GLOBAL TELESYSTEMS GROUP INC
8-K/A, 1999-01-20
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                   FORM 8-K/A


                                 CURRENT REPORT


     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


                                November 30, 1998
                Date of Report (Date of earliest event reported)


                         Global TeleSystems Group, Inc.
             (Exact name of registrant as specified in its charter)


           Delaware                      0-23717                 94-3068423
 (State or other jurisdiction    (Commission File Number)      (IRS Employer
      of incorporation)                                      Identification No.)


                 1751 Pinnacle Drive
               North Tower, 12th Floor
                   McLean, VA 22102                             22102
       (Address of principal executive offices)               (Zip Code)


                                 (703) 918-4500
              (Registrant's telephone number, including area code)



<PAGE>   2
The undersigned registrant hereby reports the following items related to the
Registrant's acquisition of NetSource Europe ASA in a transaction accounted for
as a purchase. The Registrant filed on November 30, 1998 a Current Report on
Form 8-K, which disclosed that the acquisition had been completed. The
Registrant indicated in that report its intention to submit the financial
statements and pro forma financial information prescribed by Rule 3-05 of
Regulation S-X and Article 11 of Regulation S-X, respectively, not later than
February 15, 1999, in accordance with Subsection (a)(4) of Item 7 of the General
Instructions for the Current Report on Form 8-K. This Amendment to that Current
Report is being filed to provide that financial information.


ITEM 7.  FINANCIAL STATEMENTS, PRO FROMA FINANCIAL INFORMATION AND EXHIBITS

         (a)      Financial Statements.

                  Report of Ernst & Young AS, Independent Auditors

                  NetSource Europe ASA Balance Sheets as of December 31, 1997
                  and 1996 (Audited)

                  NetSource Europe ASA Income Statements for the Years Ended
                  December 31, 1997 and December 31, 1996 (Audited)

                  NetSource Europe ASA Cash Flows Statements for the Years Ended
                  December 31, 1997 and December 31, 1996 (Audited)

                  NetSource Europe ASA Accounting Policies (Footnotes)

                  NetSource Europe ASA Condensed Balance Sheet as of 
                  September 30, 1998 (Unaudited)

                  NetSource Europe ASA Condensed Income Statement for the 
                  Nine Months Ended September 30, 1998 (Unaudited)

                  NetSource Europe ASA Condensed Cash Flows Statement for the 
                  Nine Months Ended September 30, 1998 (Unaudited)

                  NetSource Europe ASA Accounting Policies (Footnotes)



         (b)      Unaudited Pro Forma Combined Financial Statements.

                  Unaudited Pro Forma Combined Statements of Operations for the
                  Year Ended December 31, 1997 and for the Nine Months Ended
                  September 30, 1998.

                  Unaudited Pro Forma Combined Balance Sheet as of September 30,
                  1998.

                  Notes to Unaudited Pro Forma Combined Financial Statements


ITEM 9.  SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S

In connection with the acquisition of NetSource, on November 30, 1998, the
Company issued 3,737,407 shares of its common stock, par value $.10 ("Common
Shares"), to holders of NetSource stock who accepted, as of October 30, 1998,
the Company's offer to purchase the NetSource stock owned by such holders. The
Company received the NetSource shares tendered as consideration for the Common
Shares. No underwriters were involved in the issuance of the Common Shares. The
Company issued the Common Shares pursuant to Rule 903 under the Securities Act
of 1933 and the Company's offer was made exclusively to non US persons, within
the meaning of Rule 902 under the Securities Act, not in the United States. The
Company extended its offer to purchase the NetSource stock to December 15, 1998
and, consequently, 136,298 additional shares of the Company's common stock were
issued at December 15, 1998 pursuant to this transaction. That additional
issuance was also effected in accordance with Rule 903 of the Securities Act.
The Company received the additional NetSource shares tendered as consideration
for this additional issuance of the Company's common stock. No underwriters were
involved in this additional issuance.   

<PAGE>   3
                              NETSOURCE EUROPE ASA


To the Annual Shareholders' Meeting of
NetSource Europe ASA



AUDITORS' REPORT FOR 1997

We have audited the annual financial statements of NetSource Europe ASA for
1997, showing a net loss for the year of NOK 20 661 376 for the parent company
and a consolidated net loss for the year of NOK 73 388 076. The annual financial
statements, which comprise the Board of Directors' report, the profit and loss
account, balance sheet, cash flow statement, notes to the accounts and
consolidated accounts, are presented by the company's Board of Directors and its
Managing Director.

Our responsibility is to examine the company's annual financial statements, its
accounting records and other related matters.

We have conducted our audit in accordance with relevant laws, regulations and
Norwegian generally accepted auditing standards. We have performed those audit
procedures considered necessary to confirm that the annual financial statements
are free of material misstatements. We have examined selected parts of the
evidence supporting the accounts and assessed the accounting principles applied,
the estimates made by management, and the content and presentation of the annual
financial statements. To the extent required by Norwegian generally accepted
auditing standards, we have reviewed the company's internal control and the
management of its financial affairs.

The Board of Directors' proposal for the allocation of the net loss complies
with the provisions of the Norwegian Joint-Stock Companies Act.

In our opinion, the annual financial statements have been prepared in accordance
with the requirements of the Norwegian Joint-Stock Companies Act and present
fairly the financial position of the company and group as of December 31st 1997
and the result of its operations for the year then ended, in conformity with
Norwegian generally accepted accounting principles.



Kristiansand, June 16th 1998
ERNST & YOUNG AS

Ove Eriksen
State Authorized Public Accountant (Norway)

Note: The translation into English has been prepared for information purposes
only.




<PAGE>   4

                              NETSOURCE EUROPE ASA

                                  BALANCE SHEET

                                AS AT 31 DECEMBER

                                     (I NOK)

<TABLE>
<CAPTION>
          PARENT COMPANY                                                                         GROUP

         1997          1996        ASSETS                                            NOTE         1997         1996
<S>              <C>               <C>                                               <C>       <C>          <C>       
                                   CURRENT ASSETS

    8,587,817    14,744,319        Cash and bank deposits                             6        24,987,331   16,210,067
            0       324,325        Accounts receivable                                4        22,559,261    3,971,176
            0       520,365        Intercompany receivables                                             0            0
       88,480       544,867        Other current assets                                        69,380,258      713,651
            0             0        Inventory                                                   14,096,481      247,888
  -----------   -----------                                                                  ------------  -----------

    8,676,297    16,133,876        TOTAL CURRENT ASSETS                                       131,023,331   21,142,782
  -----------   -----------                                                                  ------------  -----------

                                   FIXED ASSETS

   14,348,789     1,787,164        Shares in subsidiaries                            1, 7               0            0
            1             1        Other shares                                                     2,047            1
  123,030,853     1,677,000        Long term intercompany receivables                 9                 0            0
    1,048,500             0        Other receivables                                            1,104,219            0
            0             0        Product rights                                    2,3          431,246            0
      981,000     1,177,000        Goodwill                                          2,3       16,842,090    2,304,000
            0       992,000        Routers                                           2,3       31,205,199      992,000
            0       393,300        Machinery, equipment and fixtures                 2,3        8,467,901      595,653
  -----------   -----------                                                                  ------------  -----------

  139,409,143     6,026,465        TOTAL FIXED ASSETS                                          58,052,702    3,891,654
  -----------   -----------                                                                  ------------  -----------

  148,085,440    22,160,341        TOTAL ASSETS                                               189,076,033   25,034,436
  -----------   -----------                                                                  ------------  -----------
</TABLE>




<PAGE>   5

                              NETSOURCE EUROPE ASA

                                  BALANCE SHEET

                                AS AT 31 DECEMBER

                                     (I NOK)

<TABLE>
<CAPTION>
         PARENT COMPANY                                                                               GROUP

         1997          1996        LIABILITIES AND SHAREHOLDERS' EQUITY                NOTE            1997         1996
<S>               <C>              <C>                                                 <C>       <C>            <C>

                                   CURRENT LIABILITIES

            0             0        Bank overdraft                                        6        3,615,867            0
    2,682,071     1,458,445        Accounts payable                                              36,615,048    3,012,974
            0       517,762        Accrued wages and social security expenses                    13,451,240      458,581
            0             0        Tax payable                                           5                0       17,022
      231,850             0        Current liabilities intercompanies                                     0            0
   27,206,192     4,244,353        Other current liabilities                                     69,746,082    5,029,558

   30,120,113     6,220,560        TOTAL CURRENT LIABILITIES                                    123,428,237    8,518,135
 ------------   -----------                                                                    ------------  -----------

                                   LONG TERM LIABILITIES

            0     1,520,000        Long term liabilities                                10          637,118    3,143,470
 ------------   -----------                                                                    ------------  -----------

            0     1,520,000        TOTAL LONG TERM LIABILITIES                                      637,118    3,143,470
 ------------   -----------                                                                    ------------  -----------

            0             0        Minority interest                                                      0            0

                                   SHAREHOLDERS'S FUNDS

    4,617,709     2,630,274        Share capital (23 088 543 shares of NOK 0,20)                  4,617,709    2,630,274
  113,347,618    11,789,507        Statutory reserve fund                                       113,428,536   11,789,507
 ------------   -----------                                                                    ------------  -----------
  117,965,327    14,419,781        Total restricted equity                                      118,046,245   14,419,781
            0             0        Loss carried forward                                         (53,035,567)  (1,046,950)

  117,965,327    14,419,781        TOTAL SHAREHOLDERS'S EQUITY                          11       65,010,678   13,372,831
 ------------   -----------                                                                    ------------  -----------

  148,085,440    22,160,341        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                   189,076,033   25,034,436
 ------------   -----------                                                                    ------------  -----------

                                   Mortgages                                            12
                                   Guaranties                                           13
</TABLE>




<PAGE>   6

                                INCOME STATEMENT

                             1 JANUARY - 31 DECEMBER

                                     (I NOK)



<TABLE>
<CAPTION>
         PARENT COMPANY                                                                               GROUP

         1997          1996                                                          NOTE            1997         1996
                                   OPERATING INCOME

<S>              <C>               <C>                                               <C>     <C>            <C>
    7,213,079     2,858,777        Sales                                                      135,822,072    9,611,520
  -----------   -----------                                                                  ------------   ----------

    7,213,079     2,858,777        TOTAL OPERATING INCOME                                     135,822,072    9,611,520
  -----------   -----------                                                                  ------------   ----------

                                   OPERATING EXPENSES

    4,900,597     2,355,774        Cost of sales                                              108,217,961    9,021,367
    3,700,212     3,558,643        Salaries, wages and social expenses                         36,486,852    6,983,956
   13,477,515     5,016,864        Other operating expenses                                    46,543,644    9,154,766
    1,732,809       874,590        Depreciation                                       2        10,944,731    1,232,904
      201,472       107,154        Bad debt expenses                                            3,241,275      107,154
  -----------   -----------                                                                  ------------   ----------

   24,012,605    11,913,025        TOTAL OPERATING EXPENSES                                   205,434,463   26,500,147
  -----------   -----------                                                                  ------------   ----------

  (16,799,526)   (9,055,248)       OPERATING PROFIT                                           (69,612,391) (16,888,627)

                                   FINANCIAL INCOME AND EXPENSES

   (1,933,600)      (84,950)       Interest from group companies                                        0            0
     (526,010)      (33,963)       Interest income                                             (1,080,053)     (98,822)
    3,245,900     8,987,578        Loss on intercompany receivables                                     0            0
       40,028             0        Interest expenses                                                    0            0
    3,035,532       689,238        Other financial expenses                                     4,939,932    1,014,069
  -----------   -----------                                                                  ------------   ----------

    3,861,850     9,557,903        NET FINANCIAL ITEMS                                          3,859,879      915,247
  -----------   -----------                                                                  ------------   ----------

  (20,661,376)  (18,613,151)       PROFIT BEFORE TAXES                                        (73,472,270) (17,803,874)

            0             0        Taxes                                              5           (84,194)           0
  -----------   -----------                                                                  ------------   ----------

  (20,661,376)  (18,613,151)       NET LOSS FOR THE YEAR                                      (73,388,076) (17,803,874)
  -----------   -----------                                                                  ------------   ----------

                                   ALLOCATION OF NET LOSS
  (20,661,376)  (18,613,151)       Transferred from statutory reserve
  -----------   -----------                                        
  (20,661,376)  (18,613,151)       TOTAL ALLOCATIONS
  -----------   -----------                                       
</TABLE>



<PAGE>   7

                              NETSOURCE EUROPE ASA

               CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER

                                     (I NOK)


<TABLE>
<CAPTION>
      PARENT COMPANY                                                                                      GROUP

   1997          1996                                                                NOTE        1997            1996
   ----          ----                                                                ----        ----            ----
<S>            <C>                                                                   <C>        <C>              <C>
                                CASH FLOWS FROM OPERATING ACTIVITIES
 (20,661,376)  (18,613,150)     Profit before tax                                               (73,472,270)     (17,803,874)
     436,678             0      Loss/gain at disposals of fixed assets                              (63,050)               0
           0             0      Tax payable                                                         (67,172)               0
   1,732,809       874,590      Ordinary depreciations                                           10,944,731        1,232,904
   3,245,900     9,126,786      Extraordinary depreciations                                               0          139,209
           0       769,882      Change in inventory                                             (13,648,489)         556,539
     324,325      (231,034)     Change in accounts receivables                                   (9,929,161)      (3,861,413)
   1,223,626       659,395      Change in accounts payables                                      21,594,649        1,786,110
   3,652,679      (545,115)     Change in other accruals                                        (21,460,429)       4,716,881
(124,599,754)            0      Change in long term receivables on subsidiaries                           0                0
           0             0      Translation differences                                           1,057,620          (95,123)
- ------------   -----------                                                                     ------------      -----------

(134,645,113)   (7,958,646)     NET CASH FROM OPERATING ACTIVITIES                              (85,043,571)     (13,328,767)
- ------------   -----------                                                                     ------------      -----------

                                CASH FLOWS FROM INVESTING ACTIVITIES
  14,860,000             0      Proceeds from sale of fixed assets                                  404,000                0
 (15,448,187)   (1,511,890)     Purchase of fixed assets                                        (41,553,431)      (2,776,170)
 (11,581,789)     (820,854)     Acquisitions of shares in subsidiaries                 18       (11,299,321)               0
           0             0      Acquisitions of other shares                                         (2,046)               0
  (1,048,500)  (10,049,410)     Other investments                                                (1,104,219)               0
- ------------   -----------                                                                     ------------      -----------

 (13,218,476)  (12,382,154)     NET CASH FROM INVESTING ACTIVITIES                              (53,555,017)      (2,776,170)
- ------------   -----------                                                                     ------------      -----------

                                CASH FLOWS FROM INVESTING ACTIVITIES
           0     1,520,000      Proceeds from long term borrowings                                        0        2,229,570
  20,000,000     3,965,042      Proceeds from short term borrowings                              20,000,000                0
  (1,520,000)   (1,975,000)     Repayment of long term borrowings                                (3,526,483)      (1,975,000)
           0    (1,353,415)     Repayment of short term borrowings                                        0                0
           0             0      Increased bank overdraft                                          3,615,867       (1,799,299)
 123,227,087    32,857,498      Proceeds from issuance of share capital                         127,286,468       32,857,500
           0             0      Change in minority interests                                              0          921,105
- ------------   -----------                                                                     ------------      -----------

 141,707,087    35,014,125      NET CASH FROM FINANCING ACTIVITIES                              147,375,852       32,233,876
- ------------   -----------                                                                     ------------      -----------

  (6,156,502)   14,673,325      Net change in cash and cash equivalents                           8,777,264       16,128,939
  14,744,319        70,994      Cash and cash equivalents at the beginning of the                16,210,067           81,128
                                year
- ------------   -----------                                                                     ------------      -----------

   8,587,817    14,744,319      CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                 24,987,331       16,210,067
- ------------   -----------                                                                     ------------      -----------
</TABLE>




<PAGE>   8


                              NETSOURCE EUROPE ASA


                               ACCOUNTING POLICIES


GENERALLY

The financial statements are prepared and presented in conformity with the Joint
Stock Companies Act and generally accepted accounting principles in Norway.

CONSOLIDATION PRINCIPLES

Consolidated companies

The consolidated accounts comprise the parent company Netsource Europe ASA and
the subsidiaries NetSource Norge AS, NetSource Invest II AS, NetSource Sverige
AB, NetSource Communication AB, NetSource Danmark ApS, NetSource Telecom Benelux
B.V, Teleon Holding B.V, International Telecommunications Ltd (ITL), Atlantic
Telecom Venray B.V. and WESTCom GmbH.

The income statement for the year ended 1997 for the parent company reflect
activity for the period from January 1st to June 30th as the activity was
transferred to the 100 % owned subsidiary NetSource Norge AS at July 1st 1997.
Since July 1st NetSource Europe ASA has been a holding company.

The subsidiaries have been consolidated according to the past equity method. In
the case of aquisition the difference between the cost of the shares and the
fair value of the net assets at the time of aquisition has been capitalized as
goodwill. Goodwill is depreciated by 10 % per year on a straight line basis. In
1996 goodwill was depreciated by 20 % per year. Compared to 1996 the change in
depreciation rate results in reduced depreciation on goodwill in 1997 amounted
to NOK 196,000 for the parent company and NOK 1,131,000 for the group. The
change in depreciation rate is based on a reevaluation of the useful economic
lifetime of the goodwill.

In 1997 the Board of Directors in NetSource Europe ASA signed a merger agreement
with NetSource Invest AS which ownes Teleon Holding B.V., International
Telecommunications Ltd (ITL), Atlantic Telecom Venray B.V. and WestCom GmbH. In
an extraordinary meeting in 1997 the shareholders in NetSource Europe ASA and
NetSource Invest AS approved the merger agreement. The merger was set out in
accordance with chapter 14 in the Joint Stock Companies Act in Norway. The
assets and liabilities of NetSource Invest were transferred to NetSource Europe
ASA in exchange of an issue of 1,880,298 shares at NOK 0,20 per share in
NetSource Europe ASA and cash payment amounted to NOK 11,299,321. The business
combination is accounted for according to the pooling of interests method.

Elimination of internal transactions

All significant transactions and balances between the parent company and
subsidiaries are eliminated.

Translations of accounts in foreign currencies

For consolidation purposes the income statement and the balance sheet of the
foreign group companies have been translated into NOK at the average exchange
rate of the year and the exchange rate prevailing on the balance sheet date,
respectively. The translation differences have been adjusted against equity.

ACCOUNTS RECEIVABLES

The accounts receivables have been reduced with a provision for bad debt.





<PAGE>   9
                              NETSOURCE EUROPE ASA



INVENTORIES

Inventories comprise routers for sales and are valued at the lower of cost or
market value.

PRODUCT RIGHTS

Product rights that have been aquired and external expenses related to the
aquisitions have been capitalised.

FIXED ASSETS AND DEPRECIATION

Fixed assets where the historic cost is capitalised, are depreciated on a
straight line basis over the estimated useful economic life of the asset.

PENSION EXPENSES AND PENSION OBLIGATIONS

 Certain group companies are obliged to pay contributions into to employees'
pension funds. The contribution is fixed and the companies have no foreseeable
obligation, either in legal form or in substance, to pay further contribution if
the funds do not hold sufficient assets to pay all employee benefits relating to
the service in the current and prior period.

 Pension premiums are expensed as incurred and are included in <<Salaries, wages
and social expenses>> in the income statement.

TAXES AND DEFERRED TAX BENEFIT

Taxes in the income statement include current tax payable and changes in
deferred tax.

Deferred tax and deferred tax benefits are calculated on the temporary
differences between the balance sheet items for taxation purposes and accounting
purposes. Deferred tax is entered into and classified as long term debt in the
balance sheet. Deffered tax assets have not been accounted for

FOREIGN EXCHANGE

Current liabilities/current assets are recorded at the higher/lower of the rate
the date of transaction or the rate prevailing on year end.

MINORITY INTERESTS

The losses applicable to the minority in consolidated subsidiaries that exceed
the minority interest in the equity in the subsidiaries are charged against the
majority interest.





<PAGE>   10
                              NETSOURCE EUROPE ASA


                              NOTES TO THE ACCOUNTS

                                     (I NOK)


1.     ACQUISITION OF COMPANIES AND ESTABLISHMENT OF NEW COMPANIES

The following acquisitions and establishments have been consolidated subsequent
to the establishment of the parent company. Refer to note 7 for details on the
group companies.

Aquistions and mergers

o    NetSource Sverige AB (consolidated from  January 1st 1995)

o    NetSource Telecom Benelux B.V (consolidated from January 1st 1997)

o    Teleon Holding B.V (consolidated from July 1st 1997)

o    International Telecommunications Ltd (consolidated from July 1st 1997)

o    Atlantic Telecom Venray B.V. (consolidated from July 1st 1997)

o    WESTCom GmbH (consolidated from  July 1st 1997)

The last four companies listed above were aquired by merger between NetSource
Europe ASA and NetSource Invest AS.


Establishment of new businesses

o    NetSource Communication AS (consolidated from  January 1st 1997)

o    NetSource Norge AS (consolidated from August 1st 1997)

o    NetSource Invest 2 AS (consolidated from August 1st 1997)

o    NetSource Danmark ApS (consolidated from December 1st 1996)


The parent company has per December 29th 1997 exercised the option of purchasing
the remaining 49 % of the shares in ITL Ltd. held by the minority interests. The
purchase will be executed both in legal and substance form in 1998. The former
share owners of ITL Ltd. have option to repurchase the shares from NetSource
Europe ASA at 97,3 % of NetSource' purchase price if certain conditions are not
fullfilled.

Furthermore, NetSource Europe ASA has the option of purchasing the remaining 49
% of the shares in WestCom GmbH held by the minority interests. The option has
to be exercised in the period from August 1st to December 31st 1998.





<PAGE>   11
\                              NETSOURCE EUROPE ASA


2.     FIXED ASSETS

Parent company


Parent company

<TABLE>
<CAPTION>
                                                 Machinery,
                                                fixtures and
                                  Goodwill       equipment       Routers         Total
                                ------------     ----------     ----------     ----------
<S>                             <C>               <C>          <C>            <C>      
Historical cost as at 1.1         1,960,790         578,280      1,364,000      3,903,670
Accumulated depreciation 1.1        783,790         184,980        372,600      1,341,370
                                 ----------      ----------     ----------     ----------
Book value 1.1                    1,177,000         393,300        992,000      2,562,300

Additions                                 0         586,411     14,861,776     15,448,187

Disposals at cost                         0       1,164,690     16,226,376     17,391,066

Accumulated depr. disposals               0         305,788      1,788,600      2,094,388

Ordinary depreciation               196,000         120,809      1,416,000      1,732,809
                                 ----------      ----------     ----------     ----------

Booked value as at 31.12            981,000               0              0        981,000
                                 ----------      ----------     ----------     ----------

Depreciation rate                        10%          20-30%            33%
</TABLE>



Group

<TABLE>
<CAPTION>
                                                                 Machinery,
                                  Product-                      fixtures and
                                   rights         Goodwill        equipment      Routers           Total
                                 ----------      ----------      ----------     ----------      ----------
<S>                              <C>             <C>             <C>            <C>             <C>      
Historical cost as at 1.1                 0       3,477,790         859,864      1,364,600       5,702,254
Accumulated depreciation 1.1              0       1,173,790         264,211        372,600       1,810,601
                                 ----------      ----------      ----------     ----------      ----------
Booked value as at 1.1                    0       2,304,000         595,653        992,000       3,891,653

Additions                           453,846      15,669,090       9,953,931     38,263,597      64,340,464

Disposals at cost                         0               0          66,038        750,000         816,038

Accumulated depr. disposals               0               0          12,388        462,700         475,088

Ordinary depreciation                22,600       1,131,000       2,028,033      7,763,098      10,944,731
                                 ----------      ----------      ----------     ----------      ----------

Booked value as at 31.12            431,246      16,842,090       8,467,901     31,205,199      56,946,436
                                 ----------      ----------      ----------     ----------      ----------

Depreciation rate                        20%             10%          20-30%            33%
</TABLE>





<PAGE>   12
                              NETSOURCE EUROPE ASA



3.     INVESTMENT IN AND DISPOSAL (AT SALES PRICE) OF FIXED ASSETS THE LAST 3 
       YEARS (NOK 1 000)

Parent company

<TABLE>
<CAPTION>
                             1997                   1996                     1995
                       Inv.       Sold         Inv.       Sold         Inv.        Sold
<S>                  <C>         <C>         <C>         <C>         <C>         <C>
Machinery/equip.         586         859         148           0       1,180         750
                      14,862      14,001       1,365           0           0           0
       Routers
       Goodwill            0           0           0           0       1,961           0
                     -------     -------     -------     -------     -------     -------
       Total
                      15,448      14,860       1,513           0       3,141         750
                     -------     -------     -------     -------     -------     -------
</TABLE>

Group

<TABLE>
<CAPTION>
                             1997                   1996                     1995
                       Inv.       Sold         Inv.       Sold         Inv.        Sold
<S>                  <C>         <C>         <C>         <C>         <C>         <C>
Productrights             453           0           0           0           0           0
Machinery/equip.        9,954           0         325           0       1,302         750
                       38,264         404       1,365           0           0           0
       Routers
       Goodwill        15,669           0           0           0       1,961           0
                      -------     -------     -------     -------     -------     -------
       Total
                       64,340         404       1,690           0       3,263         750
                      -------     -------     -------     -------     -------     -------
</TABLE>

4.     ACCOUNTS RECEIVABLES

<TABLE>
<CAPTION>
Parent company                                         1997             1996
<S>                                                  <C>               <C>      
Face value                                                    0          424,325
Provision for bad debt                                        0          100,000
                                                     ----------       ----------

Book value                                                    0          324,325
                                                     ----------       ----------
</TABLE>

<TABLE>
<CAPTION>
Group                                                  1997             1996
<S>                                                  <C>               <C>      
Face value                                           32,112,261        4,071,176
Provision for bad debt                                9,553,000          100,000
                                                     ----------       ----------

Book value                                           22,559,261        3,971,176
                                                     ----------       ----------
</TABLE>








<PAGE>   13
                              NETSOURCE EUROPE ASA


5.     TAXES

Tax income in the group profit and loss account, amounting to NOK 84 194,
relates to reimbursement of income tax paid previous years from the german
subsidiary WestCom GmbH.


Taxation basis for the year

<TABLE>
<S>                                                                    <C>       
Result before taxes                                                   (20,661,376)
Permanent differences                                                      14,804
Change in temporary differences                                           147,164
Issue expenses charged to the shareholders' equity                    (13,180,532)
                                                                     ------------

Taxation basis for the year                                           (33,679,940)
                                                                     ------------

Payable tax 28%                                                                 0
                                                                     ------------
</TABLE>



Temporary differences - parent company

At the end of the year, the following temporary differences and losses carried
forward exist:

<TABLE>
<CAPTION>
                                                            1997            1996
<S>                                                  <C>             <C>   
Current assets/ current liabilities                            0         (79,137)
Fixed assets/ long term liabilities                   (8,616,572)     (8,390,270)
                                                     -----------     -----------
Total temporary differences                           (8,616,572)     (8,469,407)
Loss carried forward                                 (51,613,600)    (17,933,660)
                                                     -----------     -----------


Total temp. differences/ losses carried forward      (60,230,172)    (26,403,067)
                                                     -----------     -----------

Deferred tax benefit 28%                              16,864,448       7,392,858
                                                     -----------     -----------
</TABLE>




The taxation basis for the year for the subsidiaries are negative and
consequently no taxes have been taken to the group profit and loss account.


6.     BANK DEPOSIT

<TABLE>
<CAPTION>
                                         PARENT COMPANY                     GROUP
                                          1997           1996           1997           1996
<S>                                  <C>           <C>            <C>            <C>       
Total bank deposit                   8,587,817     14,744,319     24,987,331     16,210,067

Restricted deposits incl. above      1,026,186        138,124      1,414,227        138,124

Bank overdraft  limit                1,500,000      1,500,000      6,557,993      1,971,000
</TABLE>



<PAGE>   14
                              NETSOURCE EUROPE ASA


 7.    SHARES IN SUBSIDIARIES

<TABLE>
<CAPTION>
                                                 Share       Number of       Par      Historical        Book          Our
Company name                                    capital        shares       value        cost          value        holding
- --------------------------------------        ------------  -------------  --------- -------------  -------------  ----------
<S>                                   <C>     <C>           <C>            <C>       <C>            <C>            <C> 
NetSource Sverige AB                  SEK       1,250,000         12,500        100     1,599,902      1,599,902       100%

NetSource Danmark ApS                 DKK         125,000            125      1,000       137,263        137,263       100%

NetSource Norge AS                    NOK          50,000             50      1,000        50,000         50,000       100%

NetSource Invest II AS                NOK          50,000             50      1,000        50,000         50,000       100%

NetSource Telecom Benelux B.V.        NLG          40,000             40      1,000       603,775        603,775       100%

Teleon Holding B.V.                   NLG          40,000             40      1,000     4,605,242      4,605,242       100%

WESTCom GmbH                          DEM          50,000             50      1,000     5,177,558      5,177,558        51%

Atlantic Telecom Venray B.V           NLG          40,000             40      1,000     1,737,580      1,737,580       100%

NetSource Communication AB            SEK         250,000          2,500        100       231,850        231,850       100%

International Telecommunication Ltd   IEP         100,000     10,000,000       0.01       155,619        155,619        51%
                                                                                     -------------  -------------

                                                                                       14,348,789     14,348,789
                                                                                     -------------  -------------
</TABLE>

8.     OTHER SHARES

<TABLE>
<CAPTION>
                                     Share         Number         Par        Historical          Book             Our
Company name                        capital       of shares      value          cost            value           holding
- -------------------------------  --------------   ----------   -----------  --------------  ---------------  ---------------
<S>                              <C>              <C>          <C>          <C>             <C>              <C> 
Owned by parent company:

MTC Europe  S.A.                  Usd 42,000         21           1,000        139,210                   1        50% 

Owned by subsidiary:

Sundry                                                                                               2,046
                                                                                            --------------
                                                                                                     2,047
                                                                                            --------------
</TABLE>

9.     INTERCOMPANY RECEIVABLES


The parent company has granted loans to subsidiaries at a net book value of NOK
123 030 853. Loan - agreements have been made including terms of interest and
installments. The parent company has no security for the loans and some of them
are granted as subordinated loans.


10.    LONG TERM LIABILITIES

Long term liabilities due in 1998, amounting to NOK 260 000, is included in
other current liabilities.




<PAGE>   15
                              NETSOURCE EUROPE ASA


11.    SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
Parent Company
                                                         Shares      Share capital      Statutory

                                                                                       reserve fund
<S>                                                      <C>             <C>            <C>       
Shareholders' equity as at 1 January 1997                2,630,274       2,630,274      11,789,507

New issue included share premium 14 February 1997           29,600          29,600       1,302,400

Number of shares before split                            2,659,874            --              --

Split (1:5)                                             13,299,370            --              --

New issue 18 April 1997                                  3,018,875         603,775               0

New issue included share premium 21 April 1997           1,890,000         378,000      32,697,000

Merger with NetSource Invest AS                          1,880,298         376,060             619

New issue included share premium 30 September 1997       3,000,000         600,000     101,400,000

Issue expenses                                                   0               0     (13,180,532)

Net loss for the year 1997                                       0               0     (20,661,376)
                                                       -----------     -----------     -----------
Shareholders' equity as at 31 December 1997             23,088,543       4,617,709     113,347,618
                                                       -----------     -----------     -----------
</TABLE>


Group

<TABLE>
<S>                                                                   <C>       
Equity as at 1 January 1997                                           13,372,831
New issues                                                           128,266,303
Translation differences                                                1,057,620
Minority interests' part of loss                                      (4,298,000)
Net loss for the year                                                (73,388,076)
                                                                     -----------

Equity as at 31 December 1997                                         65,010,678
                                                                     -----------
</TABLE>

12.    MORTGAGES

<TABLE>
<CAPTION>
                                       Parent company                    Group

                                      1997           1996           1997           1996
<S>                             <C>             <C>           <C>             <C>      
Mortgage  secured by pledge     20,000,000      3,965,042     45,323,000      4,465,042

Pledged assets:

Group receivables               20,000,000              0              0              0
Shares in subsidiaries           1,787,165              0              0              0
Fixed assets                             0        992,000      1,964,000      1,492,000
                                ----------     ----------     ----------     ----------
Other receivables                        0        324,325     90,433,000      1,198,325
                                ----------     ----------     ----------     ----------
Total                           21,787,165      1,316,325     92,397,000      2,690,325
                                ----------     ----------     ----------     ----------
</TABLE>

The pledged assets listed above are also security for credit facilities in bank.




<PAGE>   16
                              NETSOURCE EUROPE ASA


13.    GUARANTIES

The parent company has issued guaranties amounting to NOK 42 947 000. In
addition a subsidary has issued a guaranty amounting to NOK 464 000.

The parent company has issued a guaranty to secure the operation of one of the
subsidiaries.


14.    LEASING AND RENT AGREEMENTS

The group companies have entered into agreements for renting office premises and
leasing agreements for cars and other fixed assets with a remaining rent period
up to 4 years.


15.    SHARE OPTION PLAN

Share option plan for employees as at 31.12.97:


<TABLE>
<CAPTION>
                    Number of shares             Call date            Strike price
<S>                 <C>                      <C>                   <C>            
Option 1              105,820                May 31st  1998        Nok 26,88 per share
Option 2              105,820                May 31st  1999        Nok 29,76 per share
</TABLE>

16.    MANAGEMENT RENUMERATION

The managing director in one subsidiary is entitled to salary in two years after
leaving the company.


17.    TRANSACTIONS WITH RELATED PARTIES

NetSource Europe ASA has at 31 December 1997 recorded a short term loan of NOK
20.000.000 from Viking Supply AS. Viking Supply AS and Data Finans Holding AS
are related through common shareholders. Data Finans Holding AS ownes 18,2 % of
the shares in NetSource Europe ASA.

In 1997 consultancy fees were paid to Ivar Formo via Viking Supply AS, Nicolai
Jarlsby via S0r Part AS and Ulf Atle Hansen via NetUp AS at the amounts of NOK
225,000, NOK 550,000 and NOK 250,000, respectively. Ivar Formo, Nicolai Jarlsby
and Ulf Atle Hansen are members of the Board of Directors and ownes 0,5 %, 1,1 %
and 1,0 % of the shares in NetSource Europe ASA.




<PAGE>   17
                              NETSOURCE EUROPE ASA


18.    ACQUISITIONS

<TABLE>
<CAPTION>
Value of net assets acquired :                                                           1997
<S>                                                                              <C>      
Trade debtors and inventories                                                       8,859,028
Other accruals                                                                    (18,346,393)
Fixed assets (tangibles)                                                            7,118,562
Long term liabilities                                                              (1,020,131)
Cash and cash equivalents                                                           1,749,158
                                                                                 ------------
                                                                                   (1,640,157)
Goodwill                                                                           15,669,090
                                                                                 ------------
Total acquisition cost                                                             14,028,314
less:
- - cash and cash equivalents acquired                                               (1,749,158)
- - fair value of issued shares in parent company                                      (979,835)
                                                                                 ------------

Total outflow of cash on aquistions                                                11,299,321
                                                                                 ------------
</TABLE>

19.    FUTURE SHARE ISSUES

At 18 June 1997 the General Shareholders Meeting of NetSource Europe ASA decided
to give the Board of Directors proxy to issue up to 9,000,000 shares at NOK 0,20
per share. The proxy will last until the ordinary General Shareholders Meeting
in 1999.

Of the total number of shares of 9,000,000, 4,880,298 shares have been issued in
1997. The remaining number of shares available for new share issues is
4,119,702.




<PAGE>   18
NETSOURCE EUROPE ASA
UNAUDITED CONDENSED BALANCE SHEET

(in thousands)

<TABLE>
<CAPTION>
                                                                                  As of
                                                                            September 30, 1998
- -------------------------------------------------------------------------  --------------------
(unaudited)

<S>                                                                         <C>   
CURRENT ASSETS
       Cash and cash equivalents                                           $              3,049
       Accounts receivable, net                                                          13,602
       Prepaid expenses                                                                   3,255
       Other assets                                                                       3,602
                                                                           --------------------

              TOTAL CURRENT ASSETS                                                       23,508

Property and equipment, net                                                               4,329
Goodwill and intangible assets, net                                                      22,068
Other noncurrent assets                                                                     222
                                                                           --------------------
              TOTAL ASSETS                                                 $             50,127
                                                                           ====================

                      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
       Accounts payable and accrued expenses                               $             27,296
       Debt maturing within one year                                                     13,302
       Related party debt maturing within one year                                        8,333
                                                                           --------------------

              TOTAL CURRENT LIABILITIES                                                  48,931

Taxes and other non-current liabilities                                                   1,486
                                                                           --------------------

              TOTAL LIABILITIES                                                          50,417

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY

       Common stock                                                                         745
       Additional paid-in capital                                                        23,402
       Accumulated deficit                                                              (24,437)
                                                                           --------------------

              TOTAL SHAREHOLDERS' EQUITY                                                   (290)
                                                                           --------------------

                                                                           --------------------
              TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                   $             50,127
                                                                           ====================
</TABLE>


See accompanying notes.



<PAGE>   19
NETSOURCE EUROPE ASA
UNAUDITED CONDENSED INCOME STATEMENT
(in thousands)

<TABLE>
<CAPTION>
                                                                               For the Nine
                                                                               Months Ended
                                                                            September 30, 1998
- ------------------------------------------------------------------         --------------------
(unaudited)

<S>                                                                        <C>                 
Revenues,net                                                               $             29,364
                                                                           --------------------


OPERATING COSTS AND EXPENSES

             Cost of revenues                                                            31,089
             Selling, general and administrative                                         27,741
             Depreciation and amortization                                                3,077

                                                                           --------------------
LOSS FROM OPERATIONS                                                                    (32,543)

OTHER INCOME/(EXPENSE):
             Interest income                                                                675
             Interest expense                                                            (1,319)
                                                                           --------------------
                                                                                           (644)
                                                                           --------------------

Net loss before income taxes                                                            (33,187)

Income taxes                                                                                  0
                                                                           --------------------

NET LOSS                                                                   $            (33,187)
                                                                           ====================
</TABLE>


See accompanying notes.



<PAGE>   20
NETSOURCE EUROPE ASA
Unaudited Condensed Statement of Cash Flows
(in thousands)


<TABLE>
<CAPTION>

                                                                   For the Nine
                                                                   Months Ended
                                                             September 30, 1998
- ------------------------------------------------             ------------------
(in thousands)

<S>                                                          <C> 
OPERATING ACTIVITIES
Net income                                                         $(33,187)
Adjustments to reconcile net income to net cash
used in operating activities:
   Depreciation and amortization                                      3,077
   Provision for doubtful accounts                                   11,169
   Changes in assets and liabilities:
       Accounts receivable                                          (13,841)
       Inventory                                                     (4,128)
       Accounts payable and accrued expenses                         21,314
                                                                   --------

Net cash used in operating activities                               (15,596)

INVESTING ACTIVITIES
   Purchases of property and equipment                               (2,184)
                                                                   --------

Net cash used in investing activities                                (2,184)

FINANCING ACTIVITIES
   Proceeds from Share Capital                                        7,856
   Proceeds from Borrowings                                           9,558
                                                                   --------
Net cash provided by financing activities                            17,414
                                                                   --------
Net decrease in cash and cash equivalents                              (366)

Cash and cash equivalents at beginning of period                      3,415
                                                                   --------
Cash and cash equivalents at end of period                         $  3,049
                                                                   ========
</TABLE>






<PAGE>   21
                              NETSOURCE EUROPE ASA
                     Notes to Condensed Financial Statements
                                   (unaudited)

1.  Financial Presentation and Disclosures

    General

    Netsource Europe ASA is a limited liability company organized under the laws
    of Norway. Netsource ASA has controlling ownership in several European
    telecommunication resellers and has an established presence in Sweden,
    Norway, Denmark, Germany, the Benelux and Ireland. The service offerings
    differ from country to country but include switched voice least cost
    routing, carrier reseller services and prepaid calling card services. The
    retail business is primarily directed to the small and medium sized business
    market in each country. The selling of telecommunications services is
    conducted principally through indirect distribution channels. Customers
    remit payments through direct debit, check payment and credit card methods.

    Financial Presentation and Disclosures

    In the opinion of management, the accompanying unaudited condensed financial
    statements of Netsource Europe ASA contain all adjustments (consisting only
    of normal recurring accruals) necessary to present fairly the Company's
    financial position as of September 30, 1998, and the results of operations
    and cash flows for the periods indicated.

2.  Policies and Procedures

    Consolidated Companies

    The consolidated accounts comprise the parent company Netsource Europe ASA
    and the subsidiaries Netsource Norge AS, NetSource Invest II AS, Net Source
    Invest III AS, Net Source Invest IV AS, NetSource Sverige AB, Netsource 
    Communications AB, Netsource Phonsystem AB, Netsource Danmark ApS, 
    Netsource Danmark AS, NetSource Telecom Belgium, The Netherlands, and 
    Luxembourg B.V, Teleon Holding B.V, International Telecommunications Ltd 
    (ITL), Atlantic Telecom Venray B.V and WESTCom Gmbh.

    The consolidated accounts are prepared in accordance with Norwegian GAAP.
    Certain adjustments have been made to these accounts in order that they may
    be presented in accordance with US GAAP. Under Norwegian GAAP, all business
    combinations are accounted for following the pooling method of accounting,
    whereas, under US GAAP business combinations are accounted for following the
    purchase method unless certain requirements are met for the pooling method.
    Further, other adjustments are related to certain accrued revenue and
    expenses, foreign currency translation, and depreciation and valuation of
    property and equipment. The preparation of financial statements, in
    conformity with USGAAP, 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.

    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.

    Foreign Currency Translation

    For consolidation purposes the income statement and the balance sheet of the
    foreign group companies have been translated into USD directly from the
    operating companies' local currency financials statements at the average
    exchange rate of the period and the period end exchange rate, respectively.
    The translation differences have been charged against equity.

    Accounts Receivable

    Accounts receivable are shown at their net realizable value which
    approximates their fair value. Accounts receivable are shown in the balance
    sheet net of an allowance for uncollectible accounts of $11,169 at September
    30, 1998. Of the gross receivable balance at September 30, 1998, 57% relates
    to customer accounts in Sweden.
<PAGE>   22
                              NETSOURCE EUROPE ASA
                     Notes to Condensed Financial Statements
                                  (unaudited)

Property and Equipment

Property and Equipment are recorded at their historical cost. Depreciation and 
amortization are provided on the straight-line method over the following
estimated useful lives:

<TABLE>
<CAPTION>
<S>                             <C>
         Network equipment      3-5 years
         Routers                3   years
</TABLE>

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 5 to 10
years.


Share Capital

<TABLE>
<CAPTION>
                                            Shares            Share Capital
<S>                                         <C>               <C>
Shareholders'
         equity as at 31 December 1997      23,088,543        631,179

         New Issues                          4,470,825        114,001
                                            ----------        -------

         Equity as at 30 September 1998     27,559,368        745,180
</TABLE>






<PAGE>   23

               UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS


      The unaudited pro forma combined statement of operations for the year
ended December 31, 1997 and nine months ended September 30, 1998 gives effect to
the acquisition of NetSource Europe ASA ("NetSource") as if it had occurred on
January 1, 1997. The unaudited pro forma combined balance sheet as of
September 30, 1998 gives effect to the acquisition of NetSource as if it had
occurred on September 30, 1998. No adjustments has been included in the pro 
forma amounts for any anticipated cost savings or other synergies. 

      The unaudited pro forma statements of operations are based on available
information and on certain assumptions and adjustments described in the
accompanying notes which Global TeleSystems Group, Inc. ("GTS") believes are
reasonable. The unaudited pro forma combined statements of operations are
provided for informational purposes only and do not purport to present the
results of operations of GTS had the transaction assumed therein occurred on or
as of the date indicated, nor is it necessarily indicative of the results of
operations which may be achieved in the future. The unaudited pro forma combined
statements of operations and related notes should be read in conjunction with
the consolidated financial statements of GTS filed on its Form 10-K and Form
10-Q and the financial statements of NetSource including the notes thereto. 


Global TeleSystems Group, Inc.
Pro Forma Combined Statement of Operations
Year ended December 31, 1997
(in thousands, except per share data)
(unaudited)

<TABLE>
<CAPTION>
                                                                                                      
                                                          Historical(2)                                   
                                                     ----------------------   Pro Forma     Pro Forma
                                                                  NetSource  Adjustments     Combined
                                                        GTS        Europe     (1)(3)(4)  (GTS & NetSource)
<S>                                                  <C>          <C>          <C>          <C>       
REVENUES, NET:
       Telecommunication and other services          $  41,300    $  14,102                 $  55,402
       Equipment sales                                   5,798                                  5,798
                                                     ---------    ---------    ---------    --------- 
                                                        47,098       14,102           --       61,200
                                                     ---------    ---------    ---------    --------- 
OPERATING COSTS AND EXPENSES
       Cost of revenues:
            Telecommunication and other services        37,206       13,593                    50,799
            Equipment sales                              5,513           --                     5,513
       Selling, general and administrative              68,425       12,250                    80,675
       Depreciation and amortization                     6,227        2,120        9,726       18,073
       Non-income taxes                                  2,085           --                     2,085
                                                     ---------    ---------    ---------    --------- 
                                                       119,456       27,963        9,726      157,145
       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)
OTHER INCOME/(EXPENSE):
       Interest income                                  11,361           --                    11,361
       Interest expense                                (39,086)        (538)                  (39,624)
       Foreign currency losses                          (1,826)                                (1,826)
                                                     ---------    ---------    ---------    --------- 
                                                       (29,551)        (538)          --      (30,089)
                                                     ---------    ---------    ---------    --------- 
Net loss before income taxes and minority interest    (118,181)     (14,399)      (9,726)    (142,420)
Income taxes                                             2,482          (12)                    2,470
                                                     ---------    ---------    ---------    --------- 
Net loss before minority interest                     (120,663)     (14,387)      (9,726)    (142,306)
Minority interest                                        3,677           --                     3,677
                                                     ---------    ---------    ---------    --------- 
NET LOSS                                             ($116,986)   ($ 14,387)   ($  9,726)   ($141,099)
                                                     =========    =========    =========    ========= 

Net loss per share                                                                          ($   3.55)
                                                                                            =========

Weighted average common shares outstanding                                                     39,799
                                                                                            =========
</TABLE>

See accompanying notes.
<PAGE>   24

Global TeleSystems Group, Inc.
Pro Forma Combined Statement of Operations
For the nine months ended September 30, 1998
(in thousands, except per share data)
(unaudited)

<TABLE>
<CAPTION>
                                                               Historical(2)                                                     
                                                          ----------------------           Pro Forma               Pro Forma
                                                                      NetSource            Adjustments             Combined
                                                             GTS        Europe             (1)(3)(4)            (GTS & NetSource)
<S>                                                       <C>          <C>                   <C>                    <C>       
REVENUES, NET:
         Telecommunication and other services             $ 111,195    $  29,364                                    $ 140,559
         Equipment sales                                      6,104           --                                        6,104
                                                          ---------    ---------             ---------              --------- 
                                                            117,299       29,364                                      146,663
                                                          ---------    ---------             ---------              --------- 
OPERATING COSTS AND EXPENSES
         Cost of revenues:
                  Telecommunication and other services       77,525       31,089                                      108,614
                  Equipment sales                             4,542           --                                        4,542
         Selling, general and administrative                 75,150       27,741                                      102,891
         Depreciation and amortization                       13,953        3,077                 7,295                 24,325
         Non-income taxes                                     5,140           --                                        5,140
                                                          ---------    ---------             ---------              --------- 
                                                            176,310       61,907                 7,295                245,512
         Equity in losses of ventures                        (4,142)          --                                       (4,142)
                                                          ---------    ---------             ---------              --------- 
LOSS FROM OPERATIONS                                        (54,869)     (32,543)               (7,295)               (94,707)
OTHER INCOME/(EXPENSE):
         Interest income                                     28,110          675                                       28,785
         Interest expense                                   (52,603)      (1,319)                                     (53,922)
         Foreign currency losses                            (10,364)                                                  (10,364)
                                                          ---------    ---------             ---------              --------- 
                                                            (34,857)        (644)                   --                (35,501)
                                                          ---------    ---------             ---------              --------- 
Net loss before income taxes, minority interest and
   extraordinary loss                                       (89,726)     (33,187)               (7,295)              (130,208)
Income taxes                                                  2,151           --                                        2,151
                                                          ---------    ---------             ---------              --------- 
Net loss before minority interest and extraordinary loss    (91,877)     (33,187)               (7,295)              (132,359)
Minority interest                                             3,746           --                                        3,746
                                                          ---------    ---------             ---------              --------- 
Net loss before extraordinary loss                        $ (88,131)   $ (33,187)            $  (7,295)             $(128,613)
Extraordinary loss --- extinguishment of debt               
                                                          
NET LOSS

Loss per share before extraordinary loss                                                                            $   (2.25)
                                                                                                                    =========

Weighted average common shares outstanding                                                                             57,219
                                                                                                                    =========
</TABLE>


See accompanying notes.
<PAGE>   25

Global TeleSystems Group, Inc.
Pro Forma Combined Balance Sheet
as of September 30, 1998
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
                                                                            Historical(2)
                                                                      ------------------------   Pro Forma     Pro Forma
                                                                                     NetSource  Adjustments    Combined
                                                                           GTS        Europe     (1)(3)(5)  (GTS & NetSource)
<S>                                                                   <C>            <C>         <C>          <C>       
CURRENT ASSETS
      Cash and cash equivalents                                       $   993,928    $  3,049    ($ 46,099)   $  950,878
      Accounts receivable, net                                             59,822      13,602                     73,424
      Restricted cash                                                      42,047          --                     42,047
      Prepaid expenses                                                     22,122       3,255                     25,377
      Other assets                                                         12,539       3,602                     16,141
                                                                      -----------    --------    ---------    ----------
           TOTAL CURRENT ASSETS                                         1,130,458      23,508      (46,099)    1,107,867
Property and equipment, net                                               436,019       4,329                    440,348
Investments in and advances to ventures                                    61,705          --                     61,705
Goodwill and intangible assets, net                                       161,893      22,068      145,894       329,855
Restricted cash and other noncurrent assets                                24,818         222                     25,040
                                                                      -----------    --------    ---------    ----------
           TOTAL ASSETS                                               $ 1,814,893    $ 50,127    $  99,795    $1,964,815
                                                                      ===========    ========    =========    ==========

                       LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
      Accounts payable and accrued expenses                           $   135,565    $ 27,296    $   2,000    $  164,861
      Debt maturing within one year                                        23,741      13,302                     37,043
      Current portion of capital lease obligations                         31,130          --                     31,130
      Related party debt maturing within one year                                       8,333                      8,333
      Other current liabilities                                            32,408          --                     32,408
                                                                      -----------    --------    ---------    ----------
           TOTAL CURRENT LIABILITIES                                      222,844      48,931        2,000       273,775
Long-term debt, less current portion                                      962,232          --                    962,232
Long-term portion of capital lease obligations                            187,900          --                    187,900
Related party long-term debt, less current portion                          3,530          --                      3,530
Taxes and other non-current liabilities                                    27,378       1,486                     28,864
                                                                      -----------    --------    ---------    ----------
           TOTAL LIABILITIES                                            1,403,884      50,417        2,000     1,456,301
COMMITMENTS AND CONTINGENCIES
      Minority interest                                                    43,957          --                     43,957
      Common stock, subject to repurchase (463,489 shares
        outstanding)                                                       15,643          --                     15,643
SHAREHOLDERS' EQUITY
      Common stock 64,461,828 Pro Forma combined shares 
        issued and outstanding                                              6,050         745          396         6,446
      Additional paid-in capital                                          696,574      23,402       97,109       793,683
      Accumulated other comprehensive loss                                 (7,496)         --                     (7,496)
      Accumulated deficit                                                (343,719)    (24,437)                  (343,719)
                                                                      -----------    --------    ---------    ----------
           TOTAL SHAREHOLDERS' EQUITY                                     351,409        (290)      97,505       448,914
                                                                      -----------    --------    ---------    ----------
           TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                 $ 1,814,893    $ 50,127    $  99,505    $1,964,815
                                                                      ===========    ========    =========    ==========
</TABLE>


See accompanying notes.
<PAGE>   26
                         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 NetSource Europe ASA. 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.
    Additionally, the pro forma combined statement of operations does not 
    reflect any anticipated cost savings or other synergies that may be achieved
    by the combination.
 
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 for aggregate consideration
    consisting of up to 4,037,500 shares of the Company's common stock and $46.1
    million in cash. In addition, the Company has agreed to make additional
    "earn out" payments of up to $35 million in either cash or Company common
    stock contingent on NetSource's achieving certain quarterly performance
    targets during the quarters ended March 31, and June 30, 1999. 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 the January 1, 1997. GTS's 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 values 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's 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's results of operations, would be
    recognized in the quarter ended December 31, 1998. See Note 4.
<PAGE>   27

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to the report to be signed on its
behalf by the undersigned hereunto duly authorized.

                                            Global TeleSystems Group, Inc.
                                            (Registrant)



Date:  January 19, 1999                      /s/ Alan Krenek
                                            Vice President -
                                            Corporate Accounting




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