by the SEC.
    
 
   
     In addition, Joel Schatz, a director of GTS, was granted in 1991 stock
options to purchase GTS Stock pursuant to stock option agreements that are not
subject to any stock option plan. Mr. Schatz holds 50,250 of such stock options
to purchase shares of common stock with an exercise price of $0.533 per share.
Mr. Schatz's options are fully vested and any unexercised options he holds after
November 4, 2001 shall lapse and become void. Generally, in the event that Mr.
Schatz ceases to be an employee or nonemployee director of GTS any of his
unexercised stock options shall lapse thirty days after such termination. The
shares of common stock underlying such options have been registered under a
registration statement that has been declared effective by the SEC.
    
 
   
     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, the Soros associates and Mr. Slifka purchased
319,149 and 57,015 shares of GTS Stock, respectively, at a price of $15.67 per
share in GTS private stock offering. In addition, affiliates of Mr. Slifka
purchased $2.9 million of 8.75% Senior Subordinated Convertible Bonds due 2000
in September 1997. Pursuant to the terms of the indenture related to the 8.75%
Convertible Bonds, these Bonds are convertible into such shares of GTS common
stock as is equal to the principal amount of such 8.75% Senior Subordinated
Convertible Bonds due 2000 divided by the applicable conversion price, which
conversion price shall be equal to the public offering price of the GTS common
stock in our initial public offering in February 1998. See "-- Principal GTS
Stockholders."
    
 
   
     The Soros associates purchased $40 million of notes from GTS in 1996, which
notes bore interest at 10% per annum, in partial consideration of which (i) W.
James Peet was appointed to the Board of Directors and (ii) the affiliates
received warrants to purchase 4,444,443 shares of GTS common stock. Together
with their prior equity interests in GTS, these affiliates currently hold, on a
fully diluted basis (excluding shares underlying stock options), approximately
14% of GTS Stock. In accordance with the terms of the warrant agreement, the
exercise price of the warrants was reduced from $10.27 per share to $9.33 per
share as the outstanding debt had not been repaid prior to December 31, 1996. In
February 1998, GTS repaid the $40 million of notes, plus accrued interest, using
part of the proceeds of an offering of senior notes and the initial public
offering completed at that time. In addition, these affiliates collect a
monitoring fee of $40,000 per month. 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."
    
 
   
     On January 20, 1999, GTS filed a shelf registration statement covering all
of the affiliate shares owned by the affiliates of Mr. Slifka and the Soros
associates that were not sold in the July 1998 offering in consideration of such
shareholders' undertaking to be bound by certain restrictions. It is GTS'
belief, after consultation with its financial advisors, that this agreement
relating to the affiliate shares will contribute toward assuring the market of
an orderly manner for such affiliate shares to be sold over a period of time.
Under the restrictions,
    
 
                                       166
<PAGE>   170
 
   
holders of affiliate shares will be prevented from selling any such shares
during the first six months after the closing date of the offerings and will be
able to sell (i) 50% of such shares after the six month anniversary of the
closing date of the July 1998 offerings, (ii) 75% of such shares after the nine
month anniversary of the closing date of the July 1998 offerings and (iii) 100%
of such shares after the twelve month anniversary of the closing date of the
July 1998 offerings. In connection with this agreement, GTS also has agreed to
permit certain of the Soros associates to resell, immediately after the closing
date of the July 1998 offerings of common stock, up to 100,000 of any shares
that they are unable to resell in the July 1998 stock offerings as a result of
any cut-back that may be imposed by the underwriters (subject to a waiver by the
underwriters in GTS' IPO of the lockup agreement entered into by such affiliates
to the extent of such 100,000 shares). Certain limited partners of partnerships
affiliated with Alan B. Slifka and currently in dissolution may, upon advance
notice to GTS, withdraw some or all of their shares of GTS common stock from
registration under the shelf registration statement and from the restrictions.
The number of shares of GTS common stock subject to this withdrawal may not
exceed the total of 726,953 shares of GTS common stock minus the number of
shares sold by such limited partners in the July 1998 stock offerings. See "Risk
Factors -- Risks Specific to GTS -- Shares Eligible for Future Sale;
Registration Rights; Potential Adverse Impact on Market Price from Sales of
Common Stock."
    
 
   
     Jean Salmona, a director of GTS, is the former Chairman and Chief Executive
Officer of CESIA. CESIA also provides consultancy services for CDI and for HER.
GTS paid $37,500 in 1997 to CESIA for consulting services related to CDI. In
addition, HER paid $405,893 in 1997 to CESIA for consulting services. Further,
GTS paid $5,843 to CESIA in 1997, pursuant to the purchase agreement with CESIA
related to the CDI business.
    
 
   
     Pursuant to a 1995 purchase agreement, GTS received its interest in GTS-Vox
Limited, the intermediate holding company of TCM, in exchange for a note in the
principal amount of $693,380 issued to the sellers and certain additional
consideration to its partners payable in the form of either cash or GTS common
stock based upon its financial performance. GTS paid the note in 1996. On
January 17, 1997, the agreement was amended such that the consideration would
only be in the form of the issuance of GTS Stock and as such, GTS is obligated
under these arrangements to issue up to a maximum of 1,121,640 shares of GTS
common stock. In the first quarter of 1997, pursuant to this agreement GTS
issued 504,600 shares of common stock, which was valued at GTS's current fair
market value of $13.33 per share. In addition, GTS was credited 37,480 shares of
GTS Stock under the amended agreement, for purposes of applying against the
1,121,640 maximum number of shares of GTS Stock, for GTS' payment of its note to
the sellers in 1996. In April 1998, pursuant to this agreement, GTS issued
336,630 shares of common stock, which was valued at GTS's current fair market
value of $40.25 per share. GTS 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 GTS common stock are then being publicly traded, at the
average trading price of such shares for the 10 trading days preceding such
repurchase or (ii) if shares of GTS 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. As a result of their receipt of shares of GTS common stock in 1997,
the sellers became shareholders of GTS. Subsequent to June 30, 1998, GTS
purchased the remaining 47.36% interest in GTS-Vox Limited for $40.0 million,
which will be paid in installments. In connection with this buyout, GTS
accelerated the issuance of 126,859 shares of GTS common stock under the 1995
purchase agreement to the former GTS-Vox Limited partners.
    
 
   
     Affiliates of Baring International Investment Management Limited, which
affiliates consist primarily of investment funds and trusts, are shareholders of
GTS. In April 1996, GTS entered into an agreement with First NIS Regional Fund
SICAF, an affiliate of Barings, to organize GTS Ukrainian TeleSystems, L.L.C.,
which we refer to as 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 Golden Telecom, a Ukrainian limited liability company.
See "Business -- Russia and the CIS." Such acquisition closed in May 1996. By
    
 
                                       167
<PAGE>   171
 
   
contractual arrangement, Barings designates one member of the board of directors
of Golden Telecom. Barings funded $4.5 million to be applied towards the LLC's
purchase of the interest in Golden Telecom and for the LLC's $1.5 million
contribution to the registered capital of Golden Telecom. Prior to March 1,
1999, Barings may exercise an option to convert its initial investment into
438,311 shares of GTS common stock at an exercise price of $10.27. In June 1997
the agreement was amended, such that Barings funded an additional $4.1 million
to be applied toward Golden Telecom's capital expenditure and operating capital
requirements. On September 30, 2000, Barings may exercise an option to convert
such additional investment into 275,000 shares of GTS common stock at an
exercise price of $15.00. In connection with the restructuring of Golden
Telecom, which has been completed, the agreement was further amended in June
1998 to restructure the capital and ownership of the LLC. See
"Business -- Russia and the CIS -- GTS Cellular -- Golden Telecom." Pursuant to
such amendment Barings exercised its initial option and the 2000 option (the
exercisability of which was accelerated by GTS) and received 713,311 shares of
GTS common stock and made an additional investment of $5.75 million to be
applied toward Golden Telecom's capital expenditure and operating capital
requirements. Barings has no put right in connection with such additional
investment. As a result of the June 1998 amendment, GTS increased its ownership
interest in the LLC to 75% and in Golden Telecom to approximately 57%.
    
 
   
     On March 26, 1998, Gerald W. Thames, GTS' Vice Chairman, President and
Chief Executive Officer, exercised non-qualified options to purchase 487,500
shares of GTS common stock at an exercise price of $2.75 per share. Mr. Thames
borrowed funds from a brokerage firm in order to pay the exercise price and the
tax liabilities resulting from such exercise. The shares of GTS Stock resulting
from such exercise served as collateral for his margin loan. Subsequently, the
market price of the GTS common stock declined and consequently the brokerage
firm required Mr. Thames to reduce the size of the loan or increase the
collateral securing it. Mr. Thames was unable to sell any of the shares of GTS
common stock collateralizing the margin loan (and thereby reduce it) because of
lock-up arrangements with the underwriters of the July 1998 stock offerings. As
a result, GTS loaned Mr. Thames $3.5 million in September and October 1998, so
he could use the proceeds of such loans to repay a corresponding portion of the
loan. These loans from GTS bear interest at a rate of 7% per annum. Mr. Thames
repaid the GTS loan in January 1999. GTS has agreed to lend Mr. Thames up to an
aggregate of $4 million to meet additional margin calls on his margin loan. Mr.
Thames contemplates that he will enter into a separate loan agreement with a
commercial bank to meet any subsequent margin calls in connection with his
margin loan. GTS has agreed to guarantee Mr. Thames' obligations under such bank
loan.
    
 
                                       168
<PAGE>   172
 
                       PRINCIPAL AND SELLING STOCKHOLDERS
 
   
     The following table sets forth certain information regarding ownership of
GTS common stock and rights to acquire common stock by (i) stockholders that
manage or own, either beneficially or of record, five percent or more of the
common stock of the Company and (ii) each of the selling stockholders under this
prospectus. For the purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares which such has the right to
acquire within 60 days after such date, but such shares are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person.
    
 
   
<TABLE>
<CAPTION>
                                     SHARES BENEFICIALLY OWNED                   SHARES BENEFICIALLY OWNED
                                      PRIOR TO SHELF OFFERING                     AFTER THE SHELF OFFERING
                                    ---------------------------    NUMBER OF     --------------------------
                                     NUMBER OF                    SHARES BEING    NUMBER OF
NAME OF BENEFICIAL OWNER            SHARES(1)(2)     PERCENT(1)     OFFERED        SHARES        PERCENT
- ------------------------            ------------     ----------   ------------   -----------   ------------
<S>                                 <C>              <C>          <C>            <C>           <C>
Mutuelles AXA/AXA-UAP/............   7,989,930(3)      11.55                0     7,989,930       13.21
  The Equitable Companies
     Incorporated
  9 Place Vendome
  75001 Paris France
Fidelity Management and Research
  Corporation.....................   7,145,670(4)      10.33                0     7,145,670       11.81
  82 Devonshire Street
  Boston, MA 02109
The Open Society Institute........   4,330,281(5)       6.26        4,330,281             0           0
  c/o Soros Fund Management
  888 Seventh Avenue, 31st Floor
  New York, NY 10106
Alan B. Slifka and affiliates.....   3,752,112(6)       5.42        3,752,112             0           0
  c/o Halcyon/Alan B. Slifka
     Management Company, LLC
  477 Madison Avenue, 8th Floor
  New York, NY 10022
Soros Foundation Hungary..........   3,074,199          4.44        3,074,199             0           0
Winston Partners II LDC...........     760,764(7)       1.10          760,764             0           0
Soros Charitable Foundation.......     656,849          *             656,849             0           0
Chatterjee Fund Management........     555,555(8)       *             555,555             0           0
Winston Partners II LLC...........     378,881(9)       *             378,881             0           0
Soros Humanitarian Foundation.....      37,718          *              37,718             0           0
Fidelity International Limited....      23,640(10)      *                   0        23,640           *
Jacqueline Slifka.................      12,000          *              12,000             0           0
Barbara J. Slifka.................     116,877          *             116,877             0           0
Miriam Alford.....................      21,428          *              21,428             0           0
Gray Capital Corp. ...............      27,043          *              27,043             0           0
Carolyn Chaliff & Carl T. Wolff...       4,023          *               4,023             0           0
Molly and Merwin Bayer............       3,277          *               3,277             0           0
Ronald Claman.....................       1,596          *               1,596             0           0
Monica Saurma.....................      25,868          *              25,868             0           0
Donald Zucker.....................      44,130          *              44,130             0           0
Janice Bayer......................       3,750          *               3,750             0           0
Riane Gruss.......................      11,033          *              11,033             0           0
</TABLE>
    
 
                                       169
<PAGE>   173
 
<TABLE>
<CAPTION>
                                     SHARES BENEFICIALLY OWNED                   SHARES BENEFICIALLY OWNED
                                      PRIOR TO SHELF OFFERING                     AFTER THE SHELF OFFERING
                                    ---------------------------    NUMBER OF     --------------------------
                                     NUMBER OF                    SHARES BEING    NUMBER OF
NAME OF BENEFICIAL OWNER            SHARES(1)(2)     PERCENT(1)     OFFERED        SHARES        PERCENT
- ------------------------            ------------     ----------   ------------   -----------   ------------
<S>                                 <C>              <C>          <C>            <C>           <C>
James and Shira Levin.............       2,038          *               2,038             0           0
Barbaralee
  Diamondstein-Spielvogel.........       5,013          *               5,013             0           0
David Dove........................       7,500          *               7,500             0           0
Susan Ginsberg....................       1,803          *               1,803             0           0
Myron Simon.......................       5,214          *               5,214             0           0
Stephen K. Rush...................         150          *                 150             0           0
Philip Rush.......................         150          *                 150             0           0
Ruth Shuman.......................      15,000          *              15,000             0           0
David Jaffee......................       8,325          *               8,325             0           0
Elliot Jaffee.....................      22,200          *              22,200             0           0
Jaffee Family Limited
  Partnership.....................      24,975          *              24,975             0           0
</TABLE>
 
- ---------------
 
  *  Less than 1%
 
   
 (1) The percentage of ownership for each beneficial owner is based upon
     64,744,221 shares of GTS common stock issued and outstanding at December
     31, 1998 and the number of warrants in common stock held by such beneficial
     owner. Excluded from the calculation are: 8,127,380 shares of common stock
     issued under the GTS' option plans; and an additional 163,795 shares of
     common stock that will be issued in exchange for NetSource shares that will
     be tendered in connection with such acquisition. Subject to NetSource
     meeting certain performance targets during the first two quarters of 1999.
     An additional 1.4 million shares of common stock may be issued. See "Shares
     Eligible for Future Sale."
    
 
 (2) Includes shares of Common Stock issuable upon the exercise of stock options
     and stock warrants within 60 days of December 31, 1998.
 
   
 (3) Ownership information, that represents holdings of several separately
     managed funds, is based on a Schedule 13G dated December 10, 1998, a copy
     of which was furnished to the Company. Number of shares as to which such
     holder has: sole voting power -- 2,329,558 shares; shared voting power --
     5,651,676 shares; sole dispositive power -- 7,981,705 shares; and shared
     dispositive power -- 8,225 shares. The shareholding disclosed includes
     1,774,405 shares receivable upon conversion of convertible bonds.
    
 
   
 (4) Ownership information, that represents holdings of several separately
     managed funds, is based on a Schedule 13F-E dated as of September 30, 1998
     that was filed with the SEC on November 6, 1998.
    
 
   
 (5) Comprised of 996,948 shares and warrants to purchase 3,333,333 shares of
     Common Stock held by The Open Society Institute. See "Shares Eligible for
     Future Sale."
    
 
   
 (6) Includes 2,530,562 shares of common stock owned by Mr. Slifka, 644,072
     shares of common stock held in various trusts, options to purchase 8,000
     shares of common stock owned by Mr. Slifka, 214,478 shares of common stock
     held by various Halcyon partnerships which are managed by Halcyon/Alan B.
     Slifka Management Company (over which Mr. Slifka disclaims beneficial
     ownership), 130,000 shares of common stock issuable upon the conversion of
     GTS' 8.75% Convertible Bonds held by various Halcyon partnerships which are
     managed by Halcyon/Alan B. Slifka Management Company (over which Mr. Slifka
     disclaims beneficial ownership), and options to purchase 225,000 shares of
     common stock held by Halcyon/Alan B. Slifka Management Company (over which
     Mr. Slifka disclaims beneficial ownership). GTS has filed a shelf
     registration statement covering such shares not previously registered by
     GTS of this prospectus is a part. See "Shares Eligible for Future Sale."
    
 
   
 (7) Comprised of 390,393 shares of common stock and warrants to purchase
     370,371 shares of common stock. Information in the above entry excludes
     26,000 and 8,000 shares of, and options for the purchase of, common stock
     held by Stewart J. Paperin and W. James Peet, respectively, over which
     Winston
    
 
                                       170
<PAGE>   174
 
   
     Partners II LDC disclaims ownership. GTS has filed a shelf registration
     statement covering such shares of which this prospectus is a part. See
     "Shares Eligible for Future Sale."
    
 
   
 (8) Comprised of warrants to purchase 555,555 shares of common stock.
     Information in the above entry excludes 26,000 and 8,000 shares of, and
     options for the purchase of, common stock held by Stewart J. Paperin and W.
     James Peet, respectively, over which Chatterjee Fund Management disclaims
     ownership. GTS has filed a shelf registration statement covering such
     shares of which this prospectus is a part. See "Shares Eligible for Future
     Sale."
    
 
   
 (9) Comprised of 193,697 shares of common stock and warrants to purchase
     185,184 shares of common stock. Information in the above entry excludes
     26,000 and 8,000 shares of, and options for the purchase of, common stock
     held by Stewart J. Paperin and W. James Peet, respectively, over which
     Winston Partners II LLC disclaims ownership. GTS has filed a shelf
     registration statement covering such shares of which this prospectus is a
     part. See "Shares Eligible for Future Sale."
    
 
   
(10) Ownership information is based on a Schedule 13F-E dated as of September
     30, 1998 that was filed with the SEC on November 3, 1998.
    
   
    
 
                                       171
<PAGE>   175
 
                      DESCRIPTION OF CERTAIN INDEBTEDNESS
 
SENIOR NOTES DUE 2005
 
   
     Concurrently with the IPO, GTS offered $105 million of 9 7/8% Notes. The
9 7/8% Notes were issued pursuant to an indenture between GTS and The Bank of
New York as trustee, dated February 10, 1998. The 9 7/8% Notes mature in 2005
and bear interest, payable semi-annually, at 9 7/8% per annum. The indenture
governing the 9 7/8% Notes does not provide for a sinking fund. The 9 7/8% Notes
are subject to redemption at any time on or after February 15, 2002, at the
option of GTS, in whole or in part, at declining redemption prices set forth in
the indenture governing the 9 7/8% Notes. Notwithstanding the foregoing, during
the first three years after the date of the indenture governing the 9 7/8%
Notes, GTS will be permitted to redeem up to 33 1/3% of the aggregate principal
amount of the 9 7/8% Notes with the net proceeds of any public equity offerings
or strategic equity investments (as such terms are defined in the indenture
governing the 9 7/8% Notes) at 109.875% of the principal amount thereof. GTS
placed net proceeds of U.S.$19.6 million from the offering of the 9 7/8% Notes
representing funds that, together with the proceeds from the investment thereof,
are sufficient to pay the first four scheduled interest payments (but not
additional interest) on the 9 7/8% Notes, into an escrow account to be held by
The Bank of New York as trustee for the benefit of the holders of the 9 7/8%
Notes. GTS granted to the Trustee for the benefit of the holders of the 9 7/8%
Notes, a first priority and exclusive security interest in the escrow account
and the proceeds thereof. Funds will be disbursed from the escrow account for
interest payments (but not additional interest) on the 9 7/8% Notes. Pending
such disbursement, all funds contained in the escrow account are invested in
cash equivalents.
    
 
     Upon a change of control (as defined in the related indenture) of GTS, or
in the event of asset sales (as defined in the related indenture) in certain
circumstances, GTS is required by the terms of the indenture to make an offer to
purchase the outstanding 9 7/8% Notes at a purchase price equal to 101% and
100%, respectively, of the principal amount thereof plus accrued and unpaid
interest thereon to the date of repurchase.
 
     The indebtedness of GTS evidenced by the 9 7/8% Notes ranks pari passu in
right of payment with all other existing and future unsubordinated indebtedness
of GTS and senior in right of payment to all existing and future obligations of
GTS expressly subordinated in right of payment to the 9 7/8% Notes. The
indenture governing the 9 7/8% Notes contains a number of covenants restricting
the operations of GTS and its restricted group members (as defined in the
indenture governing the 9 7/8% Notes), including those restricting: the
incurrence of indebtedness; the making of restricted payments unless no default
or event of default exists, its leverage ratio does not exceed 6.0 to 1.0 and
such restricted payments do not exceed the basket (as defined in the indenture
governing the 9 7/8% Notes); transactions with stockholders and affiliates; the
incurrence of liens; sale-leaseback transactions; issuances and sales of capital
stock of subsidiaries; the incurrence of guarantees by subsidiaries; dividend
and other payment restrictions affecting subsidiaries; consolidation, merger or
sale of substantially all of GTS' assets; and requiring the purchase of 9 7/8%
Notes, at the option of the holder, upon the occurrence of a change of control
and certain asset sales.
 
     The events of default under the indenture governing the 9 7/8% Notes
include provisions that are typical of senior debt financings, including a
cross-acceleration to a default by GTS or any restricted group member on any
indebtedness that has an aggregate principal amount in excess of certain levels.
Upon the occurrence of such an event of default, the trustee or the holders of
not less than 25% in principal amount at maturity of the outstanding 9 7/8%
Notes may immediately accelerate the maturity of all the Notes as provided in
the related indenture.
 
THE CONVERTIBLE BONDS
 
   
     In July, 1997, GTS issued $144.8 million principal amount of Senior
Subordinated Convertible Bonds. The Convertible Bonds were initially issued
under an indenture dated as of July 14, 1997 between GTS, The Bank of New York,
as trustee, registrar and paying, conversion and transfer agent. The Convertible
Bonds mature on June 30, 2000. At September 30, 1998, U.S.$119.4 million
aggregate principal amount of the
    
 
                                       172
<PAGE>   176
 
   
Convertible Bonds was outstanding. An aggregate principal amount of U.S.$25.4
million had been converted at that date into Common Stock. The conversion price
of the Convertible Bonds is U.S.$20 per share.
    
 
     The Convertible Bonds bear interest payable at the rate of 8.75% per annum
from and including the date of their issuance. Interest is payable semiannually
in arrears on July 15 and January 15 of each year commencing January 15, 1998.
The Convertible Bonds are redeemable at the option of GTS, in whole but not in
part on or after the second anniversary of a complying public equity offering
(as defined in the indenture governing the Convertible Bonds), at the principal
amount thereof plus accrued interest to the redemption date. The IPO in February
1998 constituted a complying public equity offering.
 
     Upon the occurrence of a change of control (as defined in the indenture
governing the Convertible Bonds), GTS will be obligated to make an offer to
purchase all of the outstanding Convertible Bonds at a purchase price equal to
113.5%, (if the date of such purchase occurs after June 30, 1998 but on or
before June 30, 1999) or 121.0%, (if the date of such purchase occurs after June
30, 1999), as applicable, of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.
 
DEBENTURES DUE 2010
 
   
     On July 8 and July 22, 1998, GTS issued approximately U.S.$466.9 million of
Debentures. The Debentures will mature on July 1, 2010 and are unsecured senior
subordinated obligations of GTS. In the event of a change of control of GTS,
holders of the Debentures will have the right to require GTS to purchase such
holder's Debentures at a price equal to 100% of the principal amount plus
accrued interest. The Debentures will bear interest payable semiannually at a
rate of 5 3/4% per annum.
    
 
   
     Each Debenture will be convertible into such number of shares of Common
Stock as is equal to the principal amount of such Debenture divided by
U.S.$55.05. GTS covenanted that at all times it will cause there to be
authorized and reserved for issuance upon conversion of the Debenture such
number of shares of common stock as would be issuable upon conversion of all the
Debentures then outstanding. The Debentures are subordinated to all existing and
future senior indebtedness (as defined in the indenture) of GTS and to all
current and future obligations of subsidiaries of GTS, including trade
obligations. The Debentures rank pari passu with the convertible bonds.
    
 
     GTS, at its option, may elect to redeem all or a portion of the Debentures
commencing on July 1, 2001, at redemption prices beginning at 104.025% of
principal amount for the twelve-month period commencing July 1, 2001 declining
to par at July 1, 2008 and thereafter.
 
HER NOTES
 
   
     HER sold U.S.$265 million aggregate principal amount of HER Notes in August
1997. The HER Notes have a ten year maturity and are unsecured, senior
obligations of HER. HER placed approximately $56.6 million of the net proceeds
in escrow for the first two years' interest payments on the HER Notes. The HER
Notes were issued pursuant to an indenture containing certain covenants for the
benefit of the holders of HER 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 HER Notes are redeemable in whole
or part, at the option of HER at any time on or after August 15, 2002 at a price
ranging from 105.75% to 100.0% of the principal amount.
    
 
   
     A portion of the HER 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 HER 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 HER of at least U.S.$75 million. In the event
of a change of control of HER, holders of the HER Notes have the right to
require HER to purchase such holder's HER Notes at a price equal to 101% of the
aggregate principal amount plus accrued and unpaid interest thereon to the date
of repurchase.
    
 
                                       173
<PAGE>   177
 
NEW HER NOTES
 
   
     On December 21, 1998, HER sold U.S.$200 million aggregate principal amount
of U.S. dollar Notes and Euro 85 million aggregate principal amount of Euro
denominated Notes. This transaction closed on January 4, 1999. The U.S. dollar
Notes have a ten year maturity, and the Euro denominated Notes have a seven year
maturity. The Notes are unsecured, senior obligations of HER. The Notes were
issued pursuant to two indentures among HER and The Bank of New York as trustee,
both dated January 4, 1999, which are substantially similar to the indenture
governing the HER Notes. Both indentures dated January 4, 1999, contain certain
covenants made by HER for the benefit of the holders of the Notes, including,
among other things, covenants limiting the incurrence of indebtedness,
restricted payments, liens, payment restrictions affecting certain subsidiaries,
transactions with affiliates, asset sales and mergers. The U.S. dollar Notes are
redeemable in whole or in part, at the option of HER at any time on or after
January 15, 2004 at a price ranging from 105.188% to 100.0% of the principal
amount. The Euro denominated Notes are redeemable in whole or in part, at the
option of HER at any time on or after January 15, 2003 at a price ranging from
105.188% to 100.0% of the principal amount.
    
 
   
     A portion of the Notes are also redeemable at any time prior to or from
time to time prior to January 15, 2002 at a redemption price equal to 110.375%
of the principal amount of the Notes so redeemed, plus accrued and unpaid
interest thereon, if any, to the date of redemption with the net cash proceeds
of one or more public equity offerings or strategic equity investments resulting
in aggregate gross cash proceeds to HER of at least U.S.$75 million, provided,
however, that following such redemption at least two-thirds of the principal
amount of each of the original U.S. dollar Notes and Euro Notes remain
outstanding. In the event of a change of control of HER or GTS, holders of the
Notes have the right to require HER to purchase such holder's Notes at a price
equal to 101% of the aggregate principal amount plus accrued and unpaid interest
thereon to the date of repurchase.
    
 
EQUIPMENT FINANCING
 
   
     In connection with the purchase of equipment and services for certain
cellular ventures in the CIS region, GTS entered into a credit agreement with a
bank providing for up to $30.7 million financing. The facility is guaranteed by
the vendor of such equipment and services, and is insured against certain
political risks by the Overseas Private Investment Corporation. The loans under
the facility bear interest at LIBOR plus 35 basis points, with principal and
interest payments due semiannually in June and December of each year through
December 15, 2002. At September 30, 1998, an initial U.S.$18.6 million was
funded under the facility.
    
 
                                       174
<PAGE>   178
 
                          DESCRIPTION OF CAPITAL STOCK
 
   
     GTS's authorized capital stock consists of 135,000,000 shares of common
stock, par value $0.10 per share, of which 64,744,221 shares were issued and
outstanding as of December 31, 1998, and 10,000,000 shares of preferred stock,
par value $0.0001 per share, none of which is outstanding. In addition, GTS (i)
agreed to issue up to 5,437,500 shares of common stock in connection with its
acquisition of NetSource (of which 3,873,705 shares of common stock were issued
as of December 31, 1998 and up to 1.4 million shares of common stock may be
issued, at the option of GTS, contingent on NetSource achieving certain
performance targets in the first two quarters of 1999) and (ii) agreed to issue
17,566,938 shares of common stock to holders of Esprit Telecom shares and ADSs,
subject to the completion of an exchange offer and other conditions precedent.
For a discussion of the risks associated with these additional issuances of
stock, see "Risk Factors -- Risks Specific to GTS -- Shares Eligible for Future
Sale; Registration Rights; Potential Adverse Impact on Market Price from Sales
of Common Stock." The following summary of the rights, privileges, restrictions
and conditions of each of the classes of shares issued by the Company does not
purport to be complete and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Certificate of Incorporation and
By-laws, and to the applicable provisions of the General Corporation Law of the
State of Delaware, which we refer to as the DGCL.
    
 
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 offered shares, 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. As of December 31, 1998, GTS has authorized
200,000 shares of Series A Junior Participating Preferred Stock, par value
$.0001 per share. No other series of preferred stock has been authorized. There
are no issued and outstanding shares of Series A Preferred Stock and no such
shares are being offered hereby. A Right (as defined below) to purchase shares
of Series A Preferred Stock, however, is attached to each share of common stock
pursuant to the Rights Agreement discussed below. GTS has authorized 200,000
shares of Series A Preferred Stock initially for issuance upon exercise of such
Rights.
    
 
   
     The units of Series A Preferred Stock that may be acquired upon exercise of
the Rights will be nonredeemable and subordinate to any other shares of
preferred stock that may be issued by the Company. Each unit of Series A
Preferred Stock will have a minimum preferential quarterly dividend of $.01 per
unit or any higher per share dividend declared on the common stock. In the event
of liquidation, the holder of a unit of Series A Preferred Stock will receive a
preferred liquidation payment equal to the greater of $.01 per unit and the per
share amount paid in respect of a share of common stock.
    
 
   
     Each unit of Series A Preferred Stock will have one vote, voting together
with the common stock. The holders of units of Series A Preferred Stock, voting
as a separate class, shall be entitled to elect two directors if dividends on
the Series A Preferred Stock are in arrears for six fiscal quarters.
    
 
                                       175
<PAGE>   179
 
   
     In the event of any merger, consolidation or other transaction in which
shares of common stock are exchanged, each unit of Series A Preferred Stock will
be entitled to receive the per share amount paid in respect of each share of
common stock. The rights of holders of the Series A Preferred Stock to
dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions. Because of
the nature of the Series A Preferred Stock's dividend, liquidation and voting
rights, the economic value of one unit of Series A Preferred Stock that may be
acquired upon the exercise of each Right is expected to approximate the economic
value of one share of common stock.
    
 
PRIOR PURCHASE AGREEMENTS
 
   
     GTS previously entered into stock purchase agreements on (i) April 23,
1993, (ii) April 22, 1994 and June 17, 1994, (iii) a series of dates in 1995,
(iv) a series of dates in 1996, (v) a series of dates in 1997. These purchase
agreements contain, among other things, certain registration and other rights
granted by GTS with respect to such common stock described below.
    
 
   
     Registration Rights. Pursuant to the terms of the purchase agreements,
shareholders who were parties to these agreements holding an aggregate of
29,623,784 shares of common stock are entitled to certain demand registration
rights with respect to the common stock held by them following the consummation
of the initial public offering. In addition to these demand registration rights,
these shareholders are, subject to certain limitations, entitled to register
shares of common stock in connection with a registration statement prepared by
GTS to register its equity securities. Holders who purchased pursuant to the
Stock Purchase Agreement in 1993 may also register their shares of common stock
in connection with a registered sale of common stock by a major shareholder. All
of the registration rights of the shareholders parties to these agreements are
subject to certain conditions and limitations described in the above-referenced
purchase agreements.
    
 
   
     Rights of First Refusal and Tag-Along Rights. Under these purchase
agreements, the shareholders have certain rights of first refusal to purchase
pro rata any issue of new securities which GTS 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 of
these shareholders, when such shareholder no longer owns all the shares it
originally purchased.
    
 
   
     The purchase agreements further provide that, in the case of a sale by the
major shareholders as a group of all their major shareholders' shares, holders
under the purchase agreements may elect to participate in that sale as well.
    
 
SECTION 145 OF DGCL AND CERTAIN CHARTER PROVISIONS
 
     Section 145 of the DGCL provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether civil,
criminal or investigative (other than an action by or in the right of the
corporation) 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
 
                                       176
<PAGE>   180
 
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
 
     Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
 
   
     GTS' Certificate of Incorporation provides that GTS' Directors shall not be
liable to GTS or its stockholders for monetary damages for breach of fiduciary
duty as a director provided, however, that such exculpation from liabilities is
not permitted with respect to liability arising from items described in clauses
(i) through (iv) in the preceding paragraph. The Certificate and GTS' By-Laws
further provide that GTS shall indemnify its directors and officers to the
fullest extent permitted by the DGCL.
    
 
   
     The directors and officers of GTS are covered under directors' and
officers' liability insurance policies maintained by GTS.
    
 
CERTAIN CHARTER AND BY-LAW PROVISIONS
 
   
     Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. Certain provisions of the Certificate
of Incorporation and the By-laws, which are summarized below, may discourage or
make more difficult a takeover attempt that a shareholder might consider in its
best interest, although certain of such provisions in the By-laws are subject to
final approval by GTS' board of directors. Such provisions may also adversely
affect prevailing market prices for the common stock which is discussed in the
section "Risk Factors -- Risks Specific to GTS -- Anti-takeover Provisions."
    
 
   
     Classified Board of Directors and Related Provisions. The Certificate of
Incorporation provides that the board of directors of GTS be divided into three
classes of directors serving staggered three-year terms. The classes of
directors (designated Class I, Class II and Class III) shall be, as nearly as
possible, equal in number. Accordingly, one-third of GTS' board of directors
will be elected each year. The terms of the Initial Class I directors terminated
at the May 20, 1998 annual meeting of stockholders and such directors were re-
elected to a three-year term terminating on the date of the 2001 annual meeting
of stockholders; the term of the initial Class II directors shall terminate on
the date of the 1999 annual meeting of stockholders; and the term of the initial
Class III directors shall terminate on the date of the 2000 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 1998,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. The classified board provision may
prevent a party who acquires control of a majority of the outstanding voting
stock of GTS from obtaining control of the board of directors until the second
annual shareholders meeting following the date such party obtains the
controlling interest.
    
 
   
     Subject to the rights of the holders of any series of Preferred Stock or
any other class of capital stock of GTS (other than the common stock) then
outstanding, directors may only be removed for cause by a majority vote of the
holders of capital stock of GTS issued and outstanding and entitled to vote
generally in the election of directors, voting together as a single class.
    
 
   
     No Shareholder Action by Written Consent; Special Meetings. The Certificate
of Incorporation prohibits shareholders from taking action by written consent in
lieu of an annual or special meeting, and thus shareholders may take action at
an annual or special meeting called in accordance with the By-laws. The
Certificate of Incorporation and By-laws provide that special meetings of
shareholders may only be called only by the Chairman of the Board of Directors,
the Chief Executive Officer or a majority of the board of directors.
    
 
                                       177
<PAGE>   181
 
Special meetings may not be called by the shareholders, except as permitted by
the Shareholder Rights By-law described below.
 
     Amendments to the Certificate of Incorporation. The provisions of the
Certificate of Incorporation described above may not be amended, altered,
changed or repealed without the affirmative vote of the holders of at least 75%
of the shares of capital stock of the Company issued and outstanding and
entitled to vote.
 
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION
 
     Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested stockholder", 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.
 
   
     In addition, GTS' Certificate of Incorporation grants the board of
directors of GTS the authority to issue up to 10,000,000 shares of preferred
stock in one or more series and to determine the rights, voting powers, dividend
rate, conversion rights, redemption price, liquidation preference and other
terms of such preferred stock without any further vote or action by the
stockholders. The foregoing provisions of Section 203 of the DGCL and GTS'
Certificate of Incorporation, and any issuance of preferred stock with voting or
conversion rights, may adversely affect the voting power of the holders of
common stock and may have the effect of delaying or preventing a change of
control of GTS or adversely affect the market price of GTS' common stock.
    
 
SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW
 
   
     Shareholder Rights Plan. GTS has entered into a Rights Agreement. In
connection with the Rights Agreement, the Board of Directors of the Company
declared a distribution of one right (a "Right") for each outstanding share of
common stock, each share of common stock offered hereby and each share of common
stock issued (including shares distributed from treasury) by GTS thereafter and
prior to the Distribution Date (as defined below). Each Right will entitle the
registered holder, subject to the terms of the Rights Agreement, to purchase
from the Company one one-thousandth of a share or a unit of Series A Preferred
Stock at a purchase price of $75 per unit, subject to adjustment.
    
 
   
     Initially, the Rights will attach to all certificates representing shares
of outstanding common stock, and no separate Rights certificates will be
distributed. The Rights will separate from the common stock and the
"Distribution Date" will occur upon the earlier of (i) 10 days following a
public announcement (the date of such announcement being the "Stock Acquisition
Date") that a person or group of affiliated or associated persons (other than
GTS, any subsidiary of GTS or any employee benefit plan of GTS or such
subsidiary) (an "Acquiring Person") has acquired, obtained the right to acquire,
or otherwise obtained beneficial ownership of 15% or more of the then
outstanding shares of common stock and (ii) 10 business days (or such later date
as may be determined by action of the board of directors prior to such time as
any person becomes an Acquiring Person) following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 15% or more of the then outstanding shares of common stock. The Soros
Associates and Alan B. Slifka and his affiliates are excluded from the
definition of "Acquiring Person" under the Rights Agreement unless such persons
increase the aggregate percentage of their ownership interest in GTS to 20%.
    
 
                                       178
<PAGE>   182
 
   
     Until the Distribution Date, (i) the Rights will be evidenced by common
stock certificates and will be transferred with and only with such common stock
certificates, (ii) new common stock certificates issued after date of
consummation of the offerings in July 1998 (also including shares distributed
from treasury) will contain a notation incorporating the Rights Agreement by
reference and (iii) the surrender for transfer of any certificates representing
outstanding common stock will also constitute the transfer of the Rights
associated with the common stock represented by such certificates.
    
 
   
     The Rights will not be exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the Rights Agreement
unless earlier redeemed by GTS as described below.
    
 
   
     In the event that (i) GTS is the surviving corporation in a merger with an
Acquiring Person and shares of common stock shall remain outstanding, (ii) a
Person becomes an Acquiring Persons, (iii) an Acquiring Person engages in one or
more "self-dealing" transactions as set forth in the Rights Agreement or (iv)
during such time as there is an Acquiring Person, an event occurs which results
in such Acquiring Person's ownership interest being increased by more than 1%
(e.g., by means of a recapitalization), then, in each such case, each holder of
a Right (other than such Acquiring Person) will thereafter have the right to
receive, upon exercise, units of Series A Preferred Stock (or, in certain
circumstances, common stock, cash, property or other securities of the Company)
having a value equal to two times the exercise price of the Right. The exercise
price is the Purchase Price multiplied by the number of units of Series A
Preferred Stock issuable upon exercise of a Right prior to the events described
in this paragraph.
    
 
   
     In the event that, at any time following the Stock Acquisition Date, (i)
GTS is acquired in a merger or other business combination transaction and GTS is
not the surviving corporation (other than a merger described in the preceding
paragraph), (ii) any Person consolidates or merges with GTS and all or part of
the common stock is converted or exchanged for securities, cash or property of
any other Person or (iii) 50% or more of the GTS' assets or earning power is
sold or transferred, each holder of a Right (other than an Acquiring Person)
shall thereafter have the right to receive, upon exercise, common stock of the
ultimate parent of the Acquiring Person having a value equal to two times the
exercise price of the Right.
    
 
   
     The Purchase Price payable, and the number of units of Series A Preferred
Stock issuable, upon exercise of the Rights are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series A Preferred Stock,
(ii) if holders of the Series A Preferred Stock are granted certain rights or
warrants to subscribe for Series A Preferred Stock or convertible securities at
less than the current market price of the Series A Preferred Stock or (iii) upon
the distribution to the holder of the Series A Preferred Stock of evidences of
indebtedness, cash or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
    
 
   
     At any time until ten business days following the Stock Acquisition Date,
either (i) 75% of GTS' Board of Directors or (ii) a majority of GTS' Board of
Directors and a majority of the Continuing Directors (as defined below), may
redeem the Rights in whole, but not in part, at a nominal price. Immediately
upon the action of a majority of the GTS' board of directors ordering the
redemption of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive such redemption price. As used in the
Rights Agreement, a Continuing Director means any person (other than an
Acquiring Person or an affiliate or associate of an Acquiring Person or a
representative of an Acquiring Person or of any such affiliate or associate) who
was a director prior to the date of the Rights Agreement and any person (other
than an Acquiring Person or an affiliate or associate of an Acquiring Person or
a representative of an Acquiring Person or of any such affiliate or associate)
nominated for selection or elected to the Board of Directors pursuant to the
approval of a majority of the Continuing Directors.
    
 
   
     At its option, either (i) 75% of GTS' board of directors or (ii) a majority
of GTS' board of directors and a majority of the Continuing Directors, may
exchange each Right for (i) one unit of Series A Preferred Stock or (ii) such
number of units of Series A Preferred Stock as will equal the spread between the
market price of each Unit to be issued and the purchase price of such unit set
forth in the Rights Agreement.
    
 
                                       179
<PAGE>   183
 
   
     Any of the provisions of the Rights Agreement may be amended without the
approval of either (i) 75% of GTS' board of directors or (ii) a majority of the
GTS' board of directors and a majority of Continuing Directors in order to cure
any ambiguity, defect or inconsistency, to make changes which do not adversely
affect the interests of holders of Rights (excluding the interests of any
Acquiring Person), or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable.
    
 
   
     Shareholder Rights By-Law. If a fully financed tender offer is made
publicly to purchase all GTS' outstanding shares of common stock for cash or
Marketable Securities (as defined below) at a price that is at least 40 percent
greater than the average closing price of such shares on the principal exchange
on which such shares are listed during the 30 days prior to the date on which
such offer is first published or sent to security holders (the "Offer Date") and
the board of directors opposes such offer, the holders of more than 50% of the
outstanding shares of common stock may, at any time subsequent to the date that
is nine calendar months after the Offer Date, call a special meeting of the
stockholders, notwithstanding the provisions described in "-- Certain Charter
and By-law Provisions -- No Shareholder Action by Written Consent; Special
Meetings," at which meeting stockholders may be asked to vote upon a proposal to
request that the Board of Directors amend the Rights Agreement to exempt such
offer from the terms of the Rights Agreement; provided, however, if prior to the
expiration of such nine-month period, the board of directors determines that it
is in the best interests of the shareholders to undertake efforts to sell GTS,
such period shall be extended as long as the board of directors continues its
efforts to solicit, evaluate and negotiate alternative bids to acquire GTS. If
the proposal to amend the Rights Agreement is approved by a vote of 70% of the
votes cast for or against such proposal at such meeting of stockholders at which
a quorum is present, the board of directors shall amend the Rights Agreement to
exempt such offer from its terms no later than 60 days after the date of such
stockholders' meeting.
    
 
     "Marketable Securities" means any securities that are traded on a
nationally recognized exchange and, in the opinion of an independent investment
bank, provide sufficient value and liquidity so that they would be treated as
substantially equivalent to cash consideration.
 
                                       180
<PAGE>   184
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
   
     As of December 31, 1998, 64,744,221 shares of common stock were outstanding
excluding (v) 12,571,823 shares for which outstanding warrants and options are
exercisable, (w) 5,880,050 shares into which the 8.75% Senior Subordinated Bonds
are convertible, (x) the 8,481,417 shares into which the 5 3/4% Convertible
Senior Subordinated Debentures are convertible and (y) 163,795 of additional
shares to be issued resulting from the NetSource acquisition. Further, subject
to NetSource meeting certain performance targets during the first two quarters
of 1999, an additional 1.4 million shares of unregistered Common Stock may be
issued.
    
 
   
     Of the 64,744,221 outstanding shares of Common Stock, the 12,765,000 shares
registered in the initial public offering and the 14,506,900 shares registered
in the stock offering in July 1998 will be freely tradable without restriction
under the Securities Act. However such shares held by "affiliates" may generally
be resold only in compliance with applicable provisions of Rule 144 under the
Securities Act, as described below. Of the remainder, approximately 20,000,000
additional shares have been resold or may be resold under Rule 144 without
restriction under the Securities Act. An additional approximately 12,762,000
shares have been resold or may be resold under Rule 144 subject to volume and
manner limitations. In addition, the 8,481,417 shares into which the Debentures
are convertible will be freely tradable without restriction under the Securities
Act.
    
 
   
     In addition, GTS has filed and the SEC has declared effective three
registration statements. One registration statement covers the resale of the
Convertible Bonds and the shares of common stock into which the Convertible
Bonds are convertible. Two registration statements on Form S-8 cover the resale
of shares of common stock issued to employees, officers and directors under our
employee benefit plans.
    
 
   
     Furthermore, on January 20, 1999 we filed with the SEC a shelf registration
statement, of which this prospectus is a part, covering all of the shares of
common stock (and securities convertible into or exercisable for shares of
common stock) owned by Alan B. Slifka and his affiliates and the Soros
associates that were not sold in the offering in July 1998. We agreed to file
the shelf registration statement in exchange for these shareholders agreeing to
certain restrictions on their ability to resell their shares. These restrictions
apply for specified periods after closing of the offering in July 1998. Under
these restrictions, our affiliates holding our shares cannot, subject to certain
exceptions, sell any such shares during the first six months after the closing
date of the offering in July 1998. They may, however, sell 50% of such shares
six months after the closing date offering in July 1998; 75% of such shares nine
months after the closing date offering in July 1998; and 100% of such shares
twelve months after the closing date of the offering in July 1998. The Soros
associates have expressed to us that because the shelf registration statement is
not yet effective, the above contractual restrictions may no longer apply and
that they are free to enter into transactions in respect of their shares subject
to applicable provisions of U.S. securities law. We have expressed to them our
view that such restrictions continue to apply. See Risk Factors -- Risks Factors
Specific to GTS -- "A significant amount of our common stock may be resold in
the future."
    
 
   
     Certain limited partners of partnerships affiliated with Alan B. Slifka and
currently in dissolution may, upon giving us advance notice, withdraw some or
all of their shares of common stock from registration under the shelf
registration statement. By withdrawing their shares, those persons would no
longer be bound by the restrictions on sale. The number of shares of common
stock that such persons may withdraw is capped at 726,953 shares of common stock
minus the number of shares such persons sold in the July 1998 stock offering.
    
 
   
     GTS has filed a shelf registration statement with the SEC on January 21,
1999 covering all of the shares of common stock that may be issued to holders of
NetSource stock in connection with the acquisition of NetSource. Up to a total
of 5,437,500 shares, including up to 1.4 million shares issuable contingent on
NetSource achieving certain performance targets during the first two quarters of
1999, may be issued by GTS in connection with this acquisition.
    
 
   
     In addition, we have agreed to file a shelf registration statement of
common stock that may be issued to Apax Funds Limited and Warburg, Pincus
Ventures, L.P., two institutional shareholders of Esprit Telecom Group plc, upon
the closing of our offer for Esprit Telecom. We will issue approximately 6.2
million shares of common stock to these two Esprit Telecom shareholders if the
offer is closed.
    
 
                                       181
<PAGE>   185
 
   
     GTS cannot predict what effect, if any, that future sales of common stock
or the availability of common stock for sale would have on the market price for
common stock. Sales of large numbers of shares of common stock in the public
market pursuant to Rule 144 or pursuant to an effective registration statement
under the Securities Act, or the perception that sales could occur, may have an
adverse effect on the market price for common stock. See "Risk Factors -- Risks
Specific to GTS -- A significant amount of our common stock may be resold in the
future."
    
 
   
     GTS 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 GTS 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 GTS common stock without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf
of the Underwriters in the offerings for a period of 90 days after the date of
the consummation of the stock offerings.
    
 
     In general, under Rule 144 as currently in effect, 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.
 
                                       182
<PAGE>   186
 
   
                     CERTAIN U.S. 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 GTS 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 U.S.
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 U.S. federal income tax laws,
such as banks, insurance companies, tax-exempt entities and certain U.S.
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 U.S. or any
political subdivision thereof; (iii) an estate the income of which is subject to
U.S. federal income tax regardless of its source; or (iv) a trust if both: (A) a
court within the U.S. is able to exercise primary supervision over the
administration of the trust and (B) one or more U.S. 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 U.S. (or, if one or more of certain tax treaties apply,
are attributable to a permanent establishment in the U.S. maintained by the
Non-U.S. Holder) generally are subject to a 30% U.S. withholding tax. An
exemption 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, GTS
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 GTS may change in subsequent taxable years. Therefore, no assurances
can be made regarding GTS' future status as an 80/20 company. If, for any period
or periods, GTS fails to satisfy the requirements applicable to an 80/20
company, then, for payments made prior to January 1, 2000, the withholding agent
generally would be required to withhold tax from all distributions paid on the
common stock regardless of GTS' earnings and profits. For payments made after
January 1, 2000, a withholding agent may elect not to withhold on a distribution
to the extent it is not paid out of current or accumulated earnings and profits,
based on GTS' reasonable estimate of the extent to which the distribution will
be out of such earnings and profits. Holders could, however, apply for refunds
if such common stock's share of GTS' 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 U.S. and the country
of which the Non-U.S. Holder is a resident for tax purposes.
    
 
   
     In order to claim the benefit of an applicable tax treaty rate, a Non-U.S.
Holder may have to file with GTS or its dividend paying agent an exemption or
reduced treaty rate certificate or letter in accordance with the terms of such
treaty. Under U.S. Treasury regulations currently in effect, for purposes of
determining whether tax is to be withheld at a 30% rate or at a reduced rate as
specified by an income tax treaty, GTS ordinarily will presume that dividends
paid to an address in a foreign country are paid to a resident of such
    
 
                                       183
<PAGE>   187
 
   
country absent knowledge that such presumption is not warranted. However, as of
January 1, 2000, a Non-U.S. Holder seeking a reduced rate of withholding under
an income tax treaty generally would be required to provide to GTS a valid
Internal Revenue Service Form W-8 certifying that such Non-U.S. Holder is
entitled to benefits under an income tax treaty. The final regulations also
provide special rules for determining whether, for purposes of assessing the
applicability of an income tax treaty, dividends paid to a Non-U.S. Holder that
is an entity should be treated as being paid to the entity itself or to the
persons holding an interest in that entity. A Non-U.S. Holder who is eligible
for a reduced withholding rate may obtain a refund of any excess amounts
withheld by filing an appropriate claim for a refund with the Internal Revenue
Service.
    
 
   
     In the case of dividends that are effectively connected with the Non-U.S.
Holder's conduct of a trade or business with the U.S. or, if an income tax
treaty applies, attributable to a U.S. permanent establishment of the Non-U.S.
Holder, the Non-U.S. Holder generally will be subject to regular U.S. income tax
in the same manner as if the Non-U.S. Holder were a U.S. resident. A Non-U.S.
corporation receiving effectively connected dividends also may be subject to an
additional "branch profits tax" which is imposed, under certain circumstances,
at a rate of 30% (or such lower rate as may be specified by an applicable
treaty) of the Non-U.S. corporation's "effectively connected earnings and
profits," subject to certain adjustments.
    
 
GAIN ON DISPOSITION OF COMMON STOCK
 
   
     A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of common stock
unless (i) the gain is effectively connected with a trade or business of such
Non-U.S. Holder in the U.S., (ii) in the case of certain Non-U.S. Holders who
are non-resident alien individuals and hold the common stock as a capital asset,
such individuals are present in the U.S. for 183 or more days in the taxable
year of the disposition and either (a) such individuals have a "tax home" (as
defined for U.S. Federal income tax purposes) in the U.S., or (b) the gain is
attributable to an office or other fixed place of business maintained by such
individuals in the U.S. (iii) the Non-U.S. Holder is subject to tax, pursuant to
the provisions of U.S. tax law applicable to certain U.S. expatriates whose loss
of U.S. citizenship has as one of its principal purposes the avoidance of U.S.
taxes, or (iv) under certain circumstances if GTS is or has been during certain
time periods a "United States real property holding corporation" within the
meaning of Section 897(c)(2) of the Code and, assuming that the common stock is
regularly traded on an established securities market for tax purposes, the
Non-U.S. Holder held, directly or indirectly, at any time within the five-year
period preceding such disposition more than 5% of the outstanding common stock.
GTS is not, and does not anticipate becoming, a United States real property
holding corporation.
    
 
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
 
   
     Under the U.S. Treasury regulations, GTS must report annually to the
Internal Revenue Service and to each Non-U.S. Holder the amount of dividends
paid to such holder and any tax withheld with respect to such dividends. These
information reporting requirements apply regardless of whether withholding is
required because the dividends were effectively connected with a trade or
business in the U.S. of the Non-U.S. Holder or withholding was reduced or
eliminated by an applicable income tax treaty. Copies of the information returns
reporting such dividends and withholding may also be made available to the tax
authorities in the country in which the Non-U.S. Holder is a resident under the
provisions of an applicable income tax treaty or agreement.
    
 
   
     U.S. backup withholding (which generally is a withholding tax imposed at
the rate of 31% on certain payments to persons that fail to furnish certain
information under the U.S. information reporting requirements) generally will
not apply to (i) dividends paid to Non-U.S. Holders that are subject to the 30%
withholding discussed above (or that are not so subject because a tax treaty
applies that reduces or eliminates such 30% withholding) or (ii) under current
law, dividends paid to a Non-U.S. Holder at an address outside of the U.S.
However, as of January 1, 2000, a Non-U.S. Holder will generally be subject to
U.S. withholding tax at a 31% rate unless certain certification procedures (or,
in the case of payments made outside the U.S.
    
 
                                       184
<PAGE>   188
 
with respect to an offshore account, certain documentary evidence procedures)
are satisfied, directly or through a foreign intermediary.
 
   
     Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the U.S. on shares of GTS common stock to
beneficial owners that are not "exempt recipients" and that fail to provide in
the manner required certain identifying information.
    
 
   
     The payment of the proceeds of the disposition of common stock to or
through the U.S. office of a broker is subject to information reporting unless
the disposing holder, under penalty of perjury, certifies its Non-U.S. status or
otherwise establishes an exemption. Generally, U.S. information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the U.S. through a Non-U.S. office of a Non-U.S. broker.
However, information reporting requirements (but probably, prior to January 1,
2000, not backup withholding) will apply to a payment of disposition proceeds
outside the U.S. if (A) the payment is made through an office outside the U.S.
of a broker that is either (i) a U.S. person, (ii) a foreign person which
derives 50% or more of its gross income for certain periods from the conduct of
a trade or business in the U.S., (iii) a "controlled foreign corporation" for
U.S. Federal income tax purposes, or (iv) effective January 1, 2000, but
probably not prior to such date, a foreign broker that is (1) a foreign
partnership, one or more of whose partners are U.S. persons who, in the
aggregate, hold more than 50% of the income or capital interest in the
partnership at any time during its tax year, or (2) a foreign partnership
engaged at any time during its tax year in the conduct of a trade or business in
the U.S., and (B) the broker fails to maintain documentary evidence that the
holder is a Non-U.S. Holder and that certain conditions are met, or that the
holder otherwise is entitled to an exemption.
    
 
     Backup withholding is not an additional tax. Rather the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
 
FEDERAL ESTATE TAX
 
   
     An individual Non-U.S. Holder who is treated as the owner of or has made
certain lifetime transfers of an interest in the GTS common stock will be
required to include the value thereof in his gross estate for U.S. federal
estate tax purposes, and may be subject to U.S. Federal estate tax unless an
applicable estate tax treaty provides otherwise. Estates of non-resident aliens
are generally allowed a statutory credit which generally has the effect of
offsetting the U.S. Federal estate tax imposed on the first $60,000 of the
taxable estate.
    
 
     THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX ADVISOR WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL ESTATE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
JURISDICTION.
 
                                       185
<PAGE>   189
 
                              PLAN OF DISTRIBUTION
 
   
     The shares may be sold from time to time to purchasers directly by the
selling stockholders. Alternatively, the selling stockholders may from time to
time offer the shares to or through underwriters, broker/dealers or agents, who
may receive compensation in the form of underwriting discounts, concessions of
commissions from the selling stockholders or the purchasers of such securities
for whom they may act as agents. The selling stockholders and any underwriters,
broker/dealers or agents that participate in the distribution of the shares may
be deemed to be "underwriters" within the meaning of the Securities Act and any
profit on the sale of such securities and any discounts commissions, concessions
or other compensation received by any such underwriter, broker/dealers or agents
may be deemed to be underwriting discounts and commissions under the Securities
Act.
    
 
   
     The shares may be sold from time to time in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. Such prices will be
determined by the selling stockholders or by agreement between such selling
stockholders and underwriters or dealers who receive fees or commissions in
connection therewith. The sale of the shares may be effected in transactions
(which may involve crosses, block transactions and borrowings, returns and
reborrowings of the shares pursuant to stock loan agreements to settle short
sales of the common stock) (i) on any national securities exchange or quotation
service on which the shares may be listed or quoted at the time of the sale,
(ii) in the over-the-counter markets, (iii) in transactions otherwise than on
such exchange or in the over-the-counter market or (iv) through the writing of
options. Shares also may be delivered in connection with the issuance of
securities by issuers other than GIS that are exchangeable for (whether optional
or mandatory) or payable in, such shares or pursuant to which such shares may be
distributed. At the time a particular offering of the shares is made, a
Prospectus Supplement, if required, will be distributed which will set forth the
aggregate amount and type of the shares being offered and the terms of the
offering, including the name or names of any underwriter, broker/dealers or
agents, any discounts, commissions and other terms constituting compensation
from the selling stockholders and any discounts, commissions or concessions
allowed or reallowed or paid to broker/dealers. This prospectus also may be used
by transferees of the selling stockholders or by other persons acquiring shares,
including brokers who borrow the shares to settle short sales of shares of the
common stock.
    
 
   
     To comply with the securities laws of certain jurisdictions, if applicable
the shares will be offered or sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain jurisdictions the shares
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or any exemption from registration or qualification
is available and is complied with.
    
 
   
     The selling stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provision may limit
the timing of purchases and sales of any of the shares by the selling
stockholders. The foregoing may affect the marketability of such securities.
    
 
   
     Pursuant to the Registration Rights Agreement, all expenses of the
registration of the shares will be paid by GIS, including without limitation,
Commission filing fees and expense of compliance with state securities or "blue
sky" laws; provided, however, that the selling stockholders will pay all
underwriting discounts and selling commissions, if any. The selling stockholders
and any underwriters will be indemnified by the Company against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith. The Company will be
indemnified by the selling stockholders severally against certain civil
liabilities including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
    
 
                                 LEGAL MATTERS
 
   
     The validity of the Common Stock offered hereby has been passed upon for
GTS by Shearman & Sterling, New York, New York.
    
 
                                       186
<PAGE>   190
 
                      WHERE YOU CAN FIND MORE INFORMATION
 
   
     We and Esprit Telecom file reports, proxy statements and other information
with the Securities and Exchange Commission. In addition, we have filed a
Registration Statement on Form S-3 (as amended, the "Registration Statement") of
which this Prospectus is a part. All of the references in this Prospectus to
contracts, agreements and other documents are summaries of the actual documents
which are contained as exhibits in the Registration Statement. Since the
prospectus may not contain all the information that you may find important, you
should review the full text of these documents.
    
 
   
     You may read and copy these reports, proxy statements and other information
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located
at 7 World Trade Center, 13th floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such material at prescribed rates from the Public Reference Section of the
SEC at 450 Fifth Street, Washington, D.C. 20549. You may obtain copies from the
Public Reference Room by calling the SEC at (800) 732-0330. In addition, we are
required to file electronic versions of such material with the SEC through the
SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The SEC
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. GTS common stock and Esprit Telecom ADSs
are listed on Nasdaq and EASDAQ and reports and other information concerning us
and Esprit Telecom can also be inspected at the offices of the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20001-1500 U.S.A. and the EASDAQ Market Authority, Rue des Colonies 56, Brussels
1000, Belgium.
    
 
   
                INCORPORATION OF INFORMATION FILED WITH THE SEC
    
 
   
     The SEC allows GTS to "incorporate by reference" information regarding
Esprit Telecom into this prospectus, which means that GTS can disclose important
information to you by referring you to another document filed separately with
the SEC. Accordingly, GTS has incorporated by reference information regarding
Esprit Telecom. The information regarding Esprit Telecom incorporated by
reference is deemed to be part of this prospectus. This prospectus incorporates
by reference Esprit Telecom's Annual Report on Form 20-F for the year ended
September 30, 1998, filed with the SEC on December 24, 1998 and its Report on
Form 6-K filed with the SEC on December 24, 1998. These documents contain
important information about Esprit Telecom and its finances.
    
 
   
     We also incorporate by reference each of the following documents that
Esprit Telecom will file with the SEC after the date of this prospectus (but
excluding Esprit Telecom's solicitation/recommendation statement as Schedule
14D-9 to be filed pursuant to Rule 14d-9 and 14e-2 under the Exchange Act) but
before all the common stock offered by this prospectus have been sold:
    
 
   
     - reports filed under Section 13(a) and (c) of the Exchange Act; and
    
 
   
     - any reports filed under Section 15(d) of the Exchange Act.
    
 
                                    EXPERTS
 
     The consolidated financial statements of Global TeleSystems Group, Inc. as
of December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997 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.
 
     The financial statements of EDN Sovintel as of December 31, 1997 and 1996,
and for each of the three years in the period ended December 31, 1997, appearing
in this prospectus and Registration Statement, have been audited by Ernst &
Young (CIS) Ltd., independent auditors, as set forth in their report appearing
 
                                       187
<PAGE>   191
 
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 Esprit Telecom plc as of September
30, 1998, and for the year ended September 30, 1998, appearing in this
prospectus and Registration Statement, have been audited by
PricewaterhouseCoopers, 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 Esprit Telecom plc as of September
30, 1996 and 1997, and for each of the two years in the period ended September
30, 1997 appearing in this prospectus and Registration Statement, have been
audited by Price Waterhouse, 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 firms as experts in accounting and auditing.
 
   
     The financial statements of the Plusnet Business as of September 30, 1996
and 1997, and for each of the three years in the period ended September 30,
1997, appearing in this Prospectus and Registration Statement, have been audited
by KPMG Deutsche Treuhand-Gesellschaft, 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.
    
 
                                       188
<PAGE>   192
 
                                    INDEX TO
                      FINANCIAL INFORMATION CONCERNING GTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
YEAR END FINANCIAL STATEMENTS
  Report of Ernst & Young LLP, Independent Auditors.........   F-2
  Consolidated Balance Sheets as of December 31, 1996 and
     1997...................................................   F-3
  Consolidated Statements of Operations for the years ended
     December 31, 1995, 1996, and 1997......................   F-4
  Consolidated Statements of Cash Flows for the years ended
     December 31, 1995, 1996, and 1997......................   F-5
  Consolidated Statements of Shareholders' Equity for the
     years ended December 31, 1995, 1996, and 1997..........   F-6
  Notes to Consolidated Financial Statements................   F-7
 
THIRD QUARTER FINANCIAL STATEMENTS
  Condensed, Consolidated Balance Sheets as of December 31,
     1997 and September 30, 1998............................  F-27
  Condensed, Consolidated Statements of Operations for the
     Three and Nine Months ended September 30, 1997 and
     1998...................................................  F-28
  Condensed, Consolidated Statements of Cash Flows for the
     Three and Nine Months Ended September 30, 1997 and
     1998...................................................  F-29
  Notes to Condensed, Consolidated Financial Statements.....  F-30
 
                           EDN SOVINTEL
 
YEAR END FINANCIAL STATEMENTS
  Report of Ernst & Young (CIS) Limited, Independent
     Auditors...............................................  F-36
  Balance Sheets as of December 31, 1997 and 1996...........  F-37
  Statements of Income and Retained Earnings for the years
     ended December 31, 1997, 1996, and 1995................  F-38
  Statements of Cash Flows for the years ended December 31,
     1997, 1996, and 1995...................................  F-39
  Notes to Financial Statements.............................  F-40
 
THIRD QUARTER FINANCIAL STATEMENTS
  Condensed Balance Sheets as of December 31, 1997 and
     September 30, 1998.....................................  F-49
  Condensed Statements of Operations for the Three and Nine
     Months ended September 30, 1997 and 1998...............  F-50
  Condensed Statements of Cash Flows for the Three and Nine
     Months ended September 30, 1997 and 1998...............  F-51
  Notes to Condensed Financial Statements...................  F-52
</TABLE>
 
                                       F-1
<PAGE>   193
 
               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, 1996 and 1997, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 1997. 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, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
 
                                                  /s/ Ernst & Young LLP
 
Vienna, Virginia
February 26, 1998, except for
Note 17, as to which the date
is November 12, 1998
 
                                       F-2
<PAGE>   194
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                1996         1997
                                                              ---------    ---------
                                                                  (IN THOUSANDS,
                                                                EXCEPT SHARE DATA)
<S>                                                           <C>          <C>
CURRENT ASSETS
  Cash and cash equivalents.................................  $  57,874    $ 318,766
  Accounts receivable, net..................................      8,920       17,079
  Restricted cash...........................................     13,627       30,486
  Prepaid expenses..........................................      2,537       14,101
  Other assets..............................................      2,396        6,707
                                                              ---------    ---------
          TOTAL CURRENT ASSETS..............................     85,354      387,139
Property and equipment, net.................................     35,463      236,897
Investments in and advances to ventures.....................    104,459       76,730
Goodwill and intangible assets, net of accumulated
  amortization of $3,916 and $10,184 at December 31, 1996
  and 1997, respectively....................................      9,548       43,284
Restricted cash.............................................      2,554       36,411
                                                              ---------    ---------
          TOTAL ASSETS......................................  $ 237,378    $ 780,461
                                                              =========    =========
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES
  Accounts payable and accrued expenses.....................  $  15,211    $  61,984
  Debt maturing within one year.............................     16,261        6,390
  Current portion of capital lease obligations..............         --       21,490
  Related party debt maturing within one year...............      4,947        5,708
  Other current liabilities.................................      2,040        6,301
                                                              ---------    ---------
          TOTAL CURRENT LIABILITIES.........................     38,459      101,873
Long-term debt, less current portion........................      5,260      408,330
Long-term portion of capital lease obligations..............         --      117,645
Related party long-term debt, less current portion..........     59,079       79,796
Taxes and other non-current liabilities.....................     14,664       14,595
                                                              ---------    ---------
          TOTAL LIABILITIES.................................    117,462      722,239
COMMITMENTS AND CONTINGENCIES
  Minority interest.........................................      1,915       18,766
Common stock, subject to repurchase (325,000 shares and
  797,100 shares outstanding at December 31, 1996 and 1997,
  respectively).............................................      4,333       12,489
SHAREHOLDERS' EQUITY
  Preferred stock, $0.0001 par value (10,000,000 shares
     authorized; none issued and outstanding)...............         --           --
  Common stock, $0.10 par value (135,000,000, shares
     authorized; 34,589,106, and 37,606,814 shares issued
     and outstanding, net of 116,639 and 195,528 shares of
     treasury stock at December 31, 1996 and 1997,
     respectively)..........................................      3,459        3,761
  Additional paid-in capital................................    238,268      274,359
  Cumulative translation adjustment.........................     (2,161)      (8,269)
  Accumulated deficit.......................................   (125,898)    (242,884)
                                                              ---------    ---------
          TOTAL SHAREHOLDERS' EQUITY........................    113,668       26,967
                                                              ---------    ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........  $ 237,378    $ 780,461
                                                              =========    =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
                                       F-3
<PAGE>   195
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                            ---------------------------------------
                                                               1995          1996          1997
                                                            ----------    ----------    -----------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                         <C>           <C>           <C>
REVENUES, NET:
  Telecommunication and other services....................   $  5,979      $ 19,210      $  41,300
  Equipment sales.........................................      2,433         4,907          5,798
                                                             --------      --------      ---------
                                                                8,412        24,117         47,098
                                                             --------      --------      ---------
OPERATING COSTS AND EXPENSES
  Cost of revenues:
     Telecommunication and other services.................      8,150        14,741         37,206
     Equipment sales......................................        246         4,200          5,513
  Selling, general and administrative.....................     37,291        47,940         68,425
  Depreciation and amortization...........................      3,491         4,165          6,227
  Non-income taxes........................................        234           850          2,085
                                                             --------      --------      ---------
                                                               49,412        71,896        119,456
  Write-off of venture-related assets.....................         --            --          1,673
  Equity in losses of ventures............................      7,871        10,150         14,599
                                                             --------      --------      ---------
Loss from operations......................................    (48,871)      (57,929)       (88,630)
OTHER INCOME/(EXPENSE):
  Other non-operating income..............................     10,270            --             --
  Interest income.........................................      2,177         3,569         11,361
  Interest expense........................................       (728)      (11,122)       (39,086)
  Foreign currency losses.................................       (685)       (1,176)        (1,826)
                                                             --------      --------      ---------
                                                               11,034        (8,729)       (29,551)
                                                             --------      --------      ---------
Net loss before income taxes and minority interest........    (37,837)      (66,658)      (118,181)
Income taxes..............................................      2,565         1,360          2,482
                                                             --------      --------      ---------
Net loss before minority interest.........................    (40,402)      (68,018)      (120,663)
Minority interest.........................................          2            27          3,677
                                                             --------      --------      ---------
Net loss..................................................   $(40,400)     $(67,991)     $(116,986)
                                                             ========      ========      =========
Net loss per share........................................   $  (1.70)     $  (2.33)     $   (3.26)
                                                             ========      ========      =========
Weighted average common shares outstanding................     23,707        29,157         35,833
                                                             ========      ========      =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-4
<PAGE>   196
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1995        1996        1997
                                                            --------    --------    ---------
                                                                     (IN THOUSANDS)
<S>                                                         <C>         <C>         <C>
OPERATING ACTIVITIES
  Net loss................................................  $(40,400)   $(67,991)   $(116,986)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
  OPERATING ACTIVITIES:
  Depreciation and amortization...........................     3,721       7,444       14,843
  Amortization of discount on note payable................        --       3,598        5,023
  Equity in losses of ventures, net of dividends
     received.............................................     7,871      11,123       17,474
  Deferred interest.......................................        --       6,583       12,970
  Write-off of venture related assets.....................        --          --        1,673
  Non-cash compensation...................................        --          --        4,571
  Minority interest.......................................        (2)        (27)      (3,677)
  Other...................................................     2,577       1,342        2,985
  Changes in assets and liabilities, excluding effects of
     acquisitions and ventures:
     Accounts receivable..................................    (1,557)     (6,996)     (10,900)
     Prepaid expenses.....................................      (438)       (605)      (7,522)
     Accounts payable and accrued expenses................    12,820      (1,694)      34,925
     Other changes in assets and liabilities..............     9,474       8,207       (3,984)
                                                            --------    --------    ---------
          NET CASH USED IN OPERATING ACTIVITIES...........    (5,934)    (39,016)     (48,605)
INVESTING ACTIVITIES Investments in and advances to
  ventures, net of repayments.............................   (45,102)    (54,932)       5,943
  Purchases of property and equipment.....................   (24,324)    (12,195)     (45,148)
  Restricted cash.........................................    (2,543)    (13,138)     (62,924)
  Acquisitions, net of cash acquired......................    (1,871)         --        1,050
  Goodwill and other intangibles..........................    (6,181)       (487)      (2,196)
  Other investing activities..............................     2,069        (125)        (149)
                                                            --------    --------    ---------
          NET CASH USED IN INVESTING ACTIVITIES...........   (77,952)    (80,877)    (103,424)
FINANCING ACTIVITIES
  Proceeds from debt......................................    23,325      63,599      409,817
  Payment of debt issue costs.............................      (779)     (2,777)     (24,927)
  Net proceeds from issuance of common stock..............    42,175     107,775       36,432
  Other financing activities..............................      (750)         --         (536)
                                                            --------    --------    ---------
          NET CASH PROVIDED BY FINANCING ACTIVITIES.......    63,971     168,597      420,786
Effect of exchange rate changes on cash and cash
  equivalents.............................................      (676)        126       (7,865)
                                                            --------    --------    ---------
Net (decrease) increase in cash and cash equivalents......   (20,591)     48,830      260,892
Cash and cash equivalents at beginning of year............    29,635       9,044       57,874
                                                            --------    --------    ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................  $  9,044    $ 57,874    $ 318,766
                                                            ========    ========    =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-5
<PAGE>   197
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
 
<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, 1994....................  20,781   $2,078    $ 70,359      $  (246)     $ (17,507)     $  54,684
  Proceeds from the sale of common stock, net of
    expenses of $3,680..........................   5,091      509      41,629           --             --         42,138
  Translation adjustment........................      --       --          --       (1,289)            --         (1,289)
  Net loss......................................      --       --          --           --        (40,400)       (40,400)
  Other.........................................     333       33         156           --             --            189
                                                  ------   ------    --------      -------      ---------      ---------
BALANCE AT DECEMBER 31, 1995....................  26,205    2,620     112,144       (1,535)       (57,907)        55,322
  Proceeds from the sale of common stock, net of
    expenses of $3,567..........................   8,349      835     106,909           --             --        107,744
  Issuance of 7,223 warrants in connection with
    debt financing..............................      --       --      20,184           --             --         20,184
  Translation adjustment........................      --       --          --         (626)            --           (626)
  Net loss......................................      --       --          --           --        (67,991)       (67,991)
  Other.........................................      35        4        (969)          --             --           (965)
                                                  ------   ------    --------      -------      ---------      ---------
BALANCE AT DECEMBER 31, 1996....................  34,589    3,459     238,268       (2,161)      (125,898)       113,668
  Proceeds from the sale of common stock, net of
    expenses of $2,777..........................   2,503      250      36,182           --             --         36,432
  Translation adjustment........................      --       --          --       (6,108)            --         (6,108)
  Net loss......................................      --       --          --           --       (116,986)      (116,986)
  Other.........................................     515       52         (91)          --             --            (39)
                                                  ------   ------    --------      -------      ---------      ---------
BALANCE AT DECEMBER 31, 1997....................  37,607   $3,761    $274,359      $(8,269)     $(242,884)     $  26,967
                                                  ======   ======    ========      =======      =========      =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-6
<PAGE>   198
 
                         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
14, "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 are 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.
 
     On December 1, 1997, the Company filed an amendment to its Certificate of
Incorporation to effect an increase in the authorized common shares from
60,000,000 to 135,000,000; a 3 for 2 common share stock split, 1 1/2 common
shares for every common share issued and outstanding; and an increase in the par
value of its authorized common shares from $0.0001 to $0.10 on a post-split
basis. Accordingly, the Company has presented share and per share data for
issued and outstanding shares as well as options and warrants on a restated
basis to give effect to the increase in authorized common shares, the stock
split and the increase in par value for its capital stock.
 
     Subsequent to year end, the Company completed an initial public offering of
12.8 million shares of common stock at $20 per common share (the "Stock
Offering"). The Company also issued aggregate principal amount $105.0 million of
9.875% senior notes due 2005 (the "Notes Offering" and together with the Stock
Offering, the "Offerings"). See Note 15, "Subsequent Events."
 
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
     Wholly-owned subsidiaries and majority-owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does not exercise
unilateral operating and financial control are accounted for by the equity
method. The Company has certain majority-owned ventures that are accounted for
by the equity method as a result of minority shareholder rights, super majority
voting conditions or other governmentally imposed uncertainties so severe that
they prevent the Company from exercising 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
 
                                       F-7
<PAGE>   199
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 1995 and 1996 consolidated
financial statements in order to conform to the 1997 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 $16.2 million and $66.9 million of restricted cash at December 31, 1996 and
1997, respectively. The restricted cash is primarily related to cash held in
escrow for interest payments associated with the Company's debt obligations.
 
PROPERTY AND EQUIPMENT
 
     Property and equipment is stated at cost. Depreciation, which includes the
amortization of assets recorded under capital leases, is calculated on a
straight-line basis over the lesser of the estimated lives, ranging from five to
ten years for telecommunications equipment and three to five years for
furniture, fixtures and equipment and other property, or their contractual term.
Construction in process reflects amounts incurred for the configuration and
build-out of telecommunications equipment and telecommunications equipment not
yet placed into service. Maintenance and repairs are charged to expense as
incurred.
 
     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
34, "Capitalization of Interest Costs," the Company intends to capitalize
material interest costs associated with the construction of capital assets for
business operations and amortize the costs over the assets' useful lives. The
Company has not capitalized any interest costs through December 31, 1997.
 
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 the lesser of their estimated useful lives, generally three to fifteen
years, or their contractual term. In accordance with Accounting Principles Board
("APB") Opinion No. 17, "Intangible Assets," the Company continues to evaluate
the amortization period to determine whether events or circumstances warrant
revised amortization periods. Additionally, the Company considers whether the
carrying value of such assets should be reduced based on the future benefits of
its intangible assets.
 
LONG-LIVED ASSETS
 
     In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," long-lived
assets to be held and used by the Company are reviewed to determine whether 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 flows analysis of assets at the lowest level for
which identifiable cash flows exist. If an
 
                                       F-8
<PAGE>   200
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
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 year ended December 31, 1996, the Company's analyses
indicated that there was not an impairment of its long-lived assets. During the
year ended December 31, 1997, the Company's analyses indicated that there was an
impairment of its long-lived assets. Accordingly, the Company recorded a
write-down of long-lived assets associated with its investments in the Asia and
Central Europe regions (see Note 3, "Investments in and Advances to Ventures").
 
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 that 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. Billings received in advance of service being performed are
deferred and recognized as revenue as the service is performed.
 
NET LOSS PER SHARE
 
     During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and fully diluted earnings per share for
all years presented. The Company's net loss per share calculation (basic and
fully diluted) is based upon the weighted average common shares issued. There
are no reconciling items in the numerator or denominator of the Company's net
loss per share calculation. Employee stock options, warrants, and convertible
debt instruments have been excluded from the net loss per share calculation
because their effect would be anti-dilutive (see Note 5, "Debt Obligations,"
Note 6, Shareholders' Equity and Note 7, "Stock Option Plans").
 
                                       F-9
<PAGE>   201
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company believes that the carrying amount of its financial instruments
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 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 currently hedge against foreign currency fluctuations,
although the Company may implement such practices in the future. Under current
practices, the Company's results of 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 No. 25, "Accounting for Stock Issued to Employees." The Company has elected
to account for its stock-based compensation in accordance with the provisions of
APB No. 25 and presents pro forma disclosures of net loss as if the fair value
method had been adopted.
 
USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
 
     The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
NEW ACCOUNTING STANDARDS
 
     The Financial Accounting Standards Board has issued two new standards which
become effective for reporting periods beginning after December 15, 1997. SFAS
No. 130, "Reporting Comprehensive Income," requires additional disclosures with
respect to certain changes in assets and liabilities that previously were not
required to be reported as results of operations for the period. The Company
will begin making the additional disclosures required by SFAS No. 130 in the
first quarter of 1998. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires financial and descriptive
information with respect to "operating segments" of an entity based on the way
management disaggregates the entity for making internal operating decisions. The
Company will begin making the disclosures required by SFAS No. 131 with
financial statements for the period ending December 31, 1998.
 
NOTE 3: INVESTMENTS IN AND ADVANCES TO VENTURES
 
     The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments range from 49% to 80%. The Company has no investments in ventures
that are accounted for by the cost method.
 
                                      F-10
<PAGE>   202
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The components of the Company's investments in and advances to ventures are
as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1996       1997
                                                              --------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>         <C>
Equity in net assets acquired...............................  $ 41,105    $31,183
Excess of investment cost over equity in net assets acquired
  net of amortization of $4,347 and $4,851 at December 31,
  1996 and 1997, respectively...............................    11,288      7,582
Accumulated (losses) earnings recognized....................   (13,840)    14,659
Dividends...................................................      (973)    (3,848)
Cash advances and other.....................................    66,879     27,154
                                                              --------    -------
          Total investments in and advances to ventures.....  $104,459    $76,730
                                                              ========    =======
</TABLE>
 
     In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 2, "Summary of Significant Accounting Policies."
 
     The Company has financed the operating and investing cash flow requirements
of several of its ventures in the form of cash advances. The Company anticipates
that these ventures will generate sufficient cash inflows for the repayment of
the cash advances as their businesses mature. Also, due to the long-term nature
of the anticipated repayment period and the potential risk associated with the
repatriation of the cash advances, the Company has aggregated its investments in
and cash advances to the ventures.
 
     The Company's share of the ventures' foreign currency translation
adjustments is reflected in the investment accounts.
 
INVESTMENT RECOVERABILITY
 
     The Company periodically evaluates the recoverability of its equity
investments, in accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," and if circumstances arise where a loss in value
is considered to be other than temporary, the Company will record a write-down
of excess investment cost. The Company's recoverability analysis is based on the
projected undiscounted cash flows of the operating ventures, which is the lowest
level of cash flow information available. As of December 31, 1997, the Company
recorded a write-off of approximately $5.4 million, which represented the net
balance of certain investments in and advances to ventures located in Asia
(primarily Beijing Tianmu and V-Tech) and Central Europe (Eurohivo) which were
stated in excess of their net realizable value. The entire net balance of these
investments in and advances to ventures was written-off based on the fact that
these ventures project overall negative cash flows for the foreseeable future.
The ventures projected future operations deteriorated during 1997 as a result of
problems dealing with one of its partners, the inability of the
 
                                      F-11
<PAGE>   203
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
ventures to develop markets for its services, and technical problems. The
components of the charge, which was classified as equity in losses of ventures,
were as follows:
 
<TABLE>
<S>                                                           <C>
Equity in net assets acquired...............................  $ 17,093
Excess of investment cost over equity in net assets
  acquired..................................................       593
Accumulated (losses) earnings recognized....................   (23,253)
Dividends...................................................        --
Cash advances and other.....................................    10,921
                                                              --------
Net write-off as of December 31, 1997.......................  $  5,354
                                                              ========
</TABLE>
 
     Prior to the write-off detailed above, the Company included approximately
$14.4 million in its accumulated losses (of the $14.4 million, approximately
$13.5 million related to the write-off of advances to several Chinese owned
operating telecommunications companies to which the Company provides technical
and financial assistance and $0.9 million related to the write-off of
inventories, receivables, and other assets) which represented the Company's
share of asset write-offs recorded by certain of the Company's equity method
investments in Asia during the year ended December 31, 1997. Such write-offs,
for the same reasons mentioned in the previous paragraph, were recorded by the
Company's equity method investments pursuant to SFAS No. 121 and are included in
the $(23.3) million accumulated (losses) detailed above. Additionally, during
the year ended December 31, 1997 the Company recorded a charge of $1.7 million
in order to write off certain holding company assets associated with the
ventures located in Asia and Central Europe. This charge has been included as a
separate line item in the Company's statement of operations.
 
HERMES EUROPE RAILTEL B.V. ("HER") RECAPITALIZATION
 
     During the year ended December 31, 1997, HER recapitalized its equity
structure and amended its existing shareholder agreement. In connection with the
HER recapitalization the Company contributed approximately $51.8 million and
converted existing note receivables of approximately $28.4 million in exchange
for an additional 29% equity interest in HER. As a result of the
recapitalization and amended shareholder agreement, the Company obtained
unilateral control over HER. As such, HER has been consolidated into the
Company's financial statements effective July 6, 1997, the effective date of the
recapitalization. The Company recognized approximately $8.7 million of goodwill
in connection with the recapitalization. As a result of the Company's loss
recognition policy, the consolidation of HER would not have a material impact on
the Company's historical financial position or operating results and thus no pro
forma information is disclosed herein.
 
     As of December 31, 1997, the consolidation of HER resulted in reductions of
$72.9 million, $10.0 million, and $4.6 million in the equity in net assets
acquired, excess of investment cost over equity in net assets acquired, and cash
advances and other, respectively. Additionally, as of December 31, 1997 the
consolidation of HER had a $21.4 million favorable impact on the accumulated
(losses) earnings recognized.
 
                                      F-12
<PAGE>   204
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
CHANGES IN THE INVESTMENTS IN AND ADVANCES TO VENTURES
 
     The changes in the investments in and advances to ventures are as follows:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Balance, at beginning of period.............................  $ 56,153    $104,459
Equity in net assets acquired...............................    22,441      80,054
Excess of investment cost over equity in net assets
  acquired..................................................     5,288      10,187
Dividends...................................................      (973)     (2,875)
Cash advances (repayments) and other........................    31,700     (24,171)
Effect of consolidating equity method company...............        --     (76,325)
                                                              --------    --------
                                                                58,456     (13,130)
Equity ownership in losses..................................    (3,122)     (5,552)
Excess losses recognized over amount attributable to
  ownership
  interest..................................................    (4,451)    (10,610)
Amortization of excess of investment cost over equity in net
  assets acquired...........................................    (2,577)     (3,313)
Loss in value that is other than temporary..................        --      (5,354)
Effect of consolidating equity method company...............        --      10,230
                                                              --------    --------
                                                               (10,150)    (14,599)
                                                              --------    --------
Balance, at end of period...................................  $104,459    $ 76,730
                                                              ========    ========
</TABLE>
 
     As of December 31, 1997, the significant investments accounted for under
the equity method and the percentage interest owned consist of the following:
 
<TABLE>
<CAPTION>
                 EQUITY OWNED SUBSIDIARIES                    OWNERSHIP %
                 -------------------------                    -----------
<S>                                                           <C>
EDN Sovintel................................................     50%
Sovam Teleport..............................................     67%
GTS Ukrainian TeleSystems, L.L.C. (holds a 49% interest in
  Golden Telecom)...........................................     60%
GTS-Vox Limited (holds a 95% interest in TeleCommunications
  of Moscow)................................................   52.64%
TeleRoss Ventures -- 13 joint ventures in various regions in
  the CIS...................................................     50%
Vostok Ventures -- 12 joint ventures in various regions in
  the CIS...................................................   50-70%
PrimTelefone................................................     50%
GTS Monaco Access S.A.M.....................................     50%
</TABLE>
 
     In connection with a purchase of a venture during 1995, the Company is
required to pay additional consideration through 1998, in shares of the
Company's common stock, based on the actual earnings of the venture. The
Company's maximum obligation pursuant to this agreement is to issue 1,121,640
shares of common stock. The Company will recognize any additional consideration
paid under this agreement as goodwill. During the first quarter of 1998, the
Company will issue additional shares based on the venture's 1997 earnings (see
Note 15, "Subsequent Events").
 
     During 1996 and 1997, the Company, in connection with a venture investment,
entered into two financing agreements with a shareholder of the Company for a
total of approximately $8.6 million. Subject to certain conditions, the
shareholder has the right to require the repayment of this amount in cash or by
exchange for 713,311 shares of the Company's common stock. Subsequent to the
Stock Offering, repayment of this financing is due on demand and must be in
exchange for the Company's common stock. This amount has been included in "Other
financing agreements" (see Note 5, "Debt Obligations").
 
                                      F-13
<PAGE>   205
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Subsequent to year end, the Company purchased the remaining interest in
Sovam Teleport, one of its equity method investments in the CIS.
 
     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, 1996 and 1997.
 
YEAR ENDED DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                   MAJORITY OWNED    50% OR LESS      TOTAL EQUITY
             EQUITY METHOD ENTITIES                   VENTURES      OWNED VENTURES   METHOD VENTURES
             ----------------------                --------------   --------------   ---------------
                                                                    (IN THOUSANDS)
<S>                                                <C>              <C>              <C>
Revenue..........................................     $36,202          $107,270         $143,472
Gross margin.....................................      17,109            45,937           63,046
Net income (loss)................................       3,240            (8,460)          (5,220)
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>
 
YEAR ENDED DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
                                                   MAJORITY OWNED    50% OR LESS      TOTAL EQUITY
             EQUITY METHOD ENTITIES                   VENTURES      OWNED VENTURES   METHOD VENTURES
             ----------------------                --------------   --------------   ---------------
                                                                    (IN THOUSANDS)
<S>                                                <C>              <C>              <C>
Revenue..........................................     $47,986          $178,174         $226,160
Gross margin.....................................      29,292            69,136           98,428
Net (loss) income................................     (10,370)           14,700            4,330
Equity in net (losses) earnings..................     (11,538)            5,131           (6,407)
Current assets...................................      20,841            59,959           80,800
Total assets.....................................      35,090           176,117          211,207
Current liabilities..............................      18,719            68,503           87,222
Total liabilities................................      27,653           102,758          130,411
Net assets.......................................       7,438            73,359           80,797
Ownership interest in equity in net assets.......       9,541            45,638           55,179
</TABLE>
 
                                      F-14
<PAGE>   206
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 4: SUPPLEMENTAL BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                               1996        1997
                                                              -------    --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Accounts Receivable Consists Of:
  Trade accounts receivable.................................  $ 6,769    $ 15,725
  Value added taxes receivable..............................    1,971       3,350
  Other receivables.........................................      962       2,089
                                                              -------    --------
                                                                9,702      21,164
    Less: allowance for doubtful accounts...................      782       4,085
                                                              -------    --------
        Total accounts receivable, net......................  $ 8,920    $ 17,079
                                                              =======    ========
Property And Equipment Consists Of:
  Telecommunications equipment..............................  $28,302    $231,996
  Furniture, fixtures and equipment.........................    5,877       9,760
  Other property............................................      837       3,470
  Construction in process...................................    7,009       7,799
                                                              -------    --------
                                                               42,025     253,025
    Less: accumulated depreciation..........................    6,562      16,128
                                                              -------    --------
        Total property and equipment, net...................  $35,463    $236,897
                                                              =======    ========
Accounts Payable And Accrued Expenses Consists Of:
  Accounts payable..........................................  $ 6,761    $ 25,005
  Interest payable..........................................      213      17,483
  Accrued compensation......................................    3,151       6,165
  Other accrued expenses....................................    5,086      13,331
                                                              -------    --------
        Total accounts payable and accrued expenses.........  $15,211    $ 61,984
                                                              =======    ========
</TABLE>
 
NOTE 5: DEBT OBLIGATIONS
 
     Company debt consists of:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                               1996        1997
                                                              -------    --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Senior notes of HER, due August 15, 2007 at 11.5% interest
  payable semiannually......................................  $    --    $265,000
Senior subordinated convertible bonds, due June 30, 2000 at
  an effective interest rate of 15%, and a stated rate of
  8.75%-9.75% payable semiannually..........................       --     144,787
Related party debt obligations, with principal payments
  beginning April 1, 1998 and maturing on March 31, 2001 at
  10% interest, net of unamortized discount for warrants to
  purchase 7,778 common shares..............................   59,079      72,233
Other financing agreements..................................   26,468      18,204
                                                              -------    --------
                                                               85,547     500,224
  Less: debt maturing within one year.......................   21,208      12,098
                                                              -------    --------
          Total long-term debt..............................  $64,339    $488,126
                                                              =======    ========
</TABLE>
 
     In the third quarter of 1997, HER issued $265.0 million aggregate principal
amount of senior notes due August 15, 2007 (the "Senior Notes"). The Senior
Notes are general unsecured obligations of the subsidiary with interest payable
semiannually at a rate of 11.5%. Approximately $56.6 million of the net proceeds
of the offering of the Senior Notes is being held in escrow for the first four
semiannual interest payments commencing in 1998. HER may redeem the Senior
Notes, in whole or in part, any time on or after August 15,
 
                                      F-15
<PAGE>   207
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2002 at specific redemption prices. HER may also redeem a portion of the Senior
Notes at a price equal to 111.5% of the principal amount prior to August 15,
2000 with net cash proceeds of a public equity offering of HER with 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 remain outstanding
after each such redemption.
 
     In July 1997, the Company issued $144.8 million aggregate principal amount
of senior subordinated convertible bonds (the "Bonds") due June 30, 2000. The
Bonds constitute direct, unsecured senior subordinated indebtedness after
existing debt of $82.7 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 $0.10 per share. The Bonds will be convertible into such number of
shares of the Company's common stock as is equal to the principal amount of such
Bonds divided by the applicable conversion price as defined in the Bond
Agreement. The Bonds bear interest payable semiannually at a stated 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% of their principal amount. As a result of the redemption feature, interest
expense is being accrued and accreted at a 15% annual rate. (Subsequent to year
end, the Company completed the Stock Offering at $20.00 per common share which
will result in the Bonds being convertible into approximately 7.2 million shares
of the Company's common stock. In addition, due to the completion of the Stock
Offering, the interest rate will remain at 8.75% until maturity (see Note 15,
"Subsequent Events").)
 
     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"). 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 Company's discretion,
the initial interest accrued until the first principal payment can be deferred
until maturity. Upon commencement of principal payments, the Company is
obligated to make concurrent interest payments. Further, in connection with the
Debt Obligations, the Company issued warrants to purchase 7,777,776 common
shares, valued at $20.7 million. In accordance with the terms of the warrant
agreement, the exercise price of the warrants was reduced from $10.27 per share
to $9.33 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. 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. As of December 31,
1997, the Debt Obligations have been classified within "Related party long-term
debt, less current portion" on the balance sheet. Subsequent to year end the
Company repaid the Debt Obligations by using a portion of the proceeds from the
Offerings (see Note 15, "Subsequent Events").
 
     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.
 
     Aggregate maturities of long-term debt, as of December 31, 1997, are as
follows: 1998 -- $12.1 million, 1999 -- $1.1 million, 2000 -- $149.4 million,
2001 -- $0.2 million and $349.5 million thereafter.
 
     The Company paid interest of $0.7 million, $0.2 million and $2.0 million in
1995, 1996 and 1997, respectively. The Company incurred interest expense of
$39.1 million in 1997 and would have recorded $33.1 million in additional
interest expense in 1997 had the Senior Notes and Bonds been outstanding on
January 1, 1997.
                                      F-16
<PAGE>   208
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 6: SHAREHOLDERS' EQUITY
 
COMMON STOCK
 
     The following table summarizes the Company's equity private placements for
the periods ending:
 
<TABLE>
<CAPTION>
                                                     SHARES ISSUED   SHARE PRICE   NET PROCEEDS
                                                     -------------   -----------   ------------
                                                         (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                  <C>             <C>           <C>
December 31, 1995..................................    5,090,876       $ 9.00        $42,138
December 31, 1996..................................    8,348,532        13.33        107,744
December 31, 1997..................................    2,502,686        15.67         36,432
</TABLE>
 
     During 1995, the Company issued 400,000 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 75,000 shares at $10.00 per share and the
repurchased shares became treasury stock. In March 1997, the Company repurchased
32,500 shares at $13.33 per share, and these shares became treasury stock. The
Company will be required to repurchase the remaining shares over the next three
years. During 1997, the Company issued 504,600 shares of common stock pursuant
to a purchase agreement with a seller for a portion of their interest in a
venture within the CIS region. Pursuant to the purchase agreement, the Company
is obligated to assist the seller in locating a purchaser for the common stock,
and if unable to do so, to repurchase the issued common stock. The Company has
accreted the value of the outstanding common stock subject to repurchase
(325,000 shares at December 31, 1996 and 797,100 shares at December 31, 1997),
to the fair value of the Company's common stock as of December 31, 1996 and 1997
($13.33 and $15.67 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 warrants to purchase 7,777,776 common shares at $10.27 per share. The
exercise price of the warrants was automatically reduced to $9.33 per share as
of December 31, 1996, because the Debt Obligations remained outstanding. The
warrants 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 15,572,260 shares of common stock for issuance
upon conversion of the exercise of outstanding and future stock options,
warrants and similar rights.
 
PREFERRED STOCK
 
     As of December 31, 1996 and 1997, there were 10,000,000 shares of $0.0001
par value preferred stock authorized, with rights and preferences to be
determined by the Board of Directors. As of December 31, 1996 and 1997, no
shares of preferred stock had been issued.
 
NOTE 7: STOCK OPTION PLANS
 
     The Company applies the provisions of APB No. 25 in accounting for its
stock option incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss for
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss for the years ended December 31, 1995, 1996 and 1997 would have been
approximately $40.9 million, $69.4 million and $123.4 million, respectively. The
fair value of options
 
                                      F-17
<PAGE>   209
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
granted during 1995 and 1996 are estimated as $2.19 and $2.93 per common 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 fair
value of options granted during 1997 are estimated as $7.35 per common share, on
the date of grant using the Black Scholes option valuation model with the
following assumptions: dividend yield 0%, risk free interest rate of 5.74%, an
expected life of five years, and an expected volatility of .50. The Company
determined its volatility factor with the assistance of an investment banker,
based on peer group public companies.
 
     The Company maintains the 1992 Stock Option Plan, the Non-Employee
Directors Stock Option Plan and the GTS Equity Compensation Plan (the "Option
Plans"). As of December 31, 1997, the maximum number of shares of common stock
available for grant under the Option Plans was 8,836,534. All options granted
under the Option Plans are at exercise prices that were 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>
                                                   YEAR ENDED DECEMBER 31,
                              ------------------------------------------------------------------
                                      1995                   1996                   1997
                              --------------------   --------------------   --------------------
                                          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......................  2,431,800    $3.65     3,422,399    $ 5.56    4,869,360    $ 7.31
Options granted.............  1,210,800     9.04     1,612,962     11.10    2,215,296     14.53
Options exercised...........    (28,001)    4.46       (56,498)     6.70      (89,312)     6.34
Options canceled or
  expired...................   (192,200)    3.57      (109,503)     8.73     (433,173)     7.38
                              ---------              ---------              ---------
Outstanding at end of
  year......................  3,422,399     5.56     4,869,360      7.31    6,562,171      9.75
                              =========              =========              =========
Options exercisable at year
  end.......................    995,617    $3.59     1,992,236    $ 4.65    2,962,110    $ 6.06
</TABLE>
 
     The following table summarizes information about stock options outstanding:
 
<TABLE>
<CAPTION>
                                                  OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                       -----------------------------------------   ----------------------
                                                         WEIGHTED
                                                         AVERAGE        WEIGHTED                 WEIGHTED
                                                        REMAINING       AVERAGE                  AVERAGE
       RANGE OF EXERCISE PRICE           NUMBER      CONTRACTUAL LIFE   EXERCISE     NUMBER      EXERCISE
        AT DECEMBER 31, 1997:          OUTSTANDING      (IN YEARS)       PRICE     EXERCISABLE    PRICE
       -----------------------         -----------   ----------------   --------   -----------   --------
<S>                                    <C>           <C>                <C>        <C>           <C>
$1.42 to $2.75.......................   1,446,000           6            $ 2.69     1,371,000     $ 2.68
$4.67 to $9.00.......................   1,270,650           7              7.88       986,679       7.66
$10.00 to $15.67.....................   3,845,521           8             13.03       604,431      11.13
                                        ---------                                   ---------
                                        6,562,171           7            $ 9.75     2,962,110     $ 6.06
                                        =========                                   =========
</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 1,172,250 shares of the Company's common stock at an exercise price of
$0.53 per share. All options were granted at an exercise price equal to the fair
value of the underlying common stock at the date of grant. The options vested in
equal increments over a three-year period. During 1993, 603,000 of the options
were canceled and in 1994, 50,250 options were exercised, leaving 519,000 fully
vested options outstanding at December 31, 1995, 1996 and 1997.
 
                                      F-18
<PAGE>   210
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     During 1996, the Company implemented the GTS 1996 Top Talent Retention
Program (the "Program"), which granted options to certain employees under the
1992 Stock Option Plan. The Program was offered to 28 employees, who had an
aggregate of 339,524 options, and provided for an altered vesting period based
on certain revenue levels achieved and certain stock price levels maintained. If
these performance-based achievements are not attained, the options vest in April
2001. As of December 31, 1997 no performance levels were met.
 
     In the fourth quarter of 1997, HER implemented a stock option plan for its
key officers and employees (the "HER Plan"). The ownership dilution caused by
the HER Plan is not expected to be significant. As a result of issuing options
under the HER Plan, HER will incur a non-cash charge of approximately $3.7
million, of which $2.6 million was recorded during the fourth quarter and the
remaining $1.1 million will be recognized in 1998.
 
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% matching contribution on the first 5% contributed by the employee. The
Company may also, at its discretion, make non-matching contributions. Both
matching and non-matching contributions by the Company vest 100% after three
years of service. The Company's expense under the Savings Plan was approximately
$0.1 million, $0.2 million and $0.2 million for the years ended December 31,
1995, 1996 and 1997, respectively. The Company made no discretionary
(non-matching) contributions for the years ended December 31, 1995, 1996 or
1997.
    
 
     HER established a pension plan in 1995 that covers all HER employees upon
twenty-five years of age and at least one year of service. HER has entered into
an insurance arrangement (an annuity contract) whereby an insurance provider has
undertaken a legal obligation to provide specific benefits to participants in
return for a fixed premium. As such, HER does not bear significant financial
risk for its pension plan. HER's expense under the pension plan was $0.05
million, $0.4 million and $0.7 million for the years ended December 31, 1995,
1996 and 1997, respectively.
 
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 cash settlement of certain claims
with a third party in 1995.
 
NOTE 10: INCOME TAXES
 
     The components of loss before income taxes and minority interest were as
follows:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                     --------------------------------
                                                       1995        1996        1997
                                                     --------    --------    --------
                                                              (IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Pretax loss:
  Domestic.........................................  $(22,398)   $(41,554)   $(64,920)
  Foreign..........................................   (15,437)    (25,077)    (53,261)
                                                     --------    --------    --------
                                                     $(37,835)   $(66,631)   $(118,181)
                                                     ========    ========    ========
</TABLE>
 
     For the years ended December 31, 1995, 1996 and 1997, the Company recorded
$2.6 million, $1.4 million and $2.5 million, respectively, in income tax expense
that related exclusively to its current provision for foreign taxes.
 
                                      F-19
<PAGE>   211
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
   
     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                 1997
                               ------------------   ------------------   ------------------
                                AMOUNT    PERCENT    AMOUNT    PERCENT    AMOUNT    PERCENT
                               --------   -------   --------   -------   --------   -------
                                                      (IN THOUSANDS)
<S>                            <C>        <C>       <C>        <C>       <C>        <C>
Taxes at U.S. statutory
  rates......................  $(12,865)    34.0%   $(22,655)    34.0%   $(40,181)    34.0%
Foreign operating losses
  generating no tax
  benefit....................     6,550    (17.3)      8,526    (12.8)     18,108    (15.3)
Domestic operating losses
  generating no tax
  benefit....................     6,315    (16.7)     14,129    (21.2)     22,073    (18.7)
Other -- net.................     2,565     (6.8)      1,360     (2.1)      2,482     (2.1)
                               --------    -----    --------    -----    --------    -----
                               $  2,565     (6.8)%  $  1,360     (2.1)%  $  2,482     (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,
                                                              --------------------
                                                                1996        1997
                                                              --------    --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Deferred Tax Assets:
  Net operating loss carryforwards..........................  $ 20,720    $ 38,029
  Other deferred tax assets.................................     1,326       3,912
                                                              --------    --------
Total deferred tax asset....................................    22,046      41,941
Deferred Tax Liability......................................     1,161       2,292
                                                              --------    --------
Net deferred tax asset......................................    20,885      39,649
  Less: valuation allowance.................................   (20,885)    (39,649)
                                                              --------    --------
          Total.............................................  $     --    $     --
                                                              ========    ========
</TABLE>
 
   
     As of December 31, 1997, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $110 million expiring in
fiscal years 2003 through 2012. Because of the "change in ownership" provisions
of the Tax Reform Act of 1986, the utilization of the Company's net operating
loss carry-forwards will be subject to an annual limitation.
    
 
   
     The Company's investment in EDN Sovintel is treated for U.S. tax purposes
as a partnership and, therefore, the Company's share of EDN Sovintel's income or
loss flows through to the Company's consolidated federal income tax return on a
current basis. Undistributed earnings of the Company's other foreign investments
are considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state income taxes, or foreign withholding taxes has been made.
Upon distribution of those earnings, the Company would be subject to foreign
withholding taxes and U.S. income taxes (subject to reduction for foreign tax
credits).
    
 
     Certain of the Company's foreign ventures have foreign tax loss
carryforwards in excess of $60 million. The Company's financial statements do
not reflect any provision for benefits that might be associated with such loss
carryforwards.
 
                                      F-20
<PAGE>   212
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 11: COMMITMENTS AND CONTINGENCIES
 
LEASES
 
     The Company has various lease agreements for office space, equipment and
fiber. The obligations extend through 2018. Most of the leases contain renewal
options of one to twelve years. Assets under capital leases are included in the
consolidated balance sheets as follows:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                              1996       1997
                                                              -----    --------
                                                               (IN THOUSANDS)
<S>                                                           <C>      <C>
Telecommunications equipment................................  $  --    $150,787
Less: accumulated amortization..............................     --         482
                                                              -----    --------
                                                              $  --    $150,305
                                                              =====    ========
</TABLE>
 
     Rental expense aggregated $2.0 million, $2.2 million, and $3.1 million for
the years ended December 31, 1995, 1996 and 1997, respectively.
 
     Future minimum payments, by year and in the aggregate, under the capital
leases and other non-cancellable operating leases with initial or remaining
terms in excess of one year as of December 31, 1997 were as follows:
 
<TABLE>
<CAPTION>
                                                          CAPITAL LEASES    OPERATING LEASES
                                                          --------------    ----------------
                                                                    (IN THOUSANDS)
<S>                                                       <C>               <C>
December 31, 1998.......................................     $ 26,679           $ 3,311
              1999......................................       14,217             2,982
              2000......................................       15,300             1,604
              2001......................................       16,465             1,143
              2002......................................       16,630               933
Thereafter..............................................      152,016             1,155
                                                             --------           -------
Total minimum lease payments............................      241,307           $11,128
                                                                                =======
Less amount representing interest.......................      102,172
                                                             --------
Present value of net minimum lease payments.............      139,135
Less current portion of capital lease obligations.......       21,490
                                                             --------
Long-term portion of capital lease obligations..........     $117,645
                                                             ========
</TABLE>
 
OTHER COMMITMENTS AND CONTINGENCIES
 
     In September 1997, the Company purchased the remaining interest in one of
its subsidiaries, which owns interests in cellular ventures within the CIS
region, for $5.2 million, which was paid in October 1997. Furthermore, the
Company is required to pay additional consideration of a minimum of $2.4 million
when certain revenue levels are met, certain other events occur or, if neither
has occurred, on April 1, 1999. The purchase price and consideration have been
allocated to net assets based on the fair value at the date of acquisition. The
excess of the purchase price over the fair value of the net assets acquired was
$5.9 million, which has been recorded as goodwill and is being amortized on a
straight-line basis over five years.
 
     The Company's consolidated and non-consolidated ventures have future
purchase commitments amounting to $2.7 million and $1.1 million, respectively,
as of December 31, 1997.
 
     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, 1997 was
approximately $29.0 million.
 
                                      F-21
<PAGE>   213
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
MAJOR CUSTOMERS
 
     In 1995, the Company had one major customer, a foreign governmental agency
in Central Europe, representing $2.7 million, or 32.1%, of total revenue. In
1996, the Company had two major customers, a foreign governmental agency in
Central Europe and a customer in the CIS, representing $3.8 million, or 15.8%,
of total revenue and $2.6 million, or 10.8%, of total revenue, respectively.
There were no major customers in 1997.
 
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, 1996 and 1997. It is the
opinion of management that the ultimate resolution of the Company's Russian Tax
liability, to the extent not previously provided for, will not have a material
effect on the financial condition of the Company. However, depending on the
amount and timing of an unfavorable resolution of this contingency, it is
possible that the Company's future results of operations or cash flows could be
materially affected in a particular period.
 
     In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is 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
the Debt Obligations during 1996 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 repaid
the Debt Obligations subsequent to year end (see Note 15, "Subsequent Events").
 
     During 1996 and 1997, the Company, in connection with a venture investment,
entered into two financing agreements with a shareholder of the Company for a
total of approximately $8.6 million. Subject to certain conditions, the
shareholder has the right to require the repayment of this amount in cash or
713,311 shares of the Company's common stock. Subsequent to the Stock Offering,
repayment of this financing must be in
                                      F-22
<PAGE>   214
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
exchange for the Company's common stock. This amount has been included in "Other
financing agreements" (see Note 5, "Debt Obligations").
 
     During 1997, the Company issued 504,600 shares of common stock pursuant to
a purchase agreement with a seller for a portion of their interest in a venture
within the CIS region. As a result of the issuance of the common shares, the
seller became a shareholder of the Company (see Note 3, "Investments in and
Advances to Ventures," and Note 6, "Shareholders' Equity").
 
     The Company has entered into certain consulting agreements with directors
of the Company and paid $0.2 million, $0.2 million and $0.4 million in 1995,
1996, and 1997, respectively, pursuant to those agreements.
 
     The Company had notes receivable due from employees aggregating $0.1
million and less than $0.1 million as of December 31, 1996 and 1997,
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 and $4.4
million in 1996 and 1997, respectively. There was no significant revenue earned
from affiliate sales in 1995.
 
NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION
 
     The following table summarizes non-cash investing and financing activities
for the Company:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1996       1997
                                                              ------    --------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
Purchase of additional interest in Western Europe region
  subsidiary with conversion of debt to equity..............  $   --    $  9,139
Line of credit issued as payment on note payable and
  reclassification of restricted cash.......................      --       7,887
Conversion of a note payable to stock as additional
  consideration in relation to purchase of interest in a CIS
  region subsidiary.........................................   4,497       4,250
Note payable issued for additional capital infusion in CIS
  region subsidiary.........................................   4,500       4,125
Capitalization of leases....................................      --     139,136
</TABLE>
 
     No significant non-cash investing activities were incurred for the year
ended December 31, 1995.
 
NOTE 14: 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
 
                                      F-23
<PAGE>   215
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
consolidated financial information by geographic area for 1995, 1996 and 1997.
Transfers between geographic areas were not considered material for disclosure
purposes.
 
<TABLE>
<CAPTION>
                                                                                                 CORPORATE
                                                    WESTERN               CENTRAL                 OFFICE &
                                                     EUROPE      CIS       EUROPE      ASIA     ELIMINATIONS     TOTAL
                                                    --------   --------   --------   --------   ------------   ---------
                                                                               (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>        <C>        <C>            <C>
Year Ended December 31, 1995
  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)     (15,578)      (48,871)
  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
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                 CORPORATE
                                                    WESTERN               CENTRAL                 OFFICE &
                                                     EUROPE      CIS       EUROPE      ASIA     ELIMINATIONS     TOTAL
                                                    --------   --------   --------   --------   ------------   ---------
                                                                               (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>        <C>        <C>            <C>
Year Ended December 31, 1996
  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)     (22,934)      (57,929)
  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
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                                 CORPORATE
                                                    WESTERN               CENTRAL                 OFFICE &
                                                     EUROPE      CIS       EUROPE      ASIA     ELIMINATIONS     TOTAL
                                                    --------   --------   --------   --------   ------------   ---------
                                                                               (IN THOUSANDS)
<S>                                                 <C>        <C>        <C>        <C>        <C>            <C>
Year Ended December 31, 1997
  Total revenue...................................  $  5,373   $ 27,045   $ 13,513   $  1,016     $    151     $  47,098
  Gross margin....................................    (4,599)     3,940      4,985        (99)         152         4,379
  Operating loss..................................   (25,926)    (7,088)    (5,076)   (28,066)     (22,474)      (88,630)
  Net loss........................................   (29,064)    (9,505)    (6,882)   (28,043)     (43,492)     (116,986)
  Identifiable assets.............................   505,593     99,926     23,840     (6,544)     157,646       780,461
  Liabilities.....................................   451,171     62,862     40,465     19,161      148,580       722,239
  Net (liabilities)/assets........................    54,422     37,064    (16,625)   (25,705)       9,066        58,222
</TABLE>
 
NOTE 15: SUBSEQUENT EVENTS
 
THE OFFERINGS
 
     In February 1998, the Company completed the Stock Offering in which the
Company raised $255.3 million in gross proceeds, including $33.3 million
attributable to the sale of shares resulting from the exercise by the
underwriters of an over-allotment option, from the sale of 12.8 million shares
of common stock at an issue price of $20.00 per share. The Stock Offering
resulted in the Company's common stock being listed in the United States on the
National Association of Securities Dealers Automated Quotation Market and
internationally on the European Association of Securities Dealers Automated
Quotation Market. Also in February 1998, the Company completed the Notes
Offering and issued $105.0 million aggregate principal amount of senior notes,
due February 15, 2005. Interest at 9.875% on the Notes will be payable in cash
semiannually on February 15 and August 15 of each year, commencing August 15,
1998. Net proceeds from the Offerings were approximately $336.7 million.
Approximately $19.6 million of the net proceeds of the Notes Offering is being
held in escrow for the first four semiannual interest payments commencing in
1998.
 
                                      F-24
<PAGE>   216
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Approximately $85.2 million of the net proceeds of the Offerings has been used
to repay the related party Debt Obligations (see Note 5, "Debt Obligations") of
$70.0 million plus accrued interest that were due March 31, 2001. In addition,
approximately $13.2 million in unamortized discount and debt issuance costs on
the Debt Obligations was written off at the time of repayment. The remaining net
proceeds from the Offerings will primarily be used to provide working capital
for existing ventures, particularly in Russia and the CIS, to expand the
Company's operations and for general corporate purposes, including strategic
acquisitions.
 
     As a result of the completion of the Stock Offering, the interest rate for
the Bonds will remain at 8.75% until maturity (see Note 5, "Debt Obligations")
and the 6.25% additional interest that was previously accrued, $4.2 million, has
been reflected as an increase to additional paid-in capital. The Bonds are
convertible into approximately 7.2 million common shares at a conversion price
of $20.00 per share.
 
     The following unaudited pro forma condensed balance sheet and results of
operations of the Company give effect to the Offerings as though the
transactions had occurred on December 31, 1997. The pro forma shares and per
share data have been calculated assuming the Stock Offering occurred on January
1, 1997. The pro forma results are presented for informational purposes only and
do not purport to be indicative of the results of operations which actually
would have been obtained if the transactions had occurred in such periods, or
which may exist or be obtained in the future.
 
<TABLE>
<CAPTION>
                                                                                        AS ADJUSTED
                                                                                          FOR THE
            CONDENSED BALANCE SHEET (UNAUDITED)               REPORTED    ADJUSTMENTS    OFFERINGS
            -----------------------------------               ---------   -----------   -----------
                                                                         (IN THOUSANDS)
<S>                                                           <C>         <C>           <C>
Cash and cash equivalents...................................  $ 318,766    $ 232,875    $  551,641
Other assets................................................    461,695       23,064       484,759
                                                              ---------    ---------    ----------
        Total Assets........................................  $ 780,461    $ 255,939    $1,036,400
                                                              =========    =========    ==========
Long-term debt, less current portion........................  $ 408,330    $ 105,000    $  513,330
Related party debt..........................................     85,504      (72,140)       13,364
Other liabilities...........................................    228,405       (4,171)      224,234
                                                              ---------    ---------    ----------
        Total Liabilities...................................    722,239       28,689       750,928
Minority interest...........................................     18,766           --        18,766
Common stock subject to repurchase..........................     12,489      (12,489)           --
Common stock and additional paid-in capital.................    278,120      252,952       531,072
Cumulative translation adjustment...........................     (8,269)          --        (8,269)
Accumulated deficit.........................................   (242,884)     (13,213)     (256,097)
                                                              ---------    ---------    ----------
        Total Shareholders' Equity..........................     26,967      239,739       266,706
                                                              ---------    ---------    ----------
        Total Liabilities and Shareholders' Equity..........  $ 780,461    $ 255,939    $1,036,400
                                                              =========    =========    ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                        AS ADJUSTED
                                                                                          FOR THE       LOSS
       CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)          REPORTED    ADJUSTMENTS    OFFERINGS    PER SHARE
       ---------------------------------------------          ---------   -----------   -----------   ---------
                                                                      (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                           <C>         <C>           <C>           <C>
Loss before extraordinary item..............................  $(116,986)   $     --      $(116,986)    $(2.41)
Extraordinary item..........................................         --     (13,213)       (13,213)     (0.27)
                                                              ---------    --------      ---------     ------
        Net loss............................................  $(116,986)   $(13,213)     $(130,199)    $(2.68)
                                                              =========    ========      =========     ======
Weighted average common shares outstanding..................     35,833      12,765         48,598
</TABLE>
 
OTHER SUBSEQUENT EVENT TRANSACTIONS
 
     Pursuant to a purchase agreement that the Company has with a venture's
partner in the CIS region (see Note 3, "Investments in and Advances to
Ventures," Note 6, "Shareholders' Equity," and Note 12, "Related Party
Transactions") the Company is obligated to pay additional consideration, via
shares of common stock,
 
                                      F-25
<PAGE>   217
                         GLOBAL TELESYSTEMS GROUP, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
based on the subsidiary's earnings performance. Based on the 1997 results, the
Company is obligated to issue 336,630 shares of common stock during the first
quarter of 1998.
 
     Subsequent to December 31, 1997, HER entered into contractual commitments
to lease fiber pairs, including facilities and maintenance and utilizing the
partial routes for laying fiber optic cable. Based on the contract provisions,
these commitments are currently estimated to aggregate approximately $12.9
million. The commitments have expected lease terms of ten to twenty-one years
with options for renewal rights of one and one-half to five additional years.
 
     The Company entered into a rights agreement (the "Rights Agreement") on
February 2, 1998, and accordingly, the Company authorized the distribution of
one right (a "Right") for each common share outstanding from February 2, 1998
through the distribution date (the "Distribution Date"). Each Right entitles the
registered holder, subject to the terms of the Rights Agreement, to purchase
from the Company one one-thousandth of a share (a "Unit") of Series A Preferred
Stock at an exercise price of $75 per Unit, subject to adjustment. The
Distribution Date, as defined in further detail within the Rights Agreement, is
triggered when a person acquires 15% of the outstanding common stock of the
Company, or a tender or exchange offer is commenced for 15% of such outstanding
stock, except in the case of two related party shareholders in which case the
acquisition threshold that applies is 20% of such outstanding stock. Under
certain circumstances thereafter, certain Rightholders may have the right to
purchase common stock of the Company, or of an Acquiring Person, as defined in
the Rights Agreement, having a value equal to two times the exercise price of
the Rights. In addition, the Rights are redeemable or exchangeable under certain
circumstances.
 
NOTE 16: EVENTS OCCURRING SUBSEQUENT TO DATE OF AUDIT REPORT (UNAUDITED)
 
     In March 1998, the Company purchased an additional 10% interest in HER from
an existing shareholder of HER for ECU 13.5 million (approximately $14.6
million). As a result of the purchase, the Company owns approximately 89% of
HER.
 
NOTE 17: RECENT DEVELOPMENTS
 
   
     On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/U.S. dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing risk that many Russian banks may be declared
bankrupt. Deposits held at Russian banks, other than Sberbank, are not insured.
The official exchange rate as of September 30, 1998 was 16.0645 rubles per U.S.
dollar. The last official exchange rate prior to the suspension of trading on
August 17, 1998 was 6.2725 rubles per U.S. dollar.
    
 
     As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $13.1 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks.
 
                                      F-26
<PAGE>   218
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                     CONDENSED, CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,      SEPTEMBER 30,
                                                                   1997               1998
                                                              ---------------   ----------------
                                                              (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                           <C>               <C>
CURRENT ASSETS
  Cash and cash equivalents.................................     $ 318,766         $  993,928
  Accounts receivable, net..................................        17,079             59,822
  Restricted cash...........................................        30,486             42,047
  Prepaid expenses..........................................        14,101             22,122
  Other assets..............................................         6,707             12,539
                                                                 ---------         ----------
          TOTAL CURRENT ASSETS..............................       387,139          1,130,458
Property and equipment, net.................................       236,897            436,019
Investments in and advances to ventures.....................        76,730             61,705
Goodwill and intangible assets, net.........................        43,284            161,893
Restricted cash and other noncurrent assets.................        36,411             24,818
                                                                 ---------         ----------
          TOTAL ASSETS......................................     $ 780,461         $1,814,893
                                                                 =========         ==========
                              LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable and accrued expenses.....................     $  61,984         $  135,565
  Debt maturing within one year.............................         6,390             23,741
  Current portion of capital lease obligations..............        21,490             31,130
  Related party debt maturing within one year...............         5,708                 --
  Other current liabilities.................................         6,301             32,408
                                                                 ---------         ----------
          TOTAL CURRENT LIABILITIES.........................       101,873            222,844
Long-term debt, less current portion........................       408,330            962,232
Long-term portion of capital lease obligations..............       117,645            187,900
Related party long-term debt, less current portion..........        79,796              3,530
Taxes and other non-current liabilities.....................        14,595             27,378
                                                                 ---------         ----------
          TOTAL LIABILITIES.................................       722,239          1,403,884
COMMITMENTS AND CONTINGENCIES
  Minority interest.........................................        18,766             43,957
  Common stock, subject to repurchase (797,100 and 463,489
     shares outstanding at December 31, 1997 and September
     30, 1998, respectively)................................        12,489             15,643
SHAREHOLDERS' EQUITY
  Preferred stock, $0.0001 par value (10,000,000 shares
     authorized; none issued and outstanding)...............            --                 --
  Common stock, $0.10 par value (135,000,000, shares
     authorized; 37,606,814 and 60,495,446 shares issued and
     outstanding, net of 195,528 and 96,375 shares of
     treasury stock at December 31, 1997 and September 30,
     1998, respectively)....................................         3,761              6,050
  Additional paid-in capital................................       274,359            696,574
  Accumulated other comprehensive loss......................        (8,269)            (7,496)
  Accumulated deficit.......................................      (242,884)          (343,719)
                                                                 ---------         ----------
          TOTAL SHAREHOLDERS' EQUITY........................        26,967            351,409
                                                                 ---------         ----------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........     $ 780,461         $1,814,893
                                                                 =========         ==========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-27
<PAGE>   219
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED     NINE MONTHS ENDED
                                                       SEPTEMBER 30,         SEPTEMBER 30,
                                                    -------------------   --------------------
                                                      1997       1998       1997       1998
                                                    --------   --------   --------   ---------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>        <C>        <C>        <C>
REVENUES, NET:
  Telecommunication and other services............  $ 10,691   $ 61,405   $ 26,547   $ 111,195
  Equipment sales.................................     2,230      2,429      3,669       6,104
                                                    --------   --------   --------   ---------
                                                      12,921     63,834     30,216     117,299
                                                    --------   --------   --------   ---------
OPERATING COSTS AND EXPENSES:
  Cost of revenues:
     Telecommunication and other services.........    13,361     37,045     25,169      77,525
     Equipment sales..............................     2,028      1,804      3,183       4,542
  Selling, general and administrative.............    22,441     30,645     46,203      75,150
  Depreciation and amortization...................     2,078      8,368      4,404      13,953
  Non-income taxes................................       452      3,820      1,452       5,140
                                                    --------   --------   --------   ---------
                                                      40,360     81,682     80,411     176,310
Write-off of venture-related assets...............     1,673         --      1,673          --
Equity in losses/(earnings) of ventures...........     8,067      3,485     18,234      (4,142)
                                                    --------   --------   --------   ---------
LOSS FROM OPERATIONS..............................   (37,179)   (21,333)   (70,102)    (54,869)
OTHER INCOME (EXPENSE):
  Interest income.................................     3,116     13,858      5,278      28,110
  Interest expense................................   (13,923)   (22,009)   (21,086)    (52,603)
  Foreign currency losses.........................      (135)    (7,333)    (1,094)    (10,364)
                                                    --------   --------   --------   ---------
                                                     (10,942)   (15,484)   (16,902)    (34,857)
                                                    --------   --------   --------   ---------
Net loss before income taxes, minority interest
  and extraordinary loss..........................   (48,121)   (36,817)   (87,004)    (89,726)
Income taxes......................................     1,021        770      1,838       2,151
                                                    --------   --------   --------   ---------
Net loss before minority interest and
  extraordinary loss..............................   (49,142)   (37,587)   (88,842)    (91,877)
Minority interest.................................       957        109        970       3,746
                                                    --------   --------   --------   ---------
Net loss before extraordinary loss................   (48,185)   (37,478)   (87,872)    (88,131)
Extraordinary loss -- extinguishment of debt......        --         --         --     (12,704)
                                                    --------   --------   --------   ---------
NET LOSS..........................................  $(48,185)  $(37,478)  $(87,872)  $(100,835)
                                                    ========   ========   ========   =========
Loss per share before extraordinary loss..........  $  (1.34)  $  (0.62)  $  (2.49)  $   (1.65)
Extraordinary loss per share......................        --         --         --       (0.24)
                                                    --------   --------   --------   ---------
Net loss per share................................  $  (1.34)  $  (0.62)  $  (2.49)  $   (1.89)
                                                    ========   ========   ========   =========
Weighted average common shares outstanding........    35,928     60,182     35,242      53,253
                                                    ========   ========   ========   =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-28
<PAGE>   220
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
                CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED     NINE MONTHS ENDED
                                                           SEPTEMBER 30,         SEPTEMBER 30,
                                                        -------------------   --------------------
                                                          1997       1998       1997       1998
                                                        --------   --------   --------   ---------
                                                                      (IN THOUSANDS)
<S>                                                     <C>        <C>        <C>        <C>
OPERATING ACTIVITIES
Net loss..............................................  $(48,185)  $(37,478)  $(87,872)  $(100,835)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED
  IN) PROVIDED BY OPERATING ACTIVITIES:
  Extraordinary loss..................................        --         --         --      12,704
  Depreciation and amortization.......................     4,695     17,060      9,173      33,544
  Amortization of discount on note payable............     1,288         --      3,665         477
  Equity in losses (earnings) of ventures, net of
     dividends received...............................     8,067      3,485     18,234      (4,142)
  Deferred interest...................................     4,273         --      8,142       1,826
  Fair value adjustment for foreign currency
     instruments......................................        --     18,016         --      21,240
  Write-off of venture-related assets.................     1,673         --      1,673          --
  Non-cash compensation...............................     3,390        493      3,390         493
  Minority interest...................................      (949)       (79)      (970)     (7,924)
  Other...............................................     1,741      6,779      2,325       9,684
  Changes in assets and liabilities, excluding effects
     of acquisitions and ventures:
     Accounts receivable..............................    (2,843)    (6,826)    (5,723)    (27,959)
     Prepaid expenses.................................     5,005     (2,417)     4,387      (9,155)
     Accounts payable and accrued expenses............    10,710     16,473      7,386      35,594
     Other changes in assets and liabilities..........    (4,546)    13,743     (2,743)     29,029
                                                        --------   --------   --------   ---------
          NET CASH (USED IN) PROVIDED BY OPERATING
            ACTIVITIES................................   (15,681)    29,249    (38,933)     (5,424)
INVESTING ACTIVITIES
  Investments in and advances to ventures, net of
     repayments.......................................    10,716      8,120     (2,157)     15,055
  Purchases of property and equipment.................   (10,734)   (71,892)   (13,861)   (111,734)
  Restricted cash.....................................   (56,128)    16,815    (55,813)        832
  Goodwill and other intangibles......................      (798)   (42,743)    (2,226)    (60,362)
  Acquisitions -- cash acquired.......................     1,050         --      1,050      13,352
                                                        --------   --------   --------   ---------
          NET CASH USED IN INVESTING ACTIVITIES.......   (55,894)   (89,700)   (73,007)   (142,857)
FINANCING ACTIVITIES
  Proceeds from debt..................................   415,678    470,134    416,161     575,434
  Repayments of debt..................................               (6,013)      (175)   (104,028)
  Payment of debt issue costs.........................   (24,178)   (16,014)   (24,178)    (21,257)
  Common stock repurchased for treasury...............        --         --       (433)         --
  Net proceeds from issuance of common stock..........    36,527    127,109     36,527     362,729
  Other financing activities..........................       (25)        --       (124)      9,471
                                                        --------   --------   --------   ---------
          NET CASH PROVIDED BY FINANCING ACTIVITIES...   428,002    575,216    427,778     822,349
Effect of exchange rate changes on cash and cash
  equivalents.........................................    (4,173)     1,167     (6,871)      1,094
                                                        --------   --------   --------   ---------
Net increase in cash and cash equivalents.............   352,254    515,932    308,967     675,162
Cash and cash equivalents at beginning of period......    14,587    477,996     57,874     318,766
                                                        --------   --------   --------   ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............  $366,841   $993,928   $366,841   $ 993,928
                                                        ========   ========   ========   =========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-29
<PAGE>   221
 
                         GLOBAL TELESYSTEMS GROUP, INC.
 
             NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
1. FINANCIAL PRESENTATION AND DISCLOSURES
 
     The financial statements of Global TeleSystems Group, Inc. (the "Company"
or "GTS") included herein are unaudited and have been prepared in accordance
with generally accepted accounting principles for interim financial reporting
and in accordance with Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Material
intercompany affiliate account transactions have been eliminated; however, other
adjustments may have been required had an audit been performed. In the opinion
of management, the financial statements reflect all adjustments of a normal and
recurring nature necessary to present fairly the Company's financial position,
results of operations and cash flows for the interim periods. These financial
statements should be read in conjunction with the Company's 1997 audited
consolidated financial statements and the notes related thereto. The results of
operations for the three and nine months ended September 30, 1998 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 minority shareholder
rights, super-majority voting conditions or other governmentally imposed
uncertainties so severe that they prevent the Company from exercising 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. 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 recorded have been recovered.
 
2. RUSSIAN ECONOMIC CRISIS
 
     On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/U.S. dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing risk that many Russian banks may be declared
bankrupt. Deposits held at Russian banks, other than Sberbank, are not insured.
The official exchange rate as of September 30, 1998 and December 18, 1998 was
16.0645 and 20.7 rubles per U.S. dollar, respectively. The last official
exchange rate prior to the suspension of trading on August 17, 1998 was 6.2725
rubles per U.S. dollar.
 
     As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $13.1 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net
                                      F-30
<PAGE>   222
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
monetary assets with the remainder associated with estimates for uncollectible
accounts receivable and unrecoverable cash deposits in Russian banks.
 
3. POLICIES AND PROCEDURES
 
     On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income
(loss) is defined as the change in equity of a business enterprise during a
period from nonowner sources. Comprehensive loss was $50.3 million and $92.7
million for the three and nine months ended September 30, 1997, respectively,
and was comprised of net losses of $48.2 million and $87.9 million and foreign
currency translation adjustments of $2.2 million and $4.9 million for the three
and nine months ended September 30, 1997, respectively. Comprehensive loss was
$35.5 million and $100.1 million for the three and nine months ended September
30, 1998, respectively, and was comprised of net losses of $37.5 million and
$100.8 million and foreign currency translation income of $2.0 million for the
three months ended September 30, 1998 and foreign currency transaction income of
$0.8 million for the nine months ended September 30, 1998.
 
     During 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the Company to present basic and diluted earnings per share for all
periods presented. The Company's net loss per share calculation (basic and
diluted) is based upon the weighted average common shares issued. There are no
reconciling items in the numerator or denominator of the Company's net loss per
share calculation. Employee stock options, warrants, and convertible debt
instruments have been excluded from the net loss per share calculation because
their effect would be anti-dilutive.
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
required to be adopted by January 1, 2000. This statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
The statement also requires that changes in the derivatives fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company is currently assessing the impact of this new statement on its
consolidated financial position and results of operations.
 
     Certain reclassifications have been made to the September 1997 condensed,
consolidated financial statements in order to conform to the 1998 presentation.
 
4. SHAREHOLDERS' EQUITY
 
     In February 1998, the Company completed an initial public offering of 12.8
million shares of common stock at $20.00 per common share (the "Stock
Offering"). The Stock Offering resulted in the Company's common stock being
listed, under the symbol "GTSG," in the United States on the National
Association of Securities Dealers Automated Quotation Market and internationally
on the European Association of Securities Dealers Automated Quotation Market.
Net proceeds from the Stock Offering were approximately $235.6 million. As a
result of the Stock Offering, the Company no longer has an obligation to
repurchase the 797,100 shares of common stock that were subject to repurchase at
December 31, 1997.
 
     In July 1998, the Company completed a secondary public offering of 2.8
million shares of common stock at $45.50 per common share. Net proceeds from the
offering were approximately $119.9 million. In addition, in conjunction with
such offering, shareholders of the Company sold 11.7 million shares of the
Company's common stock. The Company did not realize any of the proceeds of such
sale.
 
     Pursuant to a purchase agreement that the Company has with a venture
partner, the Company issued 336,630 and 126,859 shares of common stock to the
partner in April 1998 and July 1998, respectively. In
 
                                      F-31
<PAGE>   223
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
accordance with the purchase agreement, if such entity is unable to sell these
shares, the Company is obligated to assist the seller in locating a purchaser
for the Common Stock, and if the Company is unable to do so, to repurchase the
issued common stock. The shares issued are restricted and therefore, have been
classified as common stock subject to repurchase as of September 30, 1998.
 
     In June 1998, pursuant to the Debt Obligation described below, 3,333,333
warrants were exercised at an exercise price of $9.33 per common share. An
additional 4,444,444 warrants to purchase the Company's common stock expire in
the first and second quarters of 2002.
 
5. DEBT OBLIGATIONS
 
     In February 1998, the Company issued aggregate principal amount of $105.0
million of 9.875% senior notes due 2005 (the "Notes Offering" and together with
the Stock Offering, the "Offerings"). Net proceeds from the Notes Offering were
approximately $100.5 million. Approximately $19.6 million of the net proceeds
were placed in escrow for the first four semi-annual interest payments,
commencing August 15, 1998.
 
     As a result of the completion of the Stock Offering, the interest rate on
the $144.8 million aggregate principal amount of 8.75% senior subordinated
convertible bonds due 2000, which were issued in July 1997 (the "Bonds") will
remain at 8.75% until maturity and the approximately $5.1 million of the 6.25%
additional interest that was previously accrued through the date of the Stock
Offering has been reflected as an increase to additional paid-in capital. Upon
completion of the Stock Offering, the Bonds became convertible into 7.2 million
common shares at a conversion price of $20.00 per share. During the nine-month
period ended September 30, 1998, a total of $25.4 million of the Bonds were
converted into approximately 1.3 million common shares of the Company's common
stock.
 
     In July 1998, the Company issued aggregate principal amount of $466.9
million of 5.75% convertible senior subordinated debentures (the "Debentures")
that mature July 1, 2010 and will be redeemable from July 1, 2001 at the option
of the Company, at redemption prices as set forth in the Debentures agreement.
Net proceeds from the Debentures offering were approximately $452.1 million. The
Debentures are convertible into 8.5 million common shares at any time prior to
maturity or redemption at a conversion price of $55.05 per common share.
Interest on the Debentures will be payable semi-annually on January 1 and July
1, commencing January 1, 1999. The Debentures are subordinated to all existing
and future indebtedness of the Company, except for the Bonds, with which they
rank pari passu in right of payment.
 
     In 1996, the Company entered into long-term obligations ("Debt
Obligations") totaling $70.0 million with lenders that are affiliated with and
are considered related parties to the Company as a result of their ownership of
the Company's common stock. In February 1998, approximately $85.2 million of the
net proceeds of the Offerings were used to repay the Debt Obligations plus
accrued interest. In addition, the unamortized discount costs and debt issuance
costs on the Debt Obligations were written off at the time of repayment,
resulting in the Company recording an extraordinary loss of $12.7 million.
 
6. OTHER TRANSACTIONS
 
     In July 1998, a wholly-owned subsidiary of the Company purchased the
remaining 47.36% interest in GTS Vox Limited, which resulted in the Company's
beneficial ownership in TCM increasing from 50% to 95%. The total consideration
paid for the additional interest in GTS Vox Limited was $40.5 million. In
connection with this buy-out, a modification was made to the original stock
purchase agreement with the Company's partner in GTS Vox, in which the Company's
obligation to issue 126,859 shares of common stock to such partner was
accelerated to July 1998. Under the stock purchase agreement, the Company is
also obligated to assist the former partner in locating a buyer for these shares
of common stock and if unable to do so, the Company will repurchase the shares
of common stock. In addition to the above payments, the purchase agreement
includes guarantees of certain cash flow assumptions for GTS Vox Limited's
consolidated subsidiary. As a result of the purchase of the remaining 47.36% of
GTS Vox Limited, the Company accounts
                                      F-32
<PAGE>   224
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
for GTS Vox Limited and TCM by the consolidation as opposed to the equity method
of accounting. The purchase price has been allocated to the net assets based on
the fair value at the date of acquisition. The excess purchase price over the
fair value of the net assets acquired was approximately $33.4 million, which has
been recorded as goodwill and is being amortized, on a straight-line basis, over
ten years.
 
     In June 1998, the Company completed the restructuring of the capital and
ownership of Golden Telecom, one of its equity method investees, which resulted
in the Company's beneficial ownership increasing from approximately 25% to
approximately 57%. Prior to the restructuring, Golden Telecom was 49% owned by
GTS Ukrainian TeleSystems LLC ("UTS"), another equity method investee which was
60% owned by the Company and 40% owned by a shareholder of the Company (the
"Shareholder"). The total consideration paid for the additional interest in
Golden Telecom was $11.4 million. In conjunction with this restructuring, the
Shareholder exercised its right to receive 0.7 million shares of the Company's
common stock in lieu of their ownership interest in UTS, and as a result, the
Company reclassified an $8.6 million short-term obligation as additional paid-in
capital. Further, the Shareholder contributed an additional $5.8 million for a
25% interest in UTS. As a result of the restructuring, as of June 30, 1998, UTS
and Golden Telecom are accounted for by the consolidation as opposed to the
equity method of accounting. The purchase price has been allocated to the net
assets based on the fair value at the date of acquisition. The excess purchase
price over the fair value of the net assets acquired was $1.2 million, which has
been recorded as goodwill and is being amortized, on a straight-line basis over
five years.
 
     In June 1998, Hermes Europe Railtel B.V. ("HER") completed the acquisition
for ECU 90 million (approximately $99.5 million) from Ebone Holding Association
(the "Association") of a 75% interest in Ebone A/S ("Ebone"), a Tier 1 Internet
backbone provider, principally serving as a carriers' carrier for European
internet service providers. As part of the transaction, Ebone will purchase,
under a transmission capacity agreement, long-term rights on HER's network
valued at ECU 90 million. The purchase price has been allocated to the net
assets based on the fair value at the date of acquisition. The excess purchase
price over the fair value of the net assets acquired was $17.2 million, which
has been recorded as goodwill and is being amortized, on a straight-line basis
over five years. The members of the Association were offered the right to buy
shares of Ebone in the third quarter of 1998; however, HER's ownership interest
in Ebone was not reduced as a result of the offer.
 
     In March 1998, the Company purchased an additional 10.3% interest in HER
from an existing shareholder of HER for ECU 13.5 million (approximately $14.6
million). As a result of the purchase, the Company owns approximately 89.4% of
HER. The purchase price has been allocated to the net assets based on the fair
value at the date of acquisition. The excess purchase price over the fair value
of the net assets acquired was $10.2 million, which has been recorded as
goodwill and is being amortized, on a straight-line basis over five years.
 
     In February 1998, the Company acquired the remaining 33% interest in Sovam
Teleport from its minority partner and as a result Sovam became a wholly-owned
subsidiary of the Company and in 1998 is accounted for by the consolidation as
opposed to the equity method of accounting. The Company paid a nominal amount
for the 33% interest.
 
7. FOREIGN CURRENCY TRANSACTIONS
 
     On April 19, 1998, HER entered into a foreign currency swap transaction
agreement (the "Swap") with Rabobank International ("Rabo") in order to minimize
the foreign currency exposure resulting from the issuance in August 1997 of $265
million aggregate principal amount 11.5% Senior Notes due 2007 (the "Notes").
HER has marked the Swap to its fair value as of September 30, 1998 and the
resulting adverse change in the fair value of $20.4 million has been recorded as
a Noncurrent Liability on the balance sheet and recognized as a foreign currency
loss in the statement of operations. In addition, in July 1998, HER entered into
several forward exchange contracts, with terms ranging from thirty to ninety
days, to limit HER's
 
                                      F-33
<PAGE>   225
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
exposure to foreign currency transactions. HER has marked the outstanding
contracts to their fair value as of September 30, 1998 and the resulting adverse
change in the fair value of $2.1 million has been recorded as an Other Current
Liability on the balance sheet and recognized as a foreign currency loss in the
statement of operations.
 
8. SUPPLEMENTAL CASH FLOW INFORMATION
 
     The following table summarizes non-cash investing and financing activities
for the Company:
 
<TABLE>
<CAPTION>
                                                            THREE MONTHS      NINE MONTHS
                                                                ENDED            ENDED
                                                            SEPTEMBER 30,    SEPTEMBER 30,
                                                                1998             1998
                                                            -------------    -------------
                                                                    (IN THOUSANDS)
<S>                                                         <C>              <C>
Capitalization of leases..................................     $42,950          $93,188
Exercise of warrants......................................          --           31,110
Conversion of the Bonds into common stock.................          --           25,385
Additional consideration in relation to purchase of
  interest in a CIS region subsidiary.....................       5,973           19,522
Reclassification of common stock subject to repurchase....          --           12,489
Conversion of note payable into common stock..............          --            8,635
Reclassification of accrued interest on the Bonds.........          --            5,052
</TABLE>
 
     No significant non-cash activities were incurred for the three and nine
months ended September 30, 1997.
 
9. SUBSEQUENT EVENTS
 
     On October 16, 1998, the Company initiated an offer (the "Offer") to
acquire the outstanding shares of NetSource Europe ASA ("NetSource Europe"), a
limited liability company organized under the laws of Norway for aggregate
consideration consisting of (i) 4,037,500 shares of Company common stock and
(ii) cash consisting of (A) $15 million and (B) the value in cash of 712,500
shares of Company common stock on the closing date of the Offer. An additional
$35 million (in cash or Company common stock, at the Company's election) may be
paid to the NetSource Europe shareholders and certain NetSource Europe managers
if NetSource Europe meets or exceeds certain quarterly and annual revenue,
operating margin and cashflow targets in calendar year 1999.
 
     The boards of directors of both the Company and NetSource Europe have
approved the transaction and the NetSource Europe board of directors has
recommended to its shareholders that they accept the Offer. The Company's
consummation of the Offer is subject to acceptance of the Offer by holders of
not less than 67 percent of NetSource Europe's shares on a fully diluted basis,
completion of due diligence by the Company and NetSource Europe, receipt of
applicable regulatory approvals, and satisfaction of certain other conditions.
As of the end of the acceptance period, October 31, 1998, 90.2% (on a fully
diluted basis) of the shareholders of NetSource Europe had accepted the offer.
The Offer may be terminated by the Company or the above-referenced holders of
NetSource Europe stock if the Offer has not been consummated by November 30,
1998. During the course of the Company's due diligence investigation, which is
ongoing, the Company has identified certain issues which are being discussed
with NetSource Europe and certain of its shareholders and which must be resolved
to the parties satisfaction prior to the consummation of the transaction.
NetSource Europe is a European telecommunications services company engaged
primarily in the business of reselling voice communications services with
executive offices in Birmingham, England and sales and operating offices in
seven European countries.
 
                                      F-34
<PAGE>   226
                         GLOBAL TELESYSTEMS GROUP, INC.
 
      NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The shares of Company common stock offered to NetSource Europe's
shareholders will not be registered under the Securities Act; however, GTS has
agreed to register, as soon as reasonably practicable, the shares of Company
common stock that will be issued as consideration to the NetSource Europe
shareholders.
 
     On October 16, 1998, 6,248 shares of common stock were issued as a result
of certain employees exercising vested options under the Company's stock option
plan. On October 31, 1998, GTS Hermes, Inc. acquired AB Swed Carrier's ownership
interest of 6,551 common shares in the Company for approximately $5.8 million.
In connection with this purchase, GTS Hermes, Inc. paid approximately $5.3
million to a company, which is affiliated with a board member, for negotiating
with AB Swed Carrier and SNCB/NMBS on behalf of GTS Hermes, Inc., to purchase
their respective ownership interest in the Company. Further, on October 26,
1998, the name of GTS Hermes, Inc. was changed to GTS Carrier Services, Inc.
 
     The ownership of the Company as a result of the subsequent events is as
follows:
 
<TABLE>
<CAPTION>
                                                              SHARES    OWNERSHIP %
                                                              -------   -----------
<S>                                                           <C>       <C>
GTS Carrier Services, Inc. .................................  176,858       89.9
NMBS........................................................   13,610        6.9
Employees...................................................    6,248        3.2
                                                              -------      -----
                                                              196,716      100.0%
                                                              =======      =====
</TABLE>
 
                                      F-35
<PAGE>   227
 
                         REPORT OF INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders
EDN Sovintel
 
     We have audited the accompanying balance sheets of EDN Sovintel as of
December 31, 1997 and 1996, and the related statements of income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1997. 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, 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, 1997 and 1996 and for each of the three years ended December 31, 1997, 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 1997 audited
financial statements and have reported separately for the 1996 and 1995
financial statements. The significant differences between the accounting
principles applied in preparing the statutory financial statements and
accounting principles generally accepted in the United States of America are
summarized in Note 2.
 
                                            /s/  Ernst & Young (CIS) Ltd.
 
Moscow, Russia
February 16, 1998
except for Note 12,
as to which the date is
November 12, 1998
 
                                      F-36
<PAGE>   228
 
                                  EDN SOVINTEL
 
                                 BALANCE SHEETS
 
                                     ASSETS
 
   
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1997       1996
                                                              -------    -------
                                                               (IN THOUSANDS OF
                                                                U.S. DOLLARS)
<S>                                                           <C>        <C>
Current assets:
  Cash and cash equivalents.................................  $ 5,620    $ 3,606
  Cash deposit with related party...........................      485        476
  Accounts receivable, net of allowances....................   16,223     15,329
  Due from affiliates.......................................    1,586      1,879
  Inventories...............................................    1,697      1,749
  Prepaid expenses and other assets.........................    1,630      1,171
  VAT receivable, net.......................................    3,688      1,157
  Deferred income taxes.....................................      186
                                                              -------    -------
          Total current assets..............................   31,115     25,367
Property and equipment, net.................................   38,709     27,709
Deferred expenses...........................................      945      1,080
                                                              -------    -------
          Total assets......................................  $70,769    $54,156
                                                              =======    =======
 
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Note due shareholder......................................  $    39    $ 5,700
  Trade payables............................................    5,725      8,382
  Accrued liabilities and other payables....................    3,194      1,661
  Taxes accrued or payable..................................    1,088        555
  Amounts due to shareholder and affiliates.................   10,104      5,703
  Amount due to partner in commercial venture...............    1,350      1,350
                                                              -------    -------
          Total current liabilities.........................   21,500     23,351
Commitments and contingencies
Shareholders' equity:
  Capital contributions.....................................    2,000      2,000
  Retained earnings.........................................   47,269     28,805
                                                              -------    -------
          Total shareholders' equity........................   49,269     30,805
                                                              -------    -------
          Total liabilities and shareholders' equity........  $70,769    $54,156
                                                              =======    =======
</TABLE>
    
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-37
<PAGE>   229
 
                                  EDN SOVINTEL
 
                   STATEMENTS OF INCOME AND RETAINED EARNINGS
 
   
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                              ------------------------------
                                                                1997       1996       1995
                                                              --------    -------    -------
                                                              (IN THOUSANDS OF U.S. DOLLARS)
<S>                                                           <C>         <C>        <C>
Revenues, net:
  Service revenues..........................................  $105,288    $63,488    $29,920
  Installation revenues.....................................     5,241      9,312     12,981
  Product sales.............................................     3,433      2,240      1,391
                                                              --------    -------    -------
                                                               113,962     75,040     44,292
Cost of revenues:
  Service costs.............................................    67,174     37,884     18,545
  Cost of installation......................................     2,621      4,656      6,491
  Cost of products..........................................     2,834      1,370      1,211
                                                              --------    -------    -------
                                                                72,629     43,910     26,247
                                                              --------    -------    -------
Gross profit................................................    41,333     31,130     18,045
Selling, general and administrative expenses................    17,020     10,291      7,145
Interest expense............................................       503        638        703
Interest income.............................................      (392)       (87)       (59)
Other (income) loss.........................................       (57)       120        (98)
Foreign exchange loss on net monetary items.................       131        252        112
                                                              --------    -------    -------
Income before taxes.........................................    24,128     19,916     10,242
Income taxes................................................     5,664      5,154      2,594
                                                              --------    -------    -------
Net income..................................................    18,464     14,762      7,648
Retained earnings, beginning of year........................    28,805     14,043      6,395
                                                              --------    -------    -------
Retained earnings, end of year..............................  $ 47,269    $28,805    $14,043
                                                              ========    =======    =======
</TABLE>
    
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-38
<PAGE>   230
 
                                  EDN SOVINTEL
 
                            STATEMENTS OF CASH FLOWS
 
   
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31
                                                              -------------------------------
                                                                1997        1996       1995
                                                              --------    --------    -------
                                                              (IN THOUSANDS OF U.S. DOLLARS)
<S>                                                           <C>         <C>         <C>
OPERATING ACTIVITIES
  Net income................................................  $ 18,464    $ 14,762    $ 7,648
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation...........................................     5,312       3,638      2,448
     Provision for deferred income taxes....................      (186)
     Provision for doubtful accounts........................       345         678        132
     Write-off of accounts receivable.......................      (602)       (147)      (492)
     Write-down of network equipment and inventories........                   100        196
     Foreign exchange loss..................................       131         252        112
  Changes in operating assets and liabilities:
     Accounts receivable....................................      (637)     (8,460)    (2,759)
     Due from affiliates....................................       293        (683)    (1,011)
     Inventories............................................        52        (911)      (309)
     Prepaid expenses and other assets......................      (538)     (1,108)       599
     VAT receivable, net....................................    (2,609)         54       (906)
     Trade payables.........................................    (2,491)       (193)     2,983
     Accrued liabilities and other payables.................     1,533         310      1,233
     Taxes accrued or payable...............................       570         326        229
     Amounts due to shareholder and affiliates..............     4,401       3,039      2,165
                                                              --------    --------    -------
          Net cash provided by operating activities.........    24,038      11,657     12,268
INVESTING ACTIVITIES -- purchases of and advances for
  property and equipment....................................   (16,177)     (9,863)    (9,259)
FINANCING ACTIVITIES
  Borrowings from shareholder...............................    10,760      11,300     11,888
  Repayments to shareholder.................................   (16,421)    (11,100)    (9,271)
  Repayments of long-term debt..............................                  (694)    (3,979)
  Cash deposited with related party.........................       (41)       (476)
                                                              --------    --------    -------
Net cash used in financing activities.......................    (5,702)       (970)    (1,362)
Effect of exchange rate changes on cash and cash
  equivalents...............................................      (145)       (312)
                                                              --------    --------    -------
Net increase in cash and cash equivalents...................     2,014         512      1,647
Cash and cash equivalents at beginning of year..............     3,606       3,094      1,447
                                                              --------    --------    -------
Cash and cash equivalents at end of year....................  $  5,620    $  3,606    $ 3,094
                                                              ========    ========    =======
</TABLE>
    
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-39
<PAGE>   231
 
                                  EDN SOVINTEL
 
                         NOTES TO FINANCIAL STATEMENTS
             (U.S. 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 May 1, 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 U.S. dollars.
    
 
   
     The Company initially registered as a Soviet-American joint venture. The
venture re-registered as a Russian limited liability partnership in November
1992. The Company is 50% owned by Open Joint Stock Company "Rostelecom", an
intercity and long-distance carrier which is 38% owned by Svyazinvest, and 50%
owned by Sovinet, a U.S. 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 rubles 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 certain accrued
revenue and expenses, foreign currency translation, deferred taxation, 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 U.S. 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 U.S.
dollars. Accordingly, transactions and balances not already measured in U.S.
dollars (primarily Russian rubles) have been remeasured into U.S. dollars in
accordance with the relevant provisions of U.S. 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 U.S. dollars are credited or charged to operations.
    
 
   
     The ruble is not a convertible currency outside the territory of Russia.
Official exchange rates are determined daily by the Central Bank of Russia
("CBR") and are generally considered to be a reasonable approximation of market
rates. The translation of ruble denominated assets and liabilities into U.S.
dollars for the purpose of these financial statements does not indicate that the
Company could realize or settle in
    
 
                                      F-40
<PAGE>   232
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
   
U.S. dollars the reported values of the assets and liabilities. Likewise, it
does not indicate that the Company could return or distribute the reported U.S.
dollar values of capital and retained earnings to its shareholders.
    
 
   
     The exchange rates at December 31, 1997, 1996 and 1995 for one U.S. dollar
were RUR 5,960, RUR 5,560 and RUR 4,640 respectively. At February 16, 1998, the
CBR rate had changed to RUR 6,050. The effect of this devaluation of the ruble
on monetary assets and liabilities has not been determined.
    
 
     On January 1, 1998, the CBR introduced a new ruble to replace existing
rubles. The new ruble has been redenominated so that one new ruble is equivalent
to one thousand old rubles. The old ruble will continue in circulation until
December 31, 1998 and will be accepted as legal tender until December 31, 2002.
 
     All ruble amounts reflected in these financial statements are stated in old
rubles.
 
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 fair value. Accounts receivable are shown in the balance sheet net
of an allowance for uncollectible accounts of $643,000 and $900,000 at December
31, 1997 and 1996, 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
is 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 shipped,
connections made, and services rendered. Taxes on certain revenues were charged
at rates ranging from 1.5% to 4.0% over the three years ended December 31, 1997,
1996 and 1995 and amounted to $4,458,000, $2,792,000 and $1,166,000,
respectively, and are charged to selling general and administrative expenses.
 
                                      F-41
<PAGE>   233
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
ADVERTISING
 
     The Company expenses the cost of advertising as incurred. Advertising
expenses for the years ended December 31, 1997, 1996 and 1995 were $671,000,
$512,000 and $395,000, 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 fund and transport fund on
behalf of all its Russian employees. Contributions were 40.5%, 40.5% and 41.0%
from base payroll for 1997, 1996 and 1995, 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.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In 1997, 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." SFAS 121 requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceeds the future undiscounted cash flows attributable to such assets. The
adoption of SFAS No. 121 had no impact on the Company's financial position or
results of operations.
 
     In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company will adopt SFAS No. 130 in fiscal 1998. SFAS No. 130
expands or modifies disclosures and, accordingly, will have no impact on the
Company's reported financial position, results of operations or cash flows.
 
RECLASSIFICATIONS
 
     Certain 1996 and 1995 comparative figures have been reclassified to conform
to the presentation adopted in the current year.
 
                                      F-42
<PAGE>   234
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
4. PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    -------
<S>                                                           <C>         <C>
Network equipment...........................................  $ 43,876    $31,251
Other property and equipment................................     4,527      3,108
                                                              --------    -------
                                                                48,403     34,359
Accumulated depreciation....................................   (14,557)    (9,380)
Construction-in-progress....................................     4,409      1,796
Network equipment and advances for network equipment not yet
  in service................................................       454        934
                                                              --------    -------
Net book value..............................................  $ 38,709    $27,709
                                                              ========    =======
</TABLE>
 
     Total depreciation expense on property and equipment for 1997, 1996 and
1995 was $5,177,000, $3,503,000 and $2,253,000, respectively.
 
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 income and retained earnings for the years ended December 31, 1997, 1996 and
1995 represents the provision for current and deferred taxes.
 
     Significant components of the provision for income taxes for the years
ended December 31 are as follows:
 
<TABLE>
<CAPTION>
                                                            1997      1996      1995
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Current tax expense......................................  $5,850    $5,154    $2,594
Deferred tax benefit.....................................    (186)
                                                           ------    ------    ------
Provision for income taxes...............................  $5,664    $5,154    $2,594
                                                           ======    ======    ======
</TABLE>
 
                                      F-43
<PAGE>   235
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     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>
                                                         1997       1996       1995
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Taxable income reported for Russian tax purposes......  $16,184    $14,726    $ 7,411
  Investment incentive deductions.....................   12,337      9,030      7,220
  Tax loss carry-forwards utilized....................       97        113
  Net permanent difference related to revenues and       (2,455)
     expenses incurred in the ordinary course of
     business which are not assessable or deductible
     for Russian tax purposes.........................              (1,174)    (2,595)
                                                        -------    -------    -------
Russian income before taxes...........................   26,163     22,695     12,036
Adjustments to present financial statements in
  accordance with US GAAP:
  Reversal of excess depreciation due to statutory       (2,101)
     revaluations.....................................              (1,497)      (293)
  Depreciation rate differences.......................     (279)      (424)      (236)
  Allowances for uncollectible accounts...............       35        369       (132)
  Inventory write-downs...............................                (100)      (249)
  Accrual of deductible expenses......................   (3,234)    (2,437)    (1,339)
  Accrual of revenue..................................    2,704      1,093         19
  Foreign exchange differences........................      236        280      1,425
  Other...............................................      604        (63)      (989)
                                                        -------    -------    -------
Income before taxes under US GAAP.....................  $24,128    $19,916    $10,242
                                                        =======    =======    =======
</TABLE>
 
     A reconciliation between the statutory rate and the effective income tax
rate is as follows for the years ended December 31:
 
<TABLE>
<CAPTION>
                                                         1997       1996       1995
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Income tax expense computed on financial income before
  taxes at statutory tax rate of 35%..................  $ 8,445    $ 6,970    $ 3,585
Tax effect of permanent differences:
  Investment incentive deductions.....................   (4,318)    (3,161)    (2,594)
  Tax loss carryforwards utilized.....................      (34)       (40)
  Other permanent differences.........................      859        411        805
  Adjustments made to compute income before taxes for
     US GAAP financial reporting......................    1,142        813        555
Increase (decrease) in the valuation allowance for
  deferred tax assets.................................     (430)       161        243
                                                        -------    -------    -------
Income tax expense reported in the financial
  statements..........................................  $ 5,664    $ 5,154    $ 2,594
                                                        =======    =======    =======
</TABLE>
 
                                      F-44
<PAGE>   236
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (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>
                                                            1997      1996      1995
                                                           ------    -------    -----
<S>                                                        <C>       <C>        <C>
Deferred tax assets (liabilities):
  Depreciation...........................................  $  398    $   300    $ 151
  Inventory write-downs and allowances...................     235        235      147
  Accrual of expenses....................................   1,132        898      469
  Accrual of revenue.....................................    (946)      (383)      (7)
  Allowance for uncollectible accounts...................     (13)                129
                                                           ------    -------    -----
Deferred tax assets......................................     806      1,050      889
Valuation allowance for deferred tax assets..............    (620)    (1,050)    (889)
                                                           ------    -------    -----
          Net deferred tax assets........................  $  186    $    --    $  --
                                                           ======    =======    =====
</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.
 
     The Company paid Russian profits tax of $4,302,000, $5,849,000 and
$2,660,000 in 1997, 1996 and 1995, respectively.
 
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 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
which was then extended to December 19, 1997. The loan was repaid prior to
December 31, 1997 except for withholding taxes on interest. The loan carried
interest at a rate equal to the then current six month LIBOR rate (5.6%) plus
5.0 percent per annum. As of December 31, 1997, 1996 and 1995, the outstanding
borrowings under this agreement were $39,000, $5,700,000 and $5,500,000,
respectively.
 
     The Company believes that the carrying value of the above loans
approximates fair values.
 
     The Company paid interest of $697,000, $542,000 and $576,000 in 1997, 1996
and 1995, respectively.
 
7. SHAREHOLDERS' EQUITY
 
     The Company's capital structure as specified in the charter capital
document is as follows as of December 31:
 
   
<TABLE>
<CAPTION>
                                                                 1997          1996
                                                              ----------    ----------
<S>                                                           <C>           <C>
Registered capital in Russian rubles:
  Rostelecom................................................     600,000       600,000
  Sovinet...................................................     600,000       600,000
                                                              ----------    ----------
                                                               1,200,000     1,200,000
                                                              ==========    ==========
Historical value of the Company's capital in U.S. 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.
 
                                      F-45
<PAGE>   237
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Retained earnings available for distribution at December 31, 1997 amounted
to 256 billion rubles or approximately $42,953,000 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 follows, as of and for the years ended
December 31:
 
<TABLE>
<CAPTION>
                                                           1997       1996      1995
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Sales...................................................  $ 2,310    $1,525    $   62
Telecommunication lease and traffic costs...............   11,183     4,586     1,506
Amounts due to shareholder and affiliates...............    4,184       656       460
Cash deposit with related party.........................      485       476
</TABLE>
 
   
     At the request of Rostelecom, a shareholder, the Company placed a deposit
of 2.65 billion rubles in August 1996 with a Russian bank related to this
shareholder. The bank deposit agreement states a deposit term of one year, which
was rolled over for an additional year during 1997. The deposit earns interest
quarterly at a rate of 15% per annum plus any devaluation losses against the
U.S. 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 follows, as of and for the years ended December 31:
 
<TABLE>
<CAPTION>
                                                            1997      1996      1995
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Sales....................................................  $4,974    $3,115    $1,041
Management service fees and reimbursements of expenses of
  expatriate staff.......................................   1,318       927     2,062
Balances due under credit facility.......................      39     5,700     5,500
Interest expense.........................................     503       626       461
Amounts due from affiliates..............................   1,586     1,879     1,196
Amounts due to shareholder and affiliates................   5,919     5,047     2,204
</TABLE>
 
     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 follows, as of and for the years ended December 31:
 
<TABLE>
<CAPTION>
                                                         1997       1996       1995
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Telecommunication settlement and rent expense.........  $19,003    $15,889    $10,491
Balances in trade payables............................               1,237      2,184
Balances in accounts receivable.......................      487
Amount due to partner in commercial venture...........    1,350      1,350      1,350
Balances in prepaid expenses and other assets.........      800
</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, net of
related amortization, as deferred expenses. In 1997 the Company prepaid $800 of
1998 rent to MTU-Inform for additional office space to be occupied during 1998.
 
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
 
                                      F-46
<PAGE>   238
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
from a variety of international and Russian business customers. As of December
31, 1997, two customers accounted for 16% and 11% of revenues and 11% and 7% of
accounts receivable, respectively. As of December 31, 1996, these same two
customers accounted for 17% and 16% of revenues and 25% and 10% of accounts
receivable, respectively. As of December 31, 1995, these two customers accounted
for 1% and 14% of revenues and 10% and 11% of accounts receivable, respectively.
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 1997, 1996 and 1995 was $2,794,000, $2,137,000 and
$1,234,000, respectively.
 
11. CONTINGENCIES
 
     Legislation and regulations regarding taxation, foreign currency
transactions and licensing of foreign currency loans in the Russian Federation
continues to evolve as the central government manages the transformation from a
command to a market-oriented economy. The various legislation and regulations
are not always clearly written and their interpretation is subject to the
opinions of the tax inspectors, Central Bank officials and the Ministry of
Finance. Instances of inconsistent opinions between local, regional and national
tax authorities and between the Central Bank and Ministry of Finance are not
unusual.
 
     The Company believes that it has paid or accrued all taxes that are
applicable. Where practice concerning the provision of taxes is unclear, the
Company has accrued tax liabilities based on management's best estimate. 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.
 
     Because of the uncertainties associated with the Russian tax and legal
systems, the ultimate amount of taxes, penalties and interest, if any, assessed
may be in excess of the amount expensed to date and accrued at December 31,
1997. It is the opinion of the Company's management that any material amounts
are either not probable, not reasonably determinable, or both.
 
     The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation and tax regulations. The Company does not
believe that these contingencies, as related to its operations, are any more
significant than those of similar enterprises in Russia.
 
12. SUBSEQUENT EVENTS
 
   
     On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/U.S. dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing risk that many Russian banks may be declared
bankrupt. Deposits held at Russian banks, other than Sberbank, are not insured.
The official exchange rate as of September 30, 1998 was 16.0645 rubles per U.S.
dollar. The last official exchange rate prior to the suspension of trading on
August 17, 1998 was 6.2725 rubles per U.S. dollar.
    
                                      F-47
<PAGE>   239
                                  EDN SOVINTEL
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $7.4 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks.
 
                                      F-48
<PAGE>   240
 
                                  EDN SOVINTEL
 
                            CONDENSED BALANCE SHEETS
                                  (UNAUDITED)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,   SEPTEMBER 30,
                                                                  1997           1998
                                                              ------------   -------------
                                                                     (IN THOUSANDS)
<S>                                                           <C>            <C>
Current Assets
  Cash and cash equivalents.................................    $ 5,620         $ 2,012
  Accounts receivable, less allowance for doubtful accounts
     of $643 and $1,927 at December 31, 1997 and September
     30, 1998...............................................     16,223          23,108
  Restricted cash...........................................        485             205
  Due from affiliated companies.............................      1,586           2,210
  Inventory.................................................      1,697           1,906
  Deferred tax asset........................................        186             186
  Prepaid expenses and other assets.........................      5,318          10,149
                                                                -------         -------
          Total Current Assets..............................     31,115          39,776
Property and equipment, net of accumulated depreciation of
  $14,557 and $19,361 at December 31, 1997 and September 30,
  1998......................................................     38,709          48,919
Deferred expenses...........................................        945             844
                                                                -------         -------
          TOTAL ASSETS......................................    $70,769         $89,539
                                                                =======         =======
 
                           LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
  Accounts payable..........................................    $ 5,725         $ 9,770
  Accrued expenses..........................................      3,194           4,318
  Due to affiliated companies...............................     10,104          17,312
  Note payable to shareholder...............................         39
  Taxes and other liabilities...............................      2,438           1,979
                                                                -------         -------
          TOTAL LIABILITIES.................................     21,500          33,379
                                                                -------         -------
Commitments and Contingencies
                                   SHAREHOLDERS' EQUITY
  Contributed capital.......................................      2,000           2,000
  Retained earnings.........................................     47,269          54,160
                                                                -------         -------
          TOTAL SHAREHOLDERS' EQUITY........................     49,269          56,160
                                                                -------         -------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........    $70,769         $89,539
                                                                =======         =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-49
<PAGE>   241
 
                                  EDN SOVINTEL
 
                       CONDENSED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED    NINE MONTHS ENDED
                                                            SEPTEMBER 30,        SEPTEMBER 30,
                                                         -------------------   -----------------
                                                           1997       1998      1997      1998
                                                         --------   --------   -------   -------
                                                                     (IN THOUSANDS)
<S>                                                      <C>        <C>        <C>       <C>
REVENUES, NET:.........................................  $27,890    $32,391    $82,029   $99,498
COST OF REVENUES:......................................   18,212     21,176     51,048    65,779
                                                         -------    -------    -------   -------
Gross margin...........................................    9,678     11,215     30,981    33,719
OPERATING EXPENSES:
  Selling, general and administrative..................    2,740      5,731      8,175    12,093
  Depreciation and amortization........................      239        467        452       858
  Non-income taxes.....................................    1,230      1,667      3,697     4,702
                                                         -------    -------    -------   -------
          Total operating expenses.....................    4,209      7,865     12,324    17,653
Income from operations.................................    5,469      3,350     18,657    16,066
OTHER (EXPENSE) INCOME:
  Interest income......................................       72         59        176       157
  Interest expense.....................................     (173)        --       (447)       --
  Foreign currency losses..............................      (18)    (5,197)       (87)   (5,490)
                                                         -------    -------    -------   -------
                                                            (119)    (5,138)      (358)   (5,333)
                                                         -------    -------    -------   -------
Net income (loss) before taxes.........................    5,350     (1,788)    18,299    10,733
Income taxes...........................................      864        960      4,084     3,842
                                                         -------    -------    -------   -------
          Net income (loss)............................  $ 4,486    $(2,748)   $14,215   $ 6,891
                                                         =======    =======    =======   =======
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-50
<PAGE>   242
 
                                  EDN SOVINTEL
 
                       CONDENSED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED     NINE MONTHS ENDED
                                                          SEPTEMBER 30,         SEPTEMBER 30,
                                                       -------------------   -------------------
                                                         1997       1998       1997       1998
                                                       --------   --------   --------   --------
                                                                    (IN THOUSANDS)
<S>                                                    <C>        <C>        <C>        <C>
OPERATING ACTIVITIES
Net income (loss)....................................  $ 4,486    $(2,748)   $ 14,215   $  6,891
Adjustments to reconcile net income (loss) to net
  cash provided by (used in) operating activities:
  Depreciation and amortization......................    1,590      1,995       3,817      4,905
  Provision for doubtful accounts....................     (225)     1,511        (577)     1,284
  Income tax benefit.................................     (665)        --        (665)        --
  Changes in assets and liabilities:
     Accounts receivable.............................    7,845     (3,185)      1,126     (8,169)
     Inventory.......................................     (965)      (563)     (1,087)      (209)
  Prepaid expenses and other assets..................     (687)     1,740      (2,216)    (5,455)
  Accounts payable and accrued expenses..............   (2,186)       538       1,937      4,710
                                                       -------    -------    --------   --------
          Net cash provided by (used in) operating
            activities...............................    9,193       (712)     16,550      3,957
INVESTING ACTIVITIES
  Purchases of property and equipment................   (2,773)    (7,893)    (11,329)   (15,014)
  Restricted cash....................................        6        263         (16)       280
                                                       -------    -------    --------   --------
          Net cash used in investing activities......   (2,767)    (7,630)    (11,345)   (14,734)
FINANCING ACTIVITIES
  Repayment of shareholder note......................   (1,523)        --      (2,251)       (39)
  Due to affiliated companies........................   (2,022)     7,089        (519)     7,208
                                                       -------    -------    --------   --------
Net cash (used in) provided by financing
  activities.........................................   (3,545)     7,089      (2,770)     7,169
                                                       -------    -------    --------   --------
Net increase (decrease) in cash and cash
  equivalents........................................    2,881     (1,253)      2,435     (3,608)
Cash and cash equivalents at beginning of period.....    3,160      3,265       3,606      5,620
                                                       -------    -------    --------   --------
Cash and cash equivalents at end of period...........  $ 6,041    $ 2,012    $  6,041   $  2,012
                                                       =======    =======    ========   ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-51
<PAGE>   243
 
                                  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, 1997 and September 30, 1998, and
the results of operations and cash flows for the periods indicated.
 
   
     The Company was established as a competitive local exchange carrier (CLEC)
in August 1990. Through the design, construction, and operation of a
telecommunications network in Moscow, the Company provides its customers,
principally major hotels, business offices and mobile communications companies,
with an alternative to the local telephone company for worldwide communications
services. 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 May 1, 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 U.S. dollars. Currently, customers have the option of being billed in
rubles or dollars. All payments from Russian companies are made in rubles.
    
 
   
     The venture is a Russian limited liability partnership. The Company is 50%
owned by Open Joint Stock Company "Rostelecom," an intercity and long distance
carrier which is 38% owned by Svyazinvest, and 50% owned by Sovinet, a U.S.
general partnership, which is owned by two wholly-owned Global TeleSystems
Group, Inc. ("GTS") subsidiaries.
    
 
     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 1997 audited financial statements and the notes related thereto. The
results of operations for the three and nine months ended September 30, 1998 may
not be indicative of the operating results for the full year.
 
     The Company also maintains its records and prepares its financial
statements in Russian rubles 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 Russian statutory
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 certain accrued revenue and expenses, foreign
currency translation, deferred taxation, and depreciation and valuation of
property and equipment. 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.
 
2. RUSSIAN ECONOMIC CRISIS
 
   
     On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The following measures were
implemented by the Russian government: 1) The repayment of GKO treasury bills
and OFZ federal bonds was suspended; subsequently, secondary trading therein was
halted. Since many Russian banks had substantial investments in these
securities, severe liquidity problems resulted for the banks. 2) The value of
the ruble was allowed to fluctuate below the ruble/U.S. dollar exchange rate
corridor that the government had previously committed to support; this
represented an effective devaluation of the ruble. 3) A 90-day moratorium on
offshore credit repayments was issued. The 90-day moratorium was not extended
when it expired on November 16, 1998 and it is anticipated that the ruble will
continue to be devalued. Due to the devaluation and the end of the 90-day
moratorium, there is an ongoing
    
 
                                      F-52
<PAGE>   244
                                  EDN SOVINTEL
 
             NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
 
   
risk that many Russian banks may be declared bankrupt. Deposits held at Russian
banks, other than Sberbank, are not insured. The official exchange rate as of
September 30, 1998 and December 18, 1998 was 16.0645 and 20.7 rubles per U.S.
dollar, respectively. The last official exchange rate prior to the suspension of
trading on August 17, 1998 was 6.2725 rubles per U.S. dollar.
    
 
     As a result of the devaluation of the ruble and the consequences of the
banking and economic crisis within Russia, the Company recorded a $7.4 million
pre-tax charge within its financial statements for the third quarter 1998, that
is mainly comprised of foreign currency exchange losses for ruble-denominated
net monetary assets with the remainder associated with estimates for
uncollectible accounts receivable and unrecoverable cash deposits in Russian
banks.
 
3. POLICIES AND PROCEDURES
 
     On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
nonowner sources. For the three and nine months ended September 30, 1997 and
1998, comprehensive income for the Company is equal to net income (loss).
 
4. CONTINGENCIES
 
     Legislation and regulations regarding taxation, foreign currency
transactions and licensing of foreign currency loans in the Russian Federation
continues to evolve as the central government manages the transformation from a
command to a market-oriented economy. The various legislation and regulations
are not always clearly written and their interpretation is subject to the
opinions of the tax inspectors, Central Bank officials and the Ministry of
Finance. Instances of inconsistent opinions between local, regional and national
tax authorities and between the Central Bank and Ministry of Finance are not
unusual.
 
     The Company believes that it has paid or accrued all taxes that are
applicable. Where practice concerning the provision of taxes is unclear, the
Company has accrued tax liabilities based on management's best estimate. 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.
 
     Because of the uncertainties associated with the Russian tax and legal
systems, the ultimate amount of taxes, penalties and interest, if any, assessed
may be in excess of the amount expensed to date and accrued at December 31, 1997
and September 30, 1998.
 
     The Company's operations and financial position will continue to be
affected by Russian political developments, including the application of
existing and future legislation and tax regulations. 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-53
<PAGE>   245
 
                INDEX TO FINANCIAL STATEMENTS CONCERNING ESPRIT
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              -----
<S>                                                           <C>
ESPRIT TELECOM GROUP PLC
AUDITED HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants..........................   F-55
Consolidated Profit and Loss Accounts for the three years
  ended September 30, 1996, 1997 and 1998...................   F-57
Consolidated Balance Sheet as of September 30, 1996, 1997
  and 1998..................................................   F-58
Consolidated Cash Flow Statements for the three years ended
  September 30, 1996, 1997 and 1998.........................   F-59
Statement of Total Recognized Gains and Losses for the three
  years ended September 30, 1996, 1997 and 1998.............   F-60
Reconciliations of Movements in Shareholders' Funds for the
  three years ended September 30, 1996, 1997 and 1998.......   F-61
Notes to the Consolidated Financial Statements..............   F-62
PLUSNET BUSINESS
AUDITED HISTORICAL FINANCIAL STATEMENTS
Report of Independent Accountants...........................   F-95
Profit and Loss Accounts for the three years ended September
  30, 1995, 1996 and 1997...................................   F-96
Balance Sheets as of September 30, 1996 and 1997............   F-97
Cash Flow Statements for the three years ended September 30,
  1995, 1996 and 1997.......................................   F-98
Statement of Total Recognized Gains and Losses and
  Reconciliations of Movements in Invested Equity for the
  three years ended September 30, 1995, 1996 and 1997.......   F-99
Notes to the Financial Statements...........................  F-100
</TABLE>
 
                                      F-54
<PAGE>   246
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of Esprit Telecom Group plc
 
     We have audited the accompanying consolidated balance sheets of Esprit
Telecom Group plc and its subsidiaries ("Company") as of September 30, 1996 and
1997 and the related consolidated profit and loss accounts, cash flow
statements, statements of total recognized gains and losses and reconciliations
of movements in shareholders' funds for each of the two years in the period
ended September 30, 1997 all expressed in pounds sterling. 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 United Kingdom generally
accepted auditing standards which do not differ in any material respect from
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1996 and 1997 and the results of the Company's operations
and its cash flows for each of the two years in the period ended September 30,
1997 in conformity with generally accepted accounting principles in the United
Kingdom.
 
     Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated loss expressed in pounds sterling for each of
the two years in the period ended September 30, 1997 and the determination of
consolidated shareholders' funds and consolidated financial position also
expressed in pounds sterling as of September 30, 1996 and 1997. Note 30 to the
consolidated financial statements summarizes this effect for each of the two
years in the period ended September 30, 1997 and as of September 30, 1996 and
1997.
 
Price Waterhouse
London, England
December 10, 1997
 
                                      F-55
<PAGE>   247
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of Esprit Telecom Group plc
 
     We have audited the accompanying consolidated balance sheet of Esprit
Telecom Group plc and its subsidiaries ("Company") as of September 30, 1998 and
the related consolidated profit and loss account, cash flow statement, statement
of total recognized gains and losses and reconciliation of movements in
shareholders' funds for the year ended September 30, 1998 all expressed in
pounds sterling. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
 
     We conducted our audit in accordance with United Kingdom generally accepted
auditing standards which do not differ in any material respect from auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1998 and the results of the Company's operations and its
cash flows for the period ended 30 September 30, 1998 in conformity with
generally accepted accounting principles in the United Kingdom.
 
     Accounting principles generally accepted in the United Kingdom differ in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated loss expressed in pounds sterling for the year
ended September 30, 1998 and the determination of consolidated shareholders'
funds and consolidated financial position also expressed in pounds sterling as
of September 30, 1998. Note 30 to the consolidated financial statements
summarizes this effect for the year ended September 30, 1998 and as of September
30, 1998.
 
PricewaterhouseCoopers
London, England
December 21, 1998
 
                                      F-56
<PAGE>   248
 
                            ESPRIT TELECOM GROUP PLC
 
                     CONSOLIDATED PROFIT AND LOSS ACCOUNTS
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED SEPTEMBER 30,
                                              -------------------------------------------------------
                                                                  CONTINUING                   1998
                                      NOTES    1996      1997     OPERATIONS   ACQUISITIONS    TOTAL
                                      -----   -------   -------   ----------   ------------   -------
                                                     (IN THOUSANDS, EXCEPT PER ORDINARY SHARE)
                                                 L         L          L             L            L
<S>                                   <C>     <C>       <C>       <C>          <C>            <C>
TURNOVER............................   1,2     24,880    45,466     62,876        19,712       82,588
COST OF SALES.......................          (18,756)  (37,949)   (52,351)      (13,478)     (65,829)
                                              -------   -------    -------       -------      -------
GROSS PROFIT........................            6,124     7,517     10,525         6,234       16,759
OTHER OPERATING EXPENSES:
Selling, general and
  administrative....................           (7,509)  (15,505)   (29,873)       (5,305)     (35,178)
Stock compensation costs............     6     (2,035)     (417)      (112)           --         (112)
Restructuring costs.................     8         --      (312)        --            --           --
Depreciation and amortisation.......           (1,471)   (2,836)    (8,477)       (1,905)     (10,382)
European network amortisation.......                                (1,519)           --       (1,519)
Operating loss......................     3     (4,891)  (11,553)   (29,456)         (976)     (30,432)
Profit on sale of investment........     9         --        --        200            --          200
Interest receivable.................    10        142     1,152                                11,821
Interest payable and similar
  charges...........................    11       (345)     (457)                              (24,034)
Loss on ordinary activities before
  taxation..........................           (5,094)  (10,858)                              (42,445)
                                              -------   -------                               -------
Taxation on loss on ordinary
  activities........................    12         --        (2)                                   (2)
                                              -------   -------                               -------
LOSS FOR THE FINANCIAL YEAR.........           (5,094)  (10,860)                              (42,447)
                                              =======   =======                               =======
LOSS PER ORDINARY SHARE.............    13      (0.07)    (0.10)                                (0.34)
                                              =======   =======                               =======
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                      F-57
<PAGE>   249
 
                            ESPRIT TELECOM GROUP PLC
                           CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                       AS AT SEPTEMBER 30,
                                                                ---------------------------------
                                                        NOTES     1996        1997        1998
                                                        -----   ---------   ---------   ---------
                                                                         (IN THOUSANDS)
                                                                    L           L           L
<S>                                                     <C>     <C>         <C>         <C>
FIXED ASSETS
Intangible assets.....................................    14          600       3,312      99,029
Tangible assets.......................................    15        7,374      14,284      55,071
Investments...........................................    16           31         131          --
                                                                ---------   ---------   ---------
                                                                    8,005      17,727     154,100
CURRENT ASSETS
Stock.................................................                  5          --          --
Trade debtors.........................................              7,309      15,395      29,444
Other debtors, prepayments and accrued income.........    17        2,352       1,896      26,244
Restricted Securities.................................    23           --          --      48,969
Short term cash deposits..............................              2,335      22,876     131,547
Bank balances and cash................................              4,095       1,649       4,233
                                                                ---------   ---------   ---------
                                                                   16,096      41,816     240,437
Creditors: Amounts falling due within one year........    18      (12,122)    (25,295)    (72,930)
                                                                ---------   ---------   ---------
Net current assets....................................              3,974      16,521     167,507
                                                                ---------   ---------   ---------
Total assets less current liabilities.................             11,979      34,248     321,607
Creditors: Amounts falling due in more than one
  year................................................    19       (1,968)     (2,874)   (328,806)
                                                                ---------   ---------   ---------
Net assets/(liabilities)..............................             10,011      31,374      (7,199)
                                                                =========   =========   =========
CAPITAL AND RESERVES
Called up share capital...............................    20        1,487       1,219       1,255
Other capital reserves................................    20       18,182      50,108      53,411
Shares to be issued...................................    20           --          --       2,168
Other reserves........................................    20        2,810       3,295       1,542
Profit and Loss account...............................    20      (12,468)    (23,248)    (65,575)
                                                                ---------   ---------   ---------
Total shareholders' funds/(deficit)...................    20       10,011      31,374      (7,199)
                                                                ---------   ---------   ---------
TOTAL SHAREHOLDERS' FUNDS/(DEFICIT) REPRESENT
  Equity interest.....................................              9,338      31,374      (7,199)
  Non-equity interest.................................                673          --          --
                                                                ---------   ---------   ---------
                                                                   10,011      31,374      (7,199)
                                                                =========   =========   =========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                      F-58
<PAGE>   250
 
                            ESPRIT TELECOM GROUP PLC
 
                       CONSOLIDATED CASH FLOW STATEMENTS
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED SEPTEMBER 30,
                                                                    ---------------------------
                                                            NOTES    1996     1997       1998
                                                            -----   ------   -------   --------
                                                                          (IN THOUSANDS)
                                                                      L         L         L
<S>                                                         <C>     <C>      <C>       <C>
Cash (outflow) from operating activities (see table
  below)..................................................          (2,245)   (2,999)   (29,133)
Returns on investments and servicing of finance...........   23       (203)      695     (4,834)
Taxation..................................................              --        (2)        (2)
Capital expenditure and financial investment..............   23     (3,594)   (7,919)   (22,478)
Acquisitions and disposals................................              --      (852)   (91,643)
                                                                    ------   -------   --------
Cash outflow before financing.............................          (6,042)  (11,077)  (148,090)
Management of liquid resources.......