GLOBAL TELESYSTEMS GROUP INC
S-3/A, 1999-06-04
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
Previous: PAPERCLIP SOFTWARE INCE, SC 13D/A, 1999-06-04
Next: MUNICIPAL INVEST TR FD MONTHLY PMT SER 604 DEF ASSET FDS, 497, 1999-06-04


<PAGE>   1


      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1999


                                                      REGISTRATION NO. 333-78097

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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


                                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 its charter)

<TABLE>
<S>                             <C>                             <C>
          DELAWARE                          4813                         94-3068423
(State or other jurisdiction    (Primary Standard Industrial          (I.R.S. Employer
    of incorporation or         Classification Code Number)            Identification
       organization)                                                      Number)
</TABLE>

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

<TABLE>
<S>                                             <C>
                                                              GRIER C. RACLIN
            1751 PINNACLE DRIVE                             1751 PINNACLE DRIVE
         NORTH TOWER -- 12TH FLOOR                       NORTH TOWER -- 12TH FLOOR
              MCLEAN, VA 22102                                MCLEAN, VA 22102
               (703) 918-4500                                  (703) 918-4573
(Address, including zip code, and telephone       (Name, address, including zip code, and
number, including area code, of registrant's     telephone number, including area code, of
        principal executive offices)                         agent for service)
</TABLE>

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

                                   Copies to:

                              LINDA C. QUINN, ESQ.
                              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 only 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. [ ]


     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BE COME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2

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.

PROSPECTUS (SUBJECT TO COMPLETION)


DATED JUNE   , 1999


10,000,000 DEPOSITARY SHARES EACH REPRESENTING 1/100 OF A SHARE OF 7 1/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK, 100,000 SHARES OF 7 1/4% CUMULATIVE
CONVERTIBLE PREFERRED STOCK, AND 8,746,000 SHARES OF COMMON STOCK ISSUABLE ON
CONVERSION OF, OR PAYABLE AS DIVIDENDS ON, THE DEPOSITARY SHARES OR THE 7 1/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK.

[GLOBAL LOGO]            GLOBAL TELESYSTEMS GROUP, INC.

     The selling stockholders listed under "Selling Stockholders" in this
prospectus intend to offer and sell from time to time, up to 10,000,000
depositary shares, 100,000 shares of our cumulative convertible preferred stock
and 8,746,000 shares of our common stock.

     Holders of the depositary shares are entitled to a quarterly cash payment
of $.90625 per depositary share (equivalent to a rate of 7 1/4% per year per
depositary share) on March 15, June 15, September 15 and December 15 of each
year, commencing on June 15, 1999. The depositary shares have a liquidation
preference of $50 per share (equivalent to a liquidation preference of $5,000
per share of convertible preferred stock).

     The depositary shares (and the corresponding convertible preferred stock)
is convertible at your option into shares of our common stock at any time unless
previously redeemed, at a conversion rate of .7246 shares of common stock per
depositary share (equivalent to a conversion value of 72.46 shares of common
stock per share of preferred stock).

     We may redeem the shares of the convertible preferred stock and the
corresponding depositary shares, on or after March 15, 2002, in whole or in
part. Upon a change of control event, each holder of convertible preferred stock
(and the corresponding depositary shares) may require us to repurchase all or a
portion of such holder's convertible preferred stock (and the corresponding
depositary shares).

     INVESTING IN THE DEPOSITARY SHARES AND THE PREFERRED STOCK INVOLVES RISKS
WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS
PROSPECTUS.

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


The date of this prospectus is June   , 1999

<PAGE>   3

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Forward-Looking Statements..................................    i
Summary.....................................................    1
Risk Factors................................................    5
Use of Proceeds.............................................   19
Ratio of Earnings to Combined Fixed Charges and Preferred
  Stock Dividends...........................................   19
Selling Stockholders........................................   19
Price Range of Common Stock.................................   21
Dividend Policy.............................................   21
Industry Overview...........................................   22
Business....................................................   24
Certain Relationships and Related Transactions..............   61
Description of Capital Stock................................   62
Description of Depositary Shares............................   69
Description of Convertible Preferred Stock..................   75
Shares Eligible for Future Sale.............................   86
Tax Considerations..........................................   88
Plan of Distribution........................................   94
Legal Matters...............................................   95
Experts.....................................................   95
Where You Can Find More Information.........................   95
Incorporation of Information We File with the SEC...........   96
Supplemental EASDAQ Information.............................  A-1
</TABLE>

<PAGE>   4

                           FORWARD-LOOKING STATEMENTS

     This prospectus includes forward-looking statements as to how we 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,
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; and

     -  our need for additional, substantial financing.

These forward-looking statements are principally contained in the following
sections of the prospectus:

     -  Risk Factors; and

     -  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" 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.

                                        i
<PAGE>   5

                                    SUMMARY

                                      GTS

     We are a leading independent provider of telecommunications services to
businesses, other high usage customers and telecommunications carriers in
Europe. We also provide telecommunications services in Russia and the
Commonwealth of Independent States (which shall be referred to as CIS). In
October 1998 we realigned our operations into five lines of business: GTS
Carrier Services, GTS Business Services, GTS Access Services, GTS Business
Services - CIS and GTS Mobile Services - CIS. In March 1999, we added a sixth
line of business, GTS Wholesale Services.

GTS CARRIER SERVICES

     GTS Carrier Services has three components: Hermes Europe Railtel B.V.,
Transoceanic Services and IP Services. Through Hermes Railtel, we operate a
centrally managed fiber optic network that is designed to carry high volumes of
telecommunications traffic across national borders in Europe and to the United
States. We sell this capacity to other telecommunications carriers and, through
our subsidiary, Ebone A/S, we connect Internet service providers in Europe to
the Internet. Through Transoceanic Services, we intend to expand our ability to
provide these services between the United States and Europe by utilizing the
resources of FLAG Atlantic Limited, a joint venture in formation in which we
have a 50% equity interest. This joint venture will build and operate a new
transatlantic dual cable system, called FLAG Atlantic-1, designed to carry
voice, data and video traffic at much faster speeds than currently available on
existing transatlantic links. Through IP Services, we plan to offer Internet
services to businesses, other high usage customers and telecommunications
carriers. These services will range from providing access to and transporting
data on the Internet to other services, such as helping other companies to set
up and maintain their web sites. We intend to utilize the three components of
our Carrier Services line of business to become a leading provider of seamless
transatlantic city-to-city managed services to businesses and telecommunications
providers. For a comprehensive discussion on our Carrier Services line of
business, see "Business -- GTS Carrier Services."

GTS BUSINESS SERVICES

     Through our Business Services line of business, we focus on providing high
quality, competitively priced telecommunications services to businesses and
other high usage customers. We currently conduct our Business Services line of
business through our three recently acquired subsidiaries, Esprit Telecom Group
plc, NetSource Europe ASA and Omnicom. We provide a range of telecommunications
services organized in the following two segments:

     -  long distance voice and fax services for corporate customers to
        worldwide destinations; and

     -  network management services and services providing access to and
        termination of traffic on our network for telecommunications service
        providers who do not own their own telecommunications facilities, such
        as calling card companies.

     At December 31, 1998, we had over 35,000 business customers and
approximately 44,000 small office and home office and residential customers in
11 countries throughout Europe. We intend to increase our Business Services
product offering to include services such as toll free services and calling
cards. For a discussion of our Business Services line of business, see
"Business -- GTS Business Services."

GTS WHOLESALE SERVICES

     In March 1999, we introduced Wholesale Services as our sixth line of
business. Wholesale Services provides international traffic termination services
to other telecommunications service providers, including public
telecommunications operators, global alliances and regional telephone companies.
Termination services involve the termination of traffic through our own network
or through other providers. Through our Wholesale Services line of business, we
expect to integrate the wholesale services activities of Esprit

                                        1
<PAGE>   6

Telecom with the international services and switching operations of our
GTS-Monaco Access operations. At a later date, Wholesale Services will also
incorporate NetSource's wholesale activities. For a discussion of our Wholesale
Services line of business, see "Business -- GTS Wholesale Services."

GTS ACCESS SERVICES

     Through our Access Services line of business, we plan to offer local access
to telecommunications networks for voice and data traffic to businesses, other
high usage customers and telecommunications carriers in 12 major Western
European cities by 2001. Our existing operations in Hungary and the Czech
Republic currently provide alternative local access and other services to
businesses and governmental customers in those markets. We plan to develop our
infrastructure through one or more of the following:

     -  constructing, purchasing or leasing fiber optic cable networks;

     -  obtaining licenses for telecommunications networks utilizing microwave
        transmissions; or

     -  forming partnerships with or acquiring existing network operators.

     We intend to reduce local access costs that we now incur for our Carrier
Services and Business Services customers by providing such local access
ourselves instead of purchasing it from incumbent public telecommunications
operators or other local access providers.

GTS BUSINESS SERVICES - CIS

     Through our Business Services - CIS line of business we offer
telecommunications services to business customers in Russia and other countries
in the Commonwealth of Independent States. These services include:

     -  international long distance, local telephone services and access to
        domestic long distance carriers in Moscow and St. Petersburg;

     -  domestic long distance services in Moscow and several other cities in
        Russia; and

     -  data services, including high-speed data transmission, electronic mail
        and Internet access services.

     We currently operate in 31 regions, including 14 cities and the city of
Moscow, in Russia and the CIS. For a discussion of our Business Services - CIS
line of business, see "Business -- GTS Business Services - CIS and Mobile
Services - CIS -- GTS Business Services - CIS."

GTS MOBILE SERVICES - CIS

     Through our Mobile Services - CIS line of business, we offer cellular
telephone services to business customers in 14 regions in Russia and in Kiev,
Ukraine. For a discussion of our Mobile Services - CIS line of business, see
"Business -- GTS Business Services - CIS and Mobile Services - CIS -- GTS Mobile
Services - CIS."

                               BUSINESS STRATEGY

     In order to achieve our objective of becoming Europe's premier independent
provider of telecommunications services to businesses, other high usage
customers and telecommunications carriers, we intend to implement the following
key strategies:

     - continue construction of the Hermes Railtel network to expand its
       geographic reach;

     - develop local access infrastructure in 12 major metropolitan markets
       throughout Europe by 2001;

     - expand our Internet capabilities and product offerings;

                                        2
<PAGE>   7

     - reinforce and extend market penetration of Hermes Railtel's network by
       enhancing the scope, capacity, reliability and efficiency of our
       infrastructure, and by providing our own local access;

     - increase high usage retail customer base and route traffic over our own
       networks; and

     - integrate the marketing and service offerings of each of our six lines of
       business.

                              RECENT DEVELOPMENTS

OMNICOM ACQUISITION


     On April 26, 1999, we purchased 52% of the shares of Omnicom, a French
corporation, for euro 194.6 million (approximately $210 million) of which we
paid 50% in cash (approximately $103,000,000) and 50% in shares of our common
stock (consisting of 1,850,497 shares). These shares are unregistered and are
therefore subject to transfer restrictions. We have agreed to file a
registration statement with respect to these shares. Certain of the Omnicom
majority shareholders have agreed:


     - to place a total of approximately 20% of the GTS shares acquired in
       escrow until the later of June 30, 2000 or thirty days after the filing
       of our Form 10-K for year end December 31, 1999; and

     - not to transfer a total of approximately 30% of the GTS common stock
       acquired until six months after the date of acquisition.


     As required by French law, we have filed with the Conseil des Marches
Financiers and are currently offering to purchase the remaining outstanding
shares and the convertible bonds of Omnicom. We are not making this offer to
Omnicom securityholders in the United States, mailing or distributing the offer
to purchase in the United States or accepting any Omnicom securityholders'
acceptances mailed to us from the United States. As of the date of this
prospectus, we currently own over 98% of the shares of Omnicom.


     Omnicom is one of France's first telecommunications providers to
successfully challenge France Telecom's network. Omnicom is the second operator
to connect with France Telecom and also holds a national network operator's
license for France. Excluding France Telecom, Omnicom is the leading provider of
telecommunications services for small and medium-sized businesses in France.
Omnicom markets its services through both a direct sales force and sales agents
throughout France. Omnicom's other service offerings include the sale and
distribution of pre-paid cards to outlets in France and the offering of
telecommunications services to residential customers.

     We believe that Omnicom's business is complementary with ours and that both
companies will enjoy benefits from this combination.

OUR NEW CHIEF EXECUTIVE OFFICER; MANAGEMENT

     In March 1999, our board of directors elected H. Brian Thompson as chairman
and chief executive officer. Mr. Thompson served as chairman and chief executive
officer of LCI International, Inc. from 1991 until June 1998, when Qwest
Communications International, Inc. acquired LCI. During Mr. Thompson's tenure at
LCI, that company grew in annual revenues from $220 million to $1.6 billion in
1997. LCI provided long-distance voice and data services in the United States
and in more than 230 international locations. In addition, our board elected
Robert J. Amman, a board member, president of our company. In April 1999, Bruno
D'Avanzo, chief operating officer, determined to leave GTS.

ESPRIT TELECOM ACQUISITION

     On February 2, 1999, we commenced an offer to purchase all of the issued
share capital of Esprit Telecom. On March 4, 1999, after all of the conditions
to our offer were satisfied, we accepted ordinary shares and American depositary
shares representing approximately 97.9% of the issued share capital of Esprit
Telecom. In exchange, we issued approximately 15.7 million shares of our common
stock.

                                        3
<PAGE>   8


     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 existing lines of business and corporate structure. We have accounted
for this transaction as a pooling of interests. On April 16, 1999, we announced
30-day postmerger combined financial results. The combined company generated
revenues of $59 million, net loss of $26 million and earnings per share of
$(0.32) for the 30-day postmerger period beginning March 5, 1999. In addition,
we incurred charges in the first quarter of 1999 in connection with the Espirit
Telecom combination. We recognized a charge of approximately $46 million in
transaction costs, including investment banking, advising, debt restructuring,
legal, accounting, printing and employee-related expenses. We also incurred
additional charges of $18 million to eliminate or reduce redundancies of the GTS
and Espirit Telecom networks, including, fiber lease cancellation, write-off of
excess equipment and redeployment of switches. For a discussion of risks
associated with the integration of this acquisition, see "Risk
Factors -- Failure to successfully integrate our recent acquisitions could
disrupt the operations of our businesses and prevent us from realizing intended
benefits."


HERMES DEBT OFFERING


     On January 4, 1999, Hermes Railtel, an 89.9% owned subsidiary, completed a
private placement of $200 million principal amount of 10 3/8% senior notes due
2009 and E85 million principal amount of 10 3/8% senior notes due 2006. Hermes
Railtel filed an S-4 registration statement with the SEC to exchange registered
senior notes with the same terms and conditions as its 10 3/8% senior notes, for
the 10 3/8% senior notes. This exchange was completed on March 29, 1999. Hermes
Railtel will use the proceeds of this offering to finance the cost of building
the remainder of the network and increasing transatlantic capacity and enhancing
the speed and capacity of the network.


SECONDARY STOCK OFFERING

     On April 19, 1999, the SEC declared effective two shelf registration
statements with respect to the resale of an aggregate of approximately 24.1
million shares of our common stock owned by some of our affiliates and other
stockholders. Shortly thereafter, Apax Funds Nominees Limited and Warburg,
Pincus Ventures L.P., which together owned approximately 7.7% of our common
stock as of December 31, 1998, sold their shares under an underwritten public
offering pursuant to the shelf registration statements.

                            OUR COMPANY INFORMATION

     We maintain our principal offices at 1751 Pinnacle Drive, North
Tower -- 12th Floor, McLean, VA 22102 (telephone (703) 918-4500).

                                        4
<PAGE>   9

                                  RISK FACTORS

     Investing in our depositary shares and convertible preferred stock will
provide you with an equity ownership interest in GTS. As a holder of depositary
shares, 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. You should
carefully consider the following factors relating to us as well as other
information contained in this prospectus before deciding to invest in these
securities.

WE MAY BE UNABLE TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO IMPLEMENT OUR
BUSINESS STRATEGY

     We will require additional capital to fund future acquisitions, capital
expenditures and ongoing operations. If we fail to generate sufficient funds in
the future from a combination of operating cash flow and additional debt or
equity financings, we may have to delay or abandon executing significant
elements of our business plan including:

     -  our plans to offer local access services in twelve major Western
        European cities by 2001;

     -  our plans to further extend our network in Europe;

     -  our participation in the FLAG Atlantic Limited joint venture, which
        plans to operate and build a new transatlantic cable; and

     -  capital expenditures and other costs necessary to develop and offer
        Internet services.

Failure to implement elements of our business plan could have a material adverse
effect on our operations and on the market price of our securities.

OUR SUBSTANTIAL DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A
COMPETITIVE DISADVANTAGE

     We have incurred substantial debt (including the assumed debt of Esprit
Telecom) and may incur substantial additional debt to implement our business
plans.

     As a result of our current 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;

     -  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; and

     -  will have more debt than some of our competitors, which may place us at
        a competitive disadvantage with respect to such competitors.

     If we fail to make the required payments or to comply with our debt
covenants we will default on our debt. A default would permit our debtholders to
accelerate the maturity of the debt, which in turn would cause defaults under
our other indebtedness.

                                        5
<PAGE>   10

COVENANTS IN OUR DEBT AGREEMENTS RESTRICT OUR ABILITY TO BORROW AND INVEST,
WHICH COULD IMPAIR OUR ABILITY TO EXPAND OR FINANCE OUR FUTURE OPERATIONS

     The covenants in our currently outstanding debt may materially and
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities. Among other things, these covenants
limit our ability to:

     -  incur additional indebtedness;

     -  pay dividends, make distributions on our common stock or make certain
        other restricted payments;

     -  limit our ability to use our assets as collateral for loans;

     -  dispose of our assets; or

     -  enter into transactions with affiliates.

FAILURE TO SUCCESSFULLY INTEGRATE OUR RECENT ACQUISITIONS COULD DISRUPT THE
OPERATIONS OF OUR BUSINESSES AND PREVENT US FROM REALIZING INTENDED BENEFITS

     If we are unable to integrate our newly acquired companies, we may fail to
realize the expected cost savings, increases in revenue and other projected
benefits from such integration, and may suffer material adverse short and
long-term effects on our operating results and financial condition. The process
of integrating NetSource, Esprit Telecom and Omnicom 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;

     -  changes in management may impair relationships with employees and
       customers;

     -  limitations under existing Esprit Telecom debt covenants;

     -  the resulting diversion of management's attention from our day-to-day
       business and the need to hire management personnel to address such
       obstacles; and

     -  additional expenditures required to facilitate this integration.

     For a discussion of the integration of recent acquisitions, see
"Summary -- GTS -- GTS Wholesale Services" and "Summary -- Recent
Developments -- Esprit Telecom Acquisition."

OUR INABILITY TO IDENTIFY FUTURE ACQUISITION OPPORTUNITIES OR ACQUIRE THE
FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE SUCH OPPORTUNITIES MAY HINDER THE
GROWTH OF OUR NETWORK

     Our inability to successfully implement our acquisition strategy may hinder
the expansion of our network and make our services less attractive to customers
seeking a geographically broader network. We believe that additional attractive
acquisition opportunities currently exist in Western and Central Europe and the
United States. We continuously evaluate attractive acquisition opportunities
and, at any given time, may be engaged in discussions with respect to possible
material acquisitions or other business combinations. Some of these transactions
may involve our selling in one or more private or public transactions certain of
our Russian businesses or our interests in these businesses, or our contributing
some of our Russian businesses in exchange for an interest in the surviving
entity. Although we have discussions
                                        6
<PAGE>   11

with other companies to assess opportunities on an ongoing basis, we do not
currently have a definitive agreement with respect to any material acquisition
or joint venture. We may be unable to identify, finance and complete, on
acceptable terms, suitable acquisitions, transactions or business combinations.
Furthermore, we may not be able to raise the additional capital necessary to
fund such acquisitions and may have to divert management's attention and our
financial and other resources from other areas. For a comprehensive discussion
of our acquisition strategy, see "Business -- GTS Carrier Services -- Business
and Marketing Strategy," "Business -- GTS Business Services -- Business and
Marketing Strategy," "Business -- GTS Wholesale Services -- Business and
Marketing Strategy," and "Business -- GTS Access Services -- Business and
Marketing Strategy."

OUR HISTORY OF SUBSTANTIAL NET LOSSES MAY CONTINUE INDEFINITELY AND MAKE IT
DIFFICULT TO FUND OUR OPERATIONS

     We have historically sustained substantial operating and net losses. If we
do not become profitable in the future, the value of our common stock may fall
and we could have difficulty obtaining funds to continue our operations. For the
following periods, we reported net losses of:


<TABLE>
<CAPTION>
PERIOD                                                             NET LOSS
- ------                                                          --------------
<S>                                                             <C>
Year ended December 31, 1996................................    $ 76.2 million
Year ended December 31, 1997................................    $134.8 million
Year ended December 31, 1998................................    $255.8 million
Quarter ended March 31, 1999................................    $162.2 million
Inception through March 31, 1999............................    $705.9 million
</TABLE>


These net losses reflect the restatement of our historical financial statements
for 1998 and prior periods to account for the acquisition of Esprit Telecom as a
pooling of interests. Since December 31, 1998 we have incurred higher net losses
as compared to the corresponding period for the previous year. We expect to
continue incurring significant operating losses during the next several years
while we develop our operations, infrastructure and customer base in new
European markets.

ESTABLISHED COMPETITORS WITH GREATER RESOURCES MAY MAKE IT MORE DIFFICULT FOR US
TO EFFECTIVELY MARKET OUR SERVICES, OFFER OUR SERVICES AT A PROFIT AND ATTRACT
AND RETAIN CUSTOMERS

     Competitors may force us to lower our prices or modify our service
offerings to remain competitive. We may not be able to effectively market our
expanded service offerings, keep prices at a profitable level or attract and
retain customers. Specifically, prices for international long distance calls
have decreased substantially over the last few years in most of our current and
potential markets. We expect our prices for services to continue to decrease for
the foreseeable future.

     Our competitors include large established national carriers, alliances
among telecommunications companies, competitors that own equipment and networks,
companies that purchase and resell the services of other carriers, Internet
service providers and other providers of bundled services. We may also face
competition from cable television companies, wireless telephone companies,
microwave carriers and satellite companies. Many of these competitors have
established customer bases and extensive brand name recognition and have greater
financial, management and other resources. Our medium- to large-sized business
and governmental agency customers and organizations may also be reluctant to
entrust their telecommunications needs to what they perceive to be a relatively
new and unproven operator.

     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 which do or will compete with Hermes Railtel.

                                        7
<PAGE>   12

     For more information on our competitors in Business Services and Access
Services lines of business, see "Business -- Competition Faced by Our Lines of
Business."

OUR COMPETITIVE POSITION MAY BE COMPROMISED BY OUR DEPENDENCE ON OTHER
TELECOMMUNICATIONS SERVICE PROVIDERS

     We 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 agreements which permit us to place our
equipment at the facilities of those third parties and/or lease
telecommunications transport capacity from those third parties. Failure to enter
into interconnection and other agreements which provide satisfactory pricing and
other terms could affect our ability to compete in a targeted market. For a
comprehensive discussion on our dependence on other telecommunications service
providers, see "Business -- Competition Faced by Our Lines of Business."

OUR ACCESS SERVICES AND BUSINESS SERVICES ACTIVITIES MAY CAUSE OUR CARRIER
SERVICES LINE OF BUSINESS TO LOSE CUSTOMERS

     Our Carrier Services line of business, through Hermes Railtel, offers
services to customers that may compete with our Access Services and Business
Services lines of business. Our Business Services and Access Services lines of
business may contract with Hermes Railtel for capacity on an arms-length basis.
However, Hermes Railtel's customers and potential customers may not perceive
Hermes Railtel as an independent operator in such transactions. Such a
perception could negatively impact Hermes Railtel's ability to attract and
retain customers, which could, in turn, adversely affect our revenues.

WE MAY INCUR ADDITIONAL CHARGES UNDER OUR RESALE AGREEMENTS WITH LONG-DISTANCE
AND INTERNATIONAL CARRIERS

     We enter into many telecommunications traffic 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. Under these arrangements, we are subject to the risk of unanticipated
price fluctuations and service restrictions or cancellations. For a
comprehensive discussion on our dependence on other telecommunications service
providers, see "Business -- Competition Faced by Our Lines of Business."

OUR INABILITY TO MANAGE OUR RAPID GROWTH COULD ADVERSELY AFFECT OUR FINANCIAL
REPORTING, CUSTOMER SERVICE AND REVENUES

     Our rapid expansion has placed and will continue to place significant
demands on our operating and financial control systems and infrastructure. In
order to manage our growth effectively, we expect to 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 excessively increase our fixed
expenses. Additionally our business development and expansion will create
additional demands on our customer support, sales and marketing and
administrative resources and network infrastructure.

OUR FAILURE TO INTEGRATE, MANAGE AND OPERATE NEW TECHNOLOGY COULD RESULT IN
SYSTEM FAILURES

     Our operations depend on our ability to successfully integrate new and
emerging technologies and equipment. These include the technology and equipment
required for dense wavelength division multiplexing, which allows multiple
signals to be carried simultaneously and Internet-data transmission using dense
wavelength division multiplexing technology. Integrating these new technologies
could increase the risk of system failure and result in further strains on our
resources. Additionally, any damage to our Carrier Services network management
center or our major Business Services switching centers could harm our ability
to monitor and manage the network operations and generate accurate call detail
reports from

                                        8
<PAGE>   13

which billing information is derived. For a comprehensive discussion of our
efforts to manage our technology, see "Business -- GTS Carrier Services" and
"Business -- GTS Business Services."

SYSTEM FAILURES OR INTERRUPTIONS IN OUR NETWORK MAY CAUSE LOSS OF CUSTOMERS

     Our success depends on the seamless uninterrupted operation of our network
and on the management of traffic volumes and route preferences over our network.
Furthermore, as we continue to expand our network to increase both its capacity
and reach, and as traffic volume continues to increase, we will face increasing
demands and challenges in managing our circuit capacity and traffic management
systems. Any prolonged failure of our communications network or other systems or
hardware that causes significant interruptions to our operations could seriously
damage our reputation and result in customer attrition and financial losses.

THE TECHNOLOGY OF OUR HERMES RAILTEL NETWORK COULD BECOME OBSOLETE AND HARM OUR
COMPETITIVENESS

     If our network is not able to meet its design specifications or if it is
unable to keep pace with technological changes in the telecommunications
industry, our network could become obsolete. Our network has been designed to
utilize dense wavelength division multiplexing and synchronous digital hierarchy
technology, another digital transmission standard that facilitates the
compatibility of dissimilar equipment from different vendors. In addition, the
network will be extended to support IP Services in 1999. While the currently
operational portion of our network has performed at or above design
specifications since November 1996, our network may not achieve the technical
specifications which we designed it for. Additionally, we may be unable to
allocate the funds necessary to upgrade our network as technological
improvements in telecommunications equipment are introduced. This could harm our
competitive position relative to other more technologically advanced networks.
For a more comprehensive discussion of the Hermes Railtel network technology,
see "Business -- GTS Carrier Services -- Hermes Railtel Network."

WE MAY ENCOUNTER DELAYS IN IMPLEMENTING KEY ELEMENTS OF OUR BUSINESS STRATEGY
WHICH COULD ADVERSELY AFFECT OUR PROJECTED REVENUE GROWTH

     We may be unable to successfully, timely and cost-effectively realize
numerous elements of our business plan, including:

     -  our plan to provide local access services in twelve major Western
        European cities by 2001;

     -  our plan to build and operate the FLAG Atlantic-1 transatlantic cable by
        the end of 2000;

     -  our plan to develop and offer Internet services;

     -  the execution of agreements with various parties regarding, among other
        things, rights-of-way and development and maintenance of infrastructure
        and equipment; and

     -  the timely performance by third parties of their contractual obligations
        to engineer, design and construct the infrastructure underlying our
        local access strategy, transatlantic services and Internet services.

     We believe that our cost estimates and the network expansion schedule are
reasonable with respect to these projects. However, the actual construction
costs or time required to complete the plans could substantially exceed current
estimates. Any significant delay or increase in the costs to develop our plans
could have a material adverse effect on our operations.

DELAYS IN REGULATORY LIBERALIZATION IN EU MEMBER STATES COULD ADVERSELY AFFECT
OUR SERVICE OFFERINGS IN THOSE COUNTRIES

     A substantial portion of our strategy depends on the timely implementation
of regulatory liberalization of the EU telecommunications market. Although EU
member states had a legal obligation to liberalize their markets in accordance
with these directives by January 1, 1998, Greece and Portugal have been
                                        9
<PAGE>   14

granted extensions. In many countries where we implement our business plan and
make capital expenditures there is a risk that regulatory liberalization may not
occur. As a result, we may be unable to provide many of our services and to
proceed with the planned growth and expansion of our networks, infrastructure
and other systems.

     Even if an EU member state promptly adopts liberalization measures in a
timely fashion, we may encounter difficulty in executing our business plan if
(1) established national or regional telecommunications operators, regulators,
trade unions and other sources resist implementation of such measures or (2) any
EU member state imposes greater restrictions on international services between
the EU member state and non-EU countries. For a comprehensive discussion of our
business strategy, see "Business -- Business Strategy," "Business -- GTS Carrier
Services -- Business and Marketing Strategy," "Business -- GTS Business
Services -- Business and Marketing Strategy," "Business -- GTS Wholesale
Services -- Business and Marketing Strategy," and "Business -- GTS Access
Services -- Business and Marketing Strategy."

WE MAY ENCOUNTER DELAYS, OPERATIONAL PROBLEMS AND INCREASED COSTS IF WE ARE
UNABLE TO ACQUIRE KEY EQUIPMENT FROM OUR MAJOR SUPPLIERS

     We are significantly dependent on the technology and equipment which we
acquire from telecommunications equipment manufacturers that may provide vendor
financing for, and maintenance of, this equipment. Without this equipment, we
would face delays, operational disruption and higher expenses. Our main
suppliers are Alcatel, Nortel, Ericsson and Siemens. While we could obtain
equipment of comparable quality from several alternative suppliers, we may be
unable to acquire compatible equipment from such alternative sources on a timely
and cost-efficient basis.

FAILURE TO OBTAIN NEW LEASES OF TRANSMISSION CAPACITY OR RENEW EXISTING LEASES
ON OUR LEASED LINES COULD CAUSE US TO INCUR LOSSES ON THE LEASED PORTIONS OF OUR
NETWORK

     We currently lease a substantial portion of our network transmission
capacity under agreements which generally have twelve-month or longer fixed
terms. These lease arrangements result in high fixed costs. If our lease
arrangements deteriorate or terminate and we are unable to enter into new
arrangements, our cost structure, service quality, network coverage, results of
operations and financial condition could be adversely affected. For a more
comprehensive discussion of our network agreements, see "Business -- GTS Carrier
Services -- Hermes Railtel Network -- Network Agreements."

FAILURE TO CARRY SUFFICIENT TRAFFIC ON OUR LEASED LINES COULD CAUSE US TO INCUR
LOSSES ON THE LEASED PORTION OF OUR NETWORK

     The revenues generated by transporting traffic in these leased fiber routes
may vary with traffic volumes and prices. Accordingly, if we do not carry enough
traffic volume over the particular route or are unable to charge an appropriate
price for this traffic, we could fail to generate revenue sufficient to cover
our lease costs, and would therefore incur operating losses on the particular
route or routes. For a more comprehensive discussion of our network agreements,
see "Business -- GTS Carrier Services -- Hermes Railtel Network -- Network
Agreements."

OUR REVENUES FROM OUR WHOLESALE AND RESELLER CUSTOMERS ARE SUBJECT TO
FLUCTUATIONS AND MAY RESULT IN LOSSES OR INCONSISTENT PROFITABILITY

     Customers of our Business Services line of business that purchase services
on a wholesale basis or for resale to retail customers typically change their
routing or providers to take advantage of the lowest cost alternative. This
often results in greater fluctuations in revenue generated by these customers
than by other categories of customers. Due to capacity and quality constraints
on our least-cost routes, we have occasionally been forced to carry traffic over
a higher-cost route, thereby decreasing our revenues. We may continue to
experience short term fluctuations in usage and revenue as customers change
routing and

                                       10
<PAGE>   15

providers. For a discussion of our wholesale and resale customers, see
"Business -- GTS Wholesale Services -- Targeted Customers."

WE WILL LOSE TAX BENEFITS IF WE ARE UNABLE TO USE OUR NET OPERATING LOSS
CARRYFORWARDS


     As of December 31, 1998, we had net operating loss carryforwards for U.S.
federal tax purposes of approximately $251.0 million expiring in 2003 through
2018. We cannot assure you that U.S. tax authorities will allow us to apply
these loss carryforwards, in part or full, to reduce taxes on our future income.
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, convertible senior subordinated debenture due 2010
offering carried out in July 1998 and our recent acquisitions of Esprit Telecom
and NetSource.


FLUCTUATIONS IN FOREIGN CURRENCIES MAY MAKE IT MORE COSTLY FOR US TO PAY OUR
U.S. DOLLAR-, DEUTSCHMARK- AND EURO-DENOMINATED DEBT

     Changes in foreign currency exchange rates can reduce the value of our
assets and revenues and increase our liabilities and costs, as our revenue and
some of our costs, assets and liabilities are denominated in multiple local
currencies. We have substantial debt denominated in U.S. dollars, Deutschmarks
and Euros. However, most of our revenues are denominated in European currencies.
Therefore, our ability to pay interest and principal on such debt is dependent
on the then current exchange rates between U.S. dollars and the currencies in
which our revenues are denominated. We historically have not used hedging
transactions to limit our exposure to risks from doing business in foreign
currencies. In April 1998, Hermes Europe Railtel B.V. entered into a currency
swap contract to limit its exposure to some if its currency risks. For further
discussion of our exposure to currency fluctuations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

OUR RISK OF FRAUD AND BAD DEBT MAY GROW AS OUR SMALL TO MEDIUM SIZED CUSTOMERS
INCREASE

     We have experienced problems relating to the fraudulent use of our access
codes and the failure of some customers to make full payment for services
rendered. However, we do not believe that such problems are substantially
different from what is generally experienced in the telecommunications industry.
We expect that the credit risk characteristic of our customer base may increase
as the share of our revenue deriving from small to medium sized enterprises and
service provider/reseller customers increases.

WE MAY NOT IMPLEMENT BILLING AND MANAGEMENT INFORMATION SYSTEMS EFFECTIVELY AND
ON SCHEDULE

     We may encounter difficulties in implementing and enhancing our new billing
and management information systems and in integrating new technology into such
systems. While our existing billing system is sufficient for its current
operations, we have selected a new billing system which we believe will provide
the capability and flexibility to support our anticipated growth. If our billing
and management information systems are not effectively implemented, our call
details may not be accurately recorded and customer bills may not be generated
promptly and accurately. This would adversely impact on our business since we
would not be able to promptly collect on customer balances due to us. For a
comprehensive discussion of our Billing and Management Information Systems, see
"Business -- GTS Business Services -- Billing and Management Information
Systems" and "Business -- GTS Access Services -- Billing and Management
Information Systems."

FAILURE OF OUR COMPUTER SYSTEMS TO RECOGNIZE THE YEAR 2000 COULD DISRUPT OUR
BUSINESS AND OPERATIONS

     We rely greatly on computer systems and other technological devices.
However, these devices may not be capable of recognizing dates beginning on
January 1, 2000. This problem could cause any of our network, Internet or
programming operations to malfunction or fail. We are communicating with third
parties significant to our business to find out more about their Year 2000
compliance programs. We cannot

                                       11
<PAGE>   16

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.


     We have spent approximately $4.9 million for our Year 2000 compliance
through December 31, 1998, and expect to spend approximately an additional $5.0
million to $6.0 million through the end of calendar year 1999. We currently
expect to incur $2.0 million to replace identified telecommunications equipment
and software. For a discussion of our Year 2000 compliance efforts, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."


LOSS OF KEY PERSONNEL COULD AFFECT OUR GROWTH AND FUTURE SUCCESS

     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. Key personnel include our senior management and the heads of
our lines of business as well as senior management personnel formerly employed
by NetSource and Esprit Telecom, which we recently acquired. We cannot assure
you that we will be able to hire and retain qualified personnel. The competition
for qualified personnel in the telecommunications industry is intense,
particularly in the emerging markets where we operate.

SIGNIFICANT STOCKHOLDERS MAY INFLUENCE MAJOR DECISIONS IN OUR BUSINESS

     At December 31, 1998, the Open Society Institute, Soros Foundation Hungary,
Soros Charitable Foundation, Soros Humanitarian Foundation, Winston Partners II
LLC, Winston Partners II LDC and Chatterjee Fund Management, L.P., which we
collectively refer to as the Soros associates, beneficially owned approximately
11.91% of our common stock and Alan B. Slifka and affiliates beneficially owned
4.60% of our common stock. In addition, two persons who are affiliated with the
Soros associates and one person who is affiliated with the Slifka affiliates
serve on our 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.

TURMOIL IN RUSSIA AND THE CIS CREATES SIGNIFICANT UNCERTAINTY FOR OUR OPERATIONS

     To date, we have earned a significant portion of our revenue from
operations in Russia and the other countries of the CIS. All foreign companies
operating in the former Soviet Union, including our company, face significant
political, economic, regulatory, legal and tax risks, as described below.

     For a discussion of our consideration of a possible sale of our interest in
certain of our Russian businesses, including through a public offering, see
"Business -- GTS Business Services -- CIS and Mobile Services -- CIS."

  THE EFFECT OF POLITICAL INSTABILITY ON OUR BUSINESS IS UNCERTAIN

     Instability in the political systems of Russia and the other independent
countries of the CIS discourages investment and spending and could reduce our
revenues and profits from our operations in these countries. The political
instability results from political gridlock, dissatisfaction with reform, social
and ethnic unrest, economic difficulties, and changes in government policies,
and may grow worse in the future. Russia's current president continues to
institute political reforms, but the pace of reform is slowing. The dismissal of
a significant number of government leaders by the Russian president over the
past year has contributed to continuing political instability.

     The Russian parliament has passed legislation to protect private property
from expropriation and nationalization. However, since the Russian government
lacks experience in enforcing these provisions and since the present political
system is unstable, we do not know if these protections will be enforced in the
future. Expropriation or nationalization of our business would have a material
adverse effect on our operations.

                                       12
<PAGE>   17

  RUSSIA'S UNSTABLE ECONOMY MAY REDUCE DEMAND FOR OUR SERVICES

     The Russian economy has experienced severe volatility in both financial and
currency markets. These developments have been accompanied by a substantial
decline in the Russian stock market and the failure of banks and other
businesses. Reforms enacted by the Russian government to create a more market-
oriented economy are at risk in this environment and it is uncertain whether
stability will return to the Russian financial markets. If the Russian economy
does not improve, this condition will most likely have an impact on the demand
for our services offered in Russia.

  THE RUSSIAN BANKING CRISIS COULD ADVERSELY AFFECT OUR ABILITY TO CONVERT
RUBLES AND RECOVER FUNDS

     The instability of the ruble and the institution of further restrictions on
certain foreign exchange payments could negatively affect our ability to convert
rubles into foreign currency and transfer foreign exchange payments out of
Russia. Through our Business Services - CIS and Mobile Services - CIS lines of
business, we have earned and continue to earn significant revenue in Russia. The
value of the ruble against the U.S. Dollar, however, 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. 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 which could
negatively affect our financial performance and require us to record another
significant pre-tax charge.

     Our ability to hedge against further declines in the values of the ruble by
converting to other currencies is significantly limited. The ruble is generally
non-convertible outside Russia. 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 or may cease to exist as a result of policies the Russian
government may implement.

     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 that foreign currency could have a material adverse effect on
our operations.

     For a more comprehensive discussion of the economic crisis in Russia and
the other independent countries of the CIS, see "Business -- GTS Business
Services - CIS and Mobile Services - CIS -- Background on the Political,
Economic and Tax Environment in Russia."

  MORE RESTRICTIVE RUSSIAN TELECOMMUNICATIONS POLICIES COULD CONSTRAIN OUR
OPERATIONS

     Presently, Russian legislation does not restrict foreign investment in the
telecommunications industry, but there have been press reports of renewed
consideration of nationalization and foreign ownership restrictions of certain
strategic industries, such as the telecommunications industry. Any change to
current government regulations or policies that negatively affects the licenses
that we hold or our ability to obtain licenses in the future would restrict our
operations in Russia and the CIS. For a more comprehensive discussion of
regulatory issues in Russia and the other independent countries of the CIS, see
"Business -- Licenses and Regulatory Issues -- GTS Business Services - CIS and
Mobile Services - CIS."

  WE MAY BE UNABLE TO ENFORCE OUR RIGHTS DUE TO CONFUSION IN RUSSIA'S LAWS AND
LEGAL STRUCTURES

     The current confusion with the Russian and CIS legal structure makes it
difficult to know if we would be able to enforce our rights in disputes with our
joint venture partners or other parties, or if we are in compliance with all
applicable laws, rules and regulations. The Russian and other CIS governments
have

                                       13
<PAGE>   18

rapidly introduced laws and regulations and have changed their legal structures
in an effort to make their economies more market-oriented, resulting in
considerable legal confusion, especially in areas of the law that directly
affect our operations. There can be no assurance that local laws and regulations
will become stable in the future. Our ability to provide services in Russia and
the other independent countries of the CIS could be adversely affected by
difficulties in protecting and enforcing our rights and by future changes to
local laws and regulations.

  OUR RUSSIAN TAX BURDEN MAY BE SIGNIFICANTLY GREATER THAN ANTICIPATED

     It is possible that our Russian taxes may be greater than the estimated
amount that we have expensed to date and accrued on our balance sheets. The
Russian tax system has many uncertainties and Russian tax authorities have
become increasingly aggressive in their interpretation of the tax law, and in
their enforcement and collection activities. We believe that the resolution of
our Russian tax liability will not have a material adverse effect on our Russian
shareholdings and financial condition. However, the amount and timing of an
unfavorable resolution of our tax liability could have a material adverse effect
on future results of operations or cash flows in a particular period.

  OUR MANAGEMENT, LEGAL AND FINANCIAL CONTROLS MAY BE INADEQUATE TO ENSURE THAT
  WE COMPLY WITH APPLICABLE LAWS

     As a result of deficient reporting and control standards, we have been
unable to ascertain whether certain practices by our ventures 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 we or our ventures could be exposed, among
other things, to significant fines, the risk of prosecution and the loss of our
licenses. Russia and the other independent countries of the CIS in which we
operate lack corporate management and financial reporting legal requirements,
and have underdeveloped banking, computer and other internal control systems.
Additionally, we have had difficulty hiring and retaining qualified employees in
these markets. As a result, we have had difficulty:

     -  establishing internal 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.

     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. In addition, in early 1997, we retained special outside counsel to
conduct a thorough review of our business practices in the emerging markets in
which we operate. The review did not identify any violations of law that we
believe would have a material adverse effect on our financial condition. We
believe that the special counsel review was properly conducted and was
sufficient in scope, but 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. In addition, if government authorities were
to disagree with our assessment, our future results of operations and cash flows
could be materially adversely affected.

  THE REORGANIZATION OF THE RUSSIAN TELECOMMUNICATIONS INDUSTRY MAY CREATE
  STRONGER COMPETITION FOR US AND HURT OUR RELATIONS WITH OUR RUSSIAN PARTNERS

     The Russian government has reorganized the Russian telecommunications
industry so that one entity, Svyazinvest, now owns a majority interest in most
of our principal venture partners and other telecommunications service providers
in Russia. This reorganization could make it more difficult for us to attract
and retain customers, and thereby reduce our revenues, because:

     -  Svyazinvest is likely to become a stronger competitor; and

                                       14
<PAGE>   19

     -  Our business relationships with our principal venture partners, which
        make up a major component of our business strategy in Russia, may be
        hurt.

     For a further discussion of Svyazinvest, see "Business -- Licenses and
Regulatory Issues -- GTS Business Services - CIS and Mobile Services - CIS."

  WE MAY BE OVERLY DEPENDENT ON OUR JOINT VENTURE PARTNERS

    INABILITY TO OBTAIN LOCAL ASSISTANCE ON MARKETING AND REGULATORY MATTERS MAY
    DISRUPT OUR RUSSIAN AND CIS OPERATIONS

     We are substantially dependent on our local partners to provide us with
marketing expertise and knowledge of the local regulatory environment. Because
their local knowledge helps facilitate the acquisition of necessary licenses and
permits, any significant disruption in our relationship with these parties could
make it more difficult for us to obtain and maintain licenses and permits for
our Russian and CIS operations.

     TERMS OF OUR JOINT VENTURE AGREEMENTS LIMIT OUR ABILITY TO MANAGE JOINT
VENTURES

     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, we are unable to unilaterally control the
operations of our joint ventures. For a discussion of these joint ventures, see
"Business -- GTS Business Services - CIS and Mobile Services - CIS -- GTS
Business Services - CIS -- Operations."

     OUR COMPETITION WITH OUR JOINT VENTURE PARTNERS MAY RESULT IN CONFLICTS OF
INTEREST

     We frequently compete with some joint venture partners in the same markets
which may lead to conflicts of interest. 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 Mobile Services - CIS. We cannot assure you that any such
conflicts will be resolved in our favor.

WE HAVE ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN
CONTROL, EVEN IF IT WOULD BENEFIT SHAREHOLDERS

     We have adopted anti-takeover provisions that 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 the change in control would
be beneficial to you. These anti-takeover provisions could depress the market
price of your common stock. These anti-takeover provisions include:

     -  Section 203 of the Delaware General Corporation 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 limited circumstances; and

     -  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;

       -  a prohibition on stockholder action by written consent;

       -  restrictions on the removal of directors;

                                       15
<PAGE>   20

       -  supermajority voting requirements with respect to certain amendments
          to our charter;

       -  the authority to issue shares of preferred stock and to determine the
          rights without stockholder approval; and

       -  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."

ANY U.S. JUDGMENTS YOU MAY OBTAIN AGAINST US MAY NOT BE ENFORCEABLE IN OTHER
COUNTRIES

     Substantially all of our assets are located outside the U.S. As a result,
it will be necessary for you to comply with non-U.S. laws in order to enforce
judgments obtained in a U.S. court (including those with respect to federal
securities law claims) against the non-U.S. assets of our operating ventures. We
cannot assure you that any U.S. judgments would be enforced under any such
non-U.S. laws.

WE MAY BE AT A COMPETITIVE DISADVANTAGE DUE TO RESTRICTIONS IMPOSED BY THE
FOREIGN CORRUPT PRACTICES ACT ON CERTAIN OF OUR BUSINESS PRACTICES

     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.

NO PUBLIC MARKETS FOR OUR DEPOSITARY SHARES AND CONVERTIBLE PREFERRED STOCK

     The purchase price of the depositary shares is substantially higher than
the net tangible book value per share of our common stock. Investors purchasing
depositary shares under this prospectus will therefore incur immediate and
substantial net tangible book value dilution. To the extent that stock options
or warrants (currently outstanding or subsequently granted) to purchase our
common stock or preferred stock are exercised, there will be further dilution.

     There is no public or other trading market for the depositary shares
offered by this prospectus or the corresponding shares of convertible preferred
stock, and we cannot assure you that any market will develop or be sustained in
the future. The initial purchasers have advised us that they do not intend to
make a market in convertible preferred stock or the common stock into which such
shares are convertible after the consummation of this offering.

OUR ABILITY TO PAY DIVIDENDS ON OUR COMMON STOCK MAY BE LIMITED

     We do not expect to pay any cash dividends in the foreseeable future. Also,
our ability to pay dividends is limited under the terms of indentures governing
our outstanding debt securities. 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. For more information on these debt
securities, see "Description of Certain Indebtedness."

WE MAY BE PRECLUDED FROM PAYING CASH DIVIDENDS ON THE CONVERTIBLE PREFERRED
STOCK

     Our ability to pay any dividends is subject to applicable provisions of
state law. Our ability to pay cash dividends on the convertible preferred stock
will be subject to the terms of the indenture governing
                                       16
<PAGE>   21

our 9 7/8% senior notes and any other debt of ours which is outstanding. Under
this indenture, we may not pay cash dividends unless, among other things, the
ratio of our total debt to our annualized operating cash flow is less than or
equal to 6.0 to 1.0. We currently do not meet this ratio and will not be able to
pay cash dividends until we experience significant improvements in our operating
cash flow. However, the certificate of designations for the convertible
preferred stock allows us, at our option, to pay dividends on the convertible
preferred stock in cash, common stock or a combination thereof. If we pay all or
a portion of a dividend in our common stock, we must deliver to the depositary a
sufficient number of shares that, upon resale by the depositary, will result in
net cash proceeds to the depositary to make the quarterly dividend payments in
cash to the holders of the depositary shares.

     Additionally, the ranking of the convertible preferred stock with respect
to the payment of dividends and upon liquidation, dissolution or winding up may
prevent us from paying cash dividends. The convertible preferred stock will rank
junior in right of payment to all of our existing and future senior securities,
including our 8 3/4% convertible senior subordinated debentures due 2000, our
9 7/8% senior notes due 2005 and our 5 3/4% senior subordinated debentures due
2010. In the event that we do not have sufficient funds to pay both our debt
service and accrued dividends on the convertible preferred stock, we will first
limit or stop paying such cash dividends until all amounts due on our senior
securities are paid.

     Also, we may, without your consent, dilute your ability to receive
dividends or amounts payable on dissolution by increasing the authorized number
of shares of preferred stock or issuing series of preferred stock ranking on a
parity with the convertible preferred stock.

SUBSTANTIAL RESALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE AND DILUTE
YOUR OWNERSHIP INTEREST

     We cannot predict what effect 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 effective registration statements
under the Securities Act, or the perception that sales could occur, may have an
adverse effect on the market price for our common stock. Presently, we filed and
the SEC declared effective five registration statements. One registration
statement covers the resale of the 8.75% convertible bonds due 2000 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. In addition,
we have filed with the SEC, and in April 1999 the SEC declared effective, two
registration statements covering 24.1 million shares of our common stock owned
by some of our affiliates and other stockholders. See "Description of Capital
Stock -- Prior Purchase Agreements -- Registration Rights." Finally, under this
prospectus which is included in another shelf registration statement, the
selling stockholders may sell shares of common stock that we issue upon
conversion of the shares of convertible preferred stock and the depository agent
may sell shares of our common stock in payment of dividends on the shares of
convertible preferred stock. The resale of shares under these registration
statements may depress our common stock price.

OUR STOCK PRICE HAS BEEN AND CONTINUES TO BE VOLATILE

     The market price for your common stock could fluctuate due to various
factors. These factors include:

     -  failure to integrate or realize projected benefits from our recent
        acquisitions;

     -  acquisition-related announcements;

     -  announcements by us or our competitors of new contracts, technological
        innovations or new products;

     -  changes in government regulations;

     -  fluctuations in our quarterly and annual operating results;

     -  political and economic development in emerging markets (including Russia
        and the other independent countries of the CIS); and

     -  general market conditions.

                                       17
<PAGE>   22

     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.

                                       18
<PAGE>   23

                                USE OF PROCEEDS

     We will not receive any of the proceeds from the sale of the securities.
The securities are being sold by the stockholders described in "Selling
Stockholders". We will pay for all expenses necessary to register the securities
offered under this prospectus except for selling commissions and underwriting
discounts, if any.

                  RATIO OF EARNINGS TO COMBINED FIXED CHARGES
                         AND PREFERRED STOCK DIVIDENDS

     Because of our historic losses, we have experienced a deficiency of
earnings available to cover fixed charges throughout our existence. The
deficiency of earnings available to cover fixed charges has been computed by
adding loss from continuing operations before income taxes minus fixed charges.
Fixed charges consist of interest on all indebtedness and amortization of
discount on all indebtedness.


<TABLE>
<CAPTION>                                QUARTER ENDED
                                           MARCH 31,                     YEARS ENDED DECEMBER 31,
                                         --------------   ------------------------------------------------------
                                              1999          1998        1997        1996       1995       1994
                                         --------------   ---------   ---------   --------   --------   --------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>              <C>         <C>         <C>        <C>        <C>
Deficiencies of earnings available to
  cover fixed charges..................    $(158,444)     $(235,300)  $(132,276)  $(74,845)  $(41,631)  $(17,951)
</TABLE>


                              SELLING STOCKHOLDERS

STOCKHOLDERS SELLING CONVERTIBLE PREFERRED SHARES

     We issued and sold 100,000 shares of convertible preferred stock
(represented by 10,000,000 depositary shares) to Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers Inc. as
initial purchasers on April 19, 1999 at a purchase price of $5,000 per share (or
$50 per depositary share). The initial purchasers sold our convertible preferred
stock in transactions exempt from the registration requirements of the
Securities Act, to persons that the initial purchasers reasonably believed to be
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act).

     The registration statement of which this prospectus is a part has been
filed under Rule 415 under the Securities Act to afford the holders of the
convertible preferred stock the opportunity to sell their securities in public
transactions rather than under an exemption from the registration and prospectus
delivery requirements of the Securities Act. In order to take advantage of that
opportunity, a holder of the convertible preferred stock must notify us of its
intention to sell securities and provide other information about itself and the
securities it is selling as required by the Securities Act.

     No holder may offer or sell securities under this prospectus until we have
been notified and until any supplement for the prospectus has been filed or an
amendment to the registration statement has become effective. Additional holders
of convertible preferred stock will be added to the prospectus at their request
and after they have provided us with any information we have requested. We will
from time to time supplement and amend the prospectus to the registration
statement, as applicable, to add additional holders of convertible preferred
stock and to reflect the required information.

     The following table describes the holders of convertible preferred stock
which have requested to be included in this prospectus. The holders of
convertible preferred stock may, from time to time, also receive shares of
common stock in the event payment of dividends on the depositary shares or the
convertible preferred stock is made with shares of common stock and such common
stock is not sold by the depositary to pay dividends in cash. This common stock
may also be offered and sold under this prospectus. The information in the
following table has been obtained from the holders of convertible preferred
stock identified in the table. Unless disclosed in the footnotes to the table,
no holder of convertible preferred stock has held any position, office or had
any other material relationship with us, our predecessor or any of our
affiliates

                                       19
<PAGE>   24

during the past three years. All of the shares of convertible preferred stock
are registered in the name of "Cede & Co." on the books of the transfer agent
for the convertible preferred stock.




<TABLE>
<CAPTION>
                                                                          SHARES OF
                                                         DEPOSITARY       PREFERRED
                                                        SHARES OWNED     STOCK OWNED    SHARES OF COMMON
                                                         AND OFFERED     AND OFFERED    STOCK OWNED AND
                                                           HEREBY           HEREBY       OFFERED HEREBY
                                                           -----------   ------------   ----------------
<S>                                                    <C>               <C>            <C>
Arkansas Teachers Retirement.........................        57,300                0                  0
Arpeggio Fund, LP....................................         2,500                0                  0
Baptist Health of So Florida.........................         4,300                0                  0
Bear, Stearns & Co. Inc..............................       102,500                0                  0
Black Diamond Offshore, Ltd..........................        14,165                0                  0
BNP Arbitrage SNC....................................        10,000                0                  0
Boston Museum of Fine Art............................         3,000                0                  0
Cap Arbitrage........................................        34,500                0                  0
Chrysler Corporation Master Retirement Trust.........        93,700                0                  0
Double Black Diamond Offshore LDC....................        23,960                0                  0
Engineers Joint Pension Fund.........................         9,400                0                  0
Forest Alternative Strategies Fund Series A-51.......         4,000                0                  0
Forest Alternative Strategies Fund Series A5M........         1,500                0                  0
Forest Alternative Strategies Fund Series B-3........         1,200                0                  0
Forest Fulcrum Fund LP...............................        57,000                0                  0
Forest Global Convertible Fund Series A-5............        79,500                0                  0
Forest Performance Fund LP...........................         2,500                0                  0
GLG Market Neutral Fund..............................       110,000                0                  0
Global Bermuda Limited Partnership...................        16,000                0                  0
GMOTERS ARBGFAA......................................        27,500                0                  0
Goldman Sachs and Company............................       153,900                0                  0
Greyhound Lines, Inc. Amalgamated Transit Union
  National Local.....................................         1,300                0                  0
Gryphon Domestic III, LLC............................        12,100                0                  0
Hamilton Partners Limited............................        50,000                0                  0
Hamilton Partners Limited............................        50,000                0                  0
Highbridge International LLC.........................       367,000                0                  0
Investcorp SAM Fund Limited..........................        22,100                0                  0
JMG Convertible Investments, L.P.....................       110,000                0                  0
LDG Limited..........................................         5,000                0                  0
LLT Limited..........................................         8,000                0                  0
Nicholas-Applegate Convertible Fund..................        12,200                0                  0
McMahan Securities Company, L.P......................        13,500                0                  0
Motion Picture Industry Health Plan Active Member
  Fund...............................................        11,500                0                  0
Motion Picture Industry Health Plan Retiree Member
  Fund...............................................         5,800                0                  0
OCM Convertible Trust................................       107,700                0                  0
Oppenheimer Convertible Securities Fund..............        85,000                0                  0
Physicians Life......................................         4,000                0                  0
Pilgrim Convertible Fund.............................        62,700                0                  0
Rhapsody Fund, LP....................................         3,300                0                  0
San Diego City Convertible...........................        60,000                0                  0
San Diego City Retirement............................        24,900                0                  0
Southport Management Partners, L.P...................        15,000                0                  0
Southport Partners International, Ltd................        30,000                0                  0
St. Thomas Trading, Ltd..............................         3,333                0                  0
State of Connecticut Combined Investment Funds.......       110,200                0                  0
</TABLE>


                                       20
<PAGE>   25


<TABLE>
<CAPTION>
                                                                          SHARES OF
                                                         DEPOSITARY       PREFERRED
                                                        SHARES OWNED     STOCK OWNED    SHARES OF COMMON
                                                         AND OFFERED     AND OFFERED    STOCK OWNED AND
                                                           HEREBY           HEREBY       OFFERED HEREBY
                                                           -----------   ------------   ----------------
<S>                                                    <C>               <C>            <C>
State Employees' Retirement Fund of the State of
  Delaware...........................................        32,700                0                  0
Straus-Gept L.P......................................         5,500                0                  0
Straus Partners L.P..................................        16,000                0                  0
Straus-Spelman Partners L.P..........................         3,500                0                  0
TQA Arbitrage Fund, L.P..............................        15,000                0                  0
TQA Leverage Fund, L.P...............................        15,000                0                  0
TQA Vantage Fund, Ltd................................        25,000                0                  0
Tribeca Investments L.L.C............................       372,500                0                  0
Triton Convertible Investments, L.P..................       110,000                0                  0
Vanguard Convertible Securities Fund, Inc............        73,400                0                  0
Wake Forest University...............................        22,200                0                  0
White River Securities LLC...........................       102,500                0                  0
The Bank of New York(1)..............................             0                0    up to 1,500,000
Any other holder of Securities or future transferee
  from any such holder...............................     7,258,642                0                  0
Totals...............................................    10,000,000                0    up to 1,500,000
</TABLE>



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



(1) Acting as depositary of these shares of common stock, which it will promptly
    resell on behalf of the holders of depositary shares in order to make any
    necessary quarterly dividend payments in cash to such holders.


                          PRICE RANGE OF COMMON STOCK

     Our 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 our 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...............................    $ 68.25    $ 47.81
Quarter ending June 30, 1999 (through June 2, 1999).........    $ 78.13    $ 56.50
                                                                =======    =======
</TABLE>



     The closing bid price for the common stock as reported on the Nasdaq
National Market on June 2, 1999 was $76.25. As of December 31, 1998, there were
approximately 484 holders of record of our common stock.


                                DIVIDEND POLICY

     We have not paid any dividend on our common stock and do not intend to pay
dividends in the foreseeable future. In addition, the indenture governing our
9 7/8% notes currently prohibits the payment of dividends. This indenture
contains restrictions against making restricted payments (in the form of the
declaration or payment of certain dividends or distributions, the purchase,
redemption or other acquisition of any of our capital stock, 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 exists,
our leverage ratio does not exceed 6.0 to 1.0 and such restricted payments do
not exceed certain amounts.

                                       21
<PAGE>   26

                               INDUSTRY OVERVIEW

EUROPEAN TELECOMMUNICATIONS MARKET

     Liberalization in the European telecommunications markets has proceeded
rapidly since the late 1980's. Historically, the European public
telecommunications operators monopolized the provision of telecommunications
services in their home markets and designed their networks according to national
rather than continental and international considerations. Between 1990 and 1997,
however, the European Union implemented a series of directives designed to open
up the telecommunications markets to competition. These directives required
member states to implement legislation liberalizing their respective
telecommunications markets to permit alternative telecommunications companies
both to provide telecommunications services and to access the existing
telecommunications infrastructure controlled by these national and regional
providers. In response to these European regulatory changes, a number of new
interests, including our company, have emerged to compete with the European
public telecommunications operators.

INTERNET INDUSTRY

     The Internet is a global collection of interconnected computer networks
that allows commercial organizations, educational institutions, government
agencies and individuals to communicate, access and share information and
conduct business electronically. The Internet originated with the ARPAnet, a
restricted network that was created in 1969 by the United States Department of
Defense Advanced Research Projects Agency to provide efficient and reliable long
distance data communications among the disparate computer systems used by
government-funded researchers and academic organizations. The networks that
comprise the Internet, or its backbone, are connected in a variety of ways,
including by public switched telephone networks and by high speed, dedicated
leased lines. Communications on the Internet are enabled by Internet Protocol or
IP, which is a market-based standard computer language broadly adopted on the
Internet and elsewhere that allows computers with different architectures and
operating systems software to communicate with each other on the Internet.

     Over time, as businesses have begun to utilize e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an Internet service provider became more prevalent.
Internet service providers offer access, e-mail, customized content and other
specialized services and products aimed at allowing both commercial and
residential customers to obtain information from, transmit information to, and
utilize resources available on the Internet.

     Internet service providers generally operate networks composed of dedicated
lines leased from public telecommunications operators, local access providers
and internet service providers using IP-based switching and routing equipment
and server-based applications and databases. Customers are connected to the
Internet service provider switching equipment by facilities obtained by the
customer or the Internet service provider from either public telecommunications
operators or local access providers through a dedicated access line or the
placement of a circuit-switched local telephone to the Internet service
provider.

IP COMMUNICATIONS TECHNOLOGY

     There are two widely used switching technologies in currently deployed
communications networks: circuit-switching systems and packet-switching systems.
Circuit-switch based communications systems establish a dedicated channel for
each communication (such as a telephone call for voice or fax), maintain the
channel for the duration of the call and disconnect the channel at the
conclusion of the call. Packet-switch based communications systems format the
information to be transmitted, such as e-mail, voice, fax and data, into a
series of shorter digital messages called "packets." Each packet consists of a
portion of the complete message plus the addressing information to identify the
destination and return address.

                                       22
<PAGE>   27

     Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, some
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by the Internet traffic volumes, are
straining capacity and contributing to latency (delays) and interruptions in
communication transmissions. In addition, there are concerns about the adequacy
of the security and reliability of packet-switch based systems as currently
implemented.

     Initiatives are under way to develop technology to address these
disadvantages of packet-switch based systems. We believe that the evolving IP
standard will remain a primary focus of these development efforts. We expect the
benefits of these efforts to be improved communications, reduced latency and
declining networking hardware costs.

                                       23
<PAGE>   28

                                    BUSINESS

OUR HISTORICAL OVERVIEW

     We were founded in 1983 as a not-for-profit company under the name San
Francisco/Moscow Teleport, Inc. We incorporated as a for-profit corporation in
1986, and reincorporated into Delaware in 1993 and changed our name to Global
TeleSystems Group, Inc. in February 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.

     From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and (2)
establishing and developing Hermes Europe Railtel B.V., a venture designed to
provide a high speed transmission network across national borders in Western
Europe. We intended to capitalize on the rapidly growing demand for
telecommunications services in countries emerging from totalitarian rule and
state-controlled economies. In addition, in Western Europe growing
liberalization of regulations governing the provision of telecommunications
services has resulted in a proliferation of new competitors to incumbent public
telecommunications operators. At the same time, with the trend toward the
increasing globalization of business, there has been a substantial growth in
demand for high quality voice and data telecommunications. We perceived a need
for a fast, efficient and lower cost cross-border network that would carry the
traffic of established public telecommunications operators and other carriers.
Since we began operating our Hermes Railtel network in late 1996, the demand for
its services has validated our decision to build and develop such a network.

     In 1998, we changed our strategy in response to the economic crisis in
emerging markets and the advent on January 1, 1998 of the deregulation of the
provision of telecommunications services in Western Europe. We also sought to
build on the success of our Hermes Railtel network by developing a plan to
provide telecommunications services, including local access services, directly
to businesses and other customers. Accordingly, during 1998, we acquired two
companies that provide such services to businesses and other high usage
customers in Western Europe and developed a plan to provide local access
services in 12 major Western European cities. In addition, we realigned our
operations into five lines of business to facilitate the coordination and
management of our activities.

BUSINESS STRATEGY

     In order to achieve our objective of becoming Europe's premier independent
provider of telecommunications services to businesses, other high usage
customers and telecommunications carriers, we intend to implement the following
key strategies:

  CONTINUE BUILDOUT OF HERMES RAILTEL NETWORK

     We intend to make Hermes Railtel's service offerings more attractive to our
carrier customers by expanding the geographic reach and reliability of our core
network. We are continuing to build our Hermes Railtel network by extending its
coverage to include approximately 50 cities throughout Europe by the end of 2000
and by putting in place a high speed, cost-efficient transatlantic link through
our FLAG Atlantic Limited joint venture. We are also deploying dense wavelength
division multiplexing technology that will permit significant expansion of the
core network's transmission capacity and allow us to upgrade the reliability and
efficiency of the network.

  DEVELOP LOCAL ACCESS INFRASTRUCTURE

     In order to facilitate our customers' access to our network and to exploit
what we believe to be an expanding market, we intend to build, lease or acquire
local access infrastructure in 12 major metropolitan markets throughout Europe
by 2001. We believe that the increasing liberalization of telecommunications
regulation in Europe and the existing level of competition in Europe for local
access services offer an

                                       24
<PAGE>   29

attractive opportunity to build out local access infrastructure. We believe that
implementing this strategy will also benefit our Carrier Services and Business
Services lines of business.

  CAPITALIZE ON GROWTH IN DATA/IP TRAFFIC

     In anticipation of continued rapid growth in data and Internet traffic, we
plan to expand our IP-based capabilities and product offerings. We intend to
apply IP technology to Hermes Railtel's fiber optic network in order to enhance
its efficiency and capacity. In addition to offering IP transport services, we
intend to offer Internet access and IP-based services, such as web site
management.

  REINFORCE AND EXTEND MARKET PENETRATION OF HERMES RAILTEL'S NETWORK

     We intend to reinforce and extend the market penetration of Hermes
Railtel's network by enhancing the scope, capacity, reliability and efficiency
of our infrastructure, and by providing our own local access. As a result of
these enhancements, we believe that we are well-positioned to generate
additional revenues from existing carrier customers and attract new customers as
demand for seamless transatlantic city-to-city services increases. Targeted new
customers include the U.S. regional Bell operating companies, as well as U.S.
and European Internet service providers.

  INCREASE HIGH USAGE RETAIL CUSTOMER BASE AND ROUTE TRAFFIC OVER OUR OWN
NETWORK

     As a result of the Esprit Telecom and NetSource acquisitions, we have an
established retail customer base of leading international businesses,
organizations and governmental agencies. We intend to continue to focus our
retail marketing efforts on small, medium and large-sized businesses,
governmental agencies and other organizations that have extensive
telecommunications needs and which generate substantial volumes of
telecommunications traffic. By routing this traffic over our Hermes Railtel,
Business Services and Access Services networks, we seek to realize the benefits
of owning our own infrastructure. In order to build our customer base, we
anticipate significantly increasing the size of our direct sales force. We also
seek to offer a level of service superior to that provided by incumbent
telecommunications providers. We believe that providing a high level of customer
service is a key element in establishing customer loyalty and attracting new
customers. For a discussion of the risks associated with our business strategy,
see "Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenues."

GTS CARRIER SERVICES

  OVERVIEW

     Our Carrier Services line of business is made up of three components:

     - Hermes Railtel;

     - Transoceanic Services; and

     - IP Services.

     Cross-border transmission capacity has historically been used predominantly
for the transmission of voice traffic. We believe that cross-border transmission
capacity will increasingly be used to transport data traffic and in several
years the volume of capacity used for transporting data traffic will
significantly exceed that used for transporting voice traffic. This trend is
being driven by the rapid growth of the Internet and other data-intensive
applications such as videoconferencing, multimedia, and medical and business
imaging, among others.

     We intend to participate in this developing market by providing
comprehensive telecommunications transport services to established and emerging
telecommunications carriers, Internet service providers and other significant
consumers of transmission services. We believe that our customers will
increasingly demand network connection to the world's major commercial and
financial centers. In addition, we believe

                                       25
<PAGE>   30

that our customers will demand Internet or IP-based services such as Internet
access, web hosting and management services in order to participate in the
expected growth of the Internet.

  HERMES RAILTEL NETWORK

     We are one of the leading providers of telecommunications services to other
telecommunications carriers. We operate a centrally managed fiber optic network
that is designed to carry high volumes of telecommunications traffic across
national borders in Europe and to the United States. At March 3, 1999, the
network operated over approximately 12,200 kilometers connecting 19 cities in 10
countries. We expect the network to extend approximately 25,000 kilometers with
points of presence, or equipment for switching or relaying traffic, in
approximately 50 cities in 20 European countries by the end of 2000.

     Capacity on the Hermes Railtel network is sold to public telecommunications
operators, other carriers, Internet service providers, resellers of unused
telecommunications capacity and other telecommunication service providers. We
believe that we are able to provide our customers a service that is superior to
other services currently available through public telecommunications operators
or through other independent providers.

     At March 3, 1999, we operated the Hermes Railtel network in Belgium, The
Netherlands, the United Kingdom, France, Germany, Switzerland, Italy, Denmark,
Sweden and Spain, linking the following 19 cities: Brussels, Antwerp, Rotterdam,
Amsterdam, London, Paris, Frankfurt, Strasbourg, Zurich, Geneva, Stuttgart,
Dusseldorf, Munich, Milan, Berlin, Copenhagen, Stockholm, Hamburg and Madrid. If
completed as expected by the end of 2000, our network will extend approximately
25,000 kilometers. During 1999, we plan to extend our network through France to
Barcelona and commence operating in Austria, the Czech Republic, Luxembourg and
Portugal.

     We currently lease capacity on transatlantic cables linking the network
with North America and are exploring various interconnectivity options to
Russia. At March 3, 1999, 54 customers were under contract for service on the
Hermes Railtel network, and at December 31, 1998 our customers were
contractually obligated to pay us an aggregate of $418 million for future
services, provided Hermes Railtel performs in accordance with contractual
specifications.

     We intend to continue to build Hermes Railtel's network using
cost-efficient access to an infrastructure of railways, motorways, pipeline
companies, waterways and power companies. We have a flexible approach to the
network plan and intend to fine-tune the scope, route and design of the network
based on our evaluation of customer demand. We have entered into agreements for
the construction and/or lease of fiber optic routes for the network in the
countries where we currently operate. We continue to negotiate rights-of-way and
other infrastructure arrangements in order to extend the network. We expect to
incur approximately $750 million in additional capital expenditures, including
capital lease obligations, through 2000 in connection with the build-out of the
network.


     In June 1998, we acquired a 75% interest in Ebone, a Danish company which
connects European Internet service providers to the Internet over its own
network. In May 1999, we acquired the remaining 25% interest in Ebone. As of
December 31, 1998, Ebone served 83 customers in 25 countries. As part of the
transaction, Ebone purchased approximately $100 million of long-term capacity
rights on Hermes Railtel's network. It will provide Ebone with capacity of up to
622 megabits per second between the majority of European cities that Ebone
serves. Many of Ebone's existing customers own a portion of Ebone's shares
through an association.


     MANAGED BANDWIDTH SERVICES

     Hermes Railtel provides primarily large capacity cross-border European
circuits and transatlantic services to carriers and service providers over an
integrated, managed network. The Hermes Railtel network, based on dense
wavelength division multiplexing and synchronous digital hierarchy technology (a
form of packet switched transmission technology), provides digital transmission
capability upon which a broad range of advanced functionality may be built. The
Hermes Railtel network offers network

                                       26
<PAGE>   31

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. Our network is designed to
provide customers with a wide variety of bandwidth speeds, ranging from a data
transmission rate of 2.048 Mbps (or millions of bits per second) to a data
transmission rate of 2.5 gigabits per second (or billions of bits per second).
For more information on technology in the telecommunications industry, see
"Industry Overview -- IP Communications Technology."

     Point-to-Point Transmission Capacity. The current market for cross-border
transport is also served by international private leased circuits provided by
public telecommunications operators. Traditionally, these private leased
circuits are formed by combining half-circuits from two public
telecommunications operators between customer locations, often with additional
public telecommunications operators providing transit segments. Under such
private leased circuits, overall service quality guarantees generally are not
provided and only a limited range of bandwidth is available, usually only at a
data transmission rate of 2.048 Mbps, and in certain instances, at a data
transmission rate of 34 Mbps. We provide a Point-to-Point Transmission Capacity
service to our customers. We believe this service is a significant improvement
to private leased circuits because it provides a greater range of bandwidths
from 2,048 Mbps to multiples of 140 Mbps or 155 Mbps and allows customers to
choose a service level agreement which provides service guarantees appropriate
for their applications, including guarantees for on-time service delivery and
service availability.

     Our point-to-point transmission capacity consists of "integrated" and
"node-to-node" services. Our network integrated service provides an end-to-end
service between customer-specified locations where we arrange for the connection
between the network node location and the customer's location. The node-to-node
service can be selected when the customer prefers to provide its own connection
to the local network node location. In node-to-node service, we guarantee
service only on our network and not from our network node to the customer's
location. Our network prices for both services are competitive relative to
current service offerings. Our customers can choose flexible contract terms from
one to ten years in duration, with discount schemes designed to ensure that we
remain a cost-effective solution.

     Virtual Network Transmission Services. As the European marketplace
liberalizes and carriers and other telecommunications service providers plan to
expand their operations across Europe, a need arises for a flexible and
cost-effective means of telecommunications transport. Such service providers
have traditionally obtained international transport service by leasing
international private leased circuits. Leasing private leased circuits requires
a carrier to lease channels on a segment-by-segment basis from multiple public
telecommunications operators, linking the target cities under arrangements
having a fixed capacity and pricing structure for each segment of the carrier's
network. Private leased circuits have several disadvantages, including (1)
difficulty in obtaining discount/volume pricing schemes since there is no single
provider of pan-European coverage, (2) delays in implementation due to numerous
contractual negotiations and the need to interconnect numerous leased circuits,
(3) limited opportunities to lease high-bandwidth pan-European capacity and (4)
variability of quality due to the absence of a centrally managed single uniform
network. Telecommunications carriers could also construct their own network,
which is expensive, time-consuming and complex and which may not be justified by
traffic volume.

     Our network transmission service provides a new solution and an attractive
alternative to leasing circuits or building infrastructure. This service enables
our 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
our network with 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 control over the
physical configuration of their networks. This service connects multiple
customer locations with multiple paths in a ring configuration. We provide the
customer with reliable and direct control over the paths dedicated to its
traffic within the ring and exclusive control over the routing. We can add
additional ring capacity with no service interruption and additional customer
locations with minimal service interruption. We can provide this ring service at
a very competitive rate compared to other point-to-point services. For a
discussion of the risks associated with the

                                       27
<PAGE>   32

Hermes Railtel network technology, see "Risk Factors -- The technology of our
Hermes Railtel network could become obsolete and harm our competitiveness."

     INTERNET ACCESS AND IP TRANSPORT

     Ebone Internet Access Services. Internet service providers, which are
companies that provide Internet access to end-users, have purchased Internet
access from Ebone since 1991. Ebone has one of the largest installed bases of
Internet service provider customers in Europe. Building on the expertise
developed since the advent of the Internet in Europe, Ebone now offers Internet
service providers a high quality Internet access service with the following
significant features:

     - Reliable access to Internet service throughout Ebone's network, which is
       made possible by always dedicating excess bandwidth capacity on its
       network;

     - Access to other Internet networks through links with major Internet
       backbone providers in Europe and in the United States; and

     - Access speeds ranging up to 620 Mbps.

     IP Transport Services. We are developing IP transport services for service
providers that focus on building their own Internet backbone, 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 Hermes Railtel's network) and Internet network services (like
Ebone's Internet services).

     Today, large service providers building their Internet networks demand the
speed offered by fiber infrastructure, the reliability of managed bandwidth
services and the flexibility of Internet network services.

     We intend to carry the international Internet traffic of service providers
between their private points of presence and/or Internet exchange points. We
expect these services to combine high quality transmission services with the
ability to upgrade transmission capacity and speed and to control configurations
which are the strengths of large Internet network providers. For a discussion of
the risks associated with the Hermes Railtel network technology, see "Risk
Factors -- The technology of our Hermes Railtel network could become obsolete
and harm our competitiveness."

     BUSINESS AND MARKETING STRATEGY

     The overall strategy of Hermes Railtel is to offer public
telecommunications operators and other carriers pan-European cross-border
telecommunications transport services. Our Hermes Railtel network provides a
vehicle through which a carrier can compete in markets where it does not own
infrastructure. Our primary service offering is the sale of large capacity
cross-border circuits to our customers. Our network's focus on carriers is
designed to complement and not compete with such carriers' own business
objectives in providing services to their end-users.

     As a result of our acquisition of Ebone, we are now accelerating our plans
to become a leading player in the provision of seamless transatlantic
city-to-city services in order to take advantage of the increased market demand
for low cost transatlantic city-to-city services. In 1998, we contracted for
long-term leased capacity on transatlantic cables linking the Hermes Railtel
network to North America. In addition, we intend to further increase our
transatlantic capacity through the purchase of capacity from the FLAG Atlantic
Limited joint venture. We also intend to invest further in extending and
increasing the capacity of the Hermes Railtel network.

     To establish ourselves as the leading provider of telecommunications
services to carriers within Europe, we offer our customers significantly higher
quality transmission and advanced network capabilities at a competitive price by
focusing on the following:

     - High Capacity Cross-Border Network Facilities. Our network is designed to
       offer our customers 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
                                       28
<PAGE>   33

       range of capacity offerings. By utilizing dense wavelength division
       multiplexing technology over our network, we anticipate that, once fully
       deployed, this technology will enable our network to provide a minimum
       speed of 800 gigabits per second on all major routes. Options are in
       place to expand fiber capacity further on a number of routes.

     - Uniform Network Architecture. Our 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 under the control of separate, not necessarily compatible,
       network control systems. The Hermes Railtel network's uniform technology
       enhances service by providing quality and reliability as well as
       uniformity of features throughout the network.

     - Diverse Routing. We have designed our network over multiple routes to
       provide high levels of reliability so that if a failure occurs on one
       route, traffic can be diverted to an alternate route. 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. We believe that to achieve this level of reliability without
       the use of a network similar to Hermes Railtel's network, carrier
       customers would need to purchase additional dedicated circuits.

     - Rapid Provisioning. Our customers can quickly obtain additional capacity
       on our network. This ability to rapidly provide service is largely due to
       our development of capacity substantially in excess of our forecasted
       requirements.

     - Flexibility. Our services provide customers flexibility across Hermes
       Railtel's network so that the customer may minimize risk by enabling
       network rerouting, eventually even under customer direct control.

     - Advanced Technology. We are deploying dense wavelength division
       multiplexing and synchronous digital hierarchy technology that can be
       upgraded and will permit significant expansion of transmission capacity
       without increasing the number of fiber pairs on a network. This
       technology also provides the basis for structuring advanced operating
       features, such as virtual private network services and IP-based services.

     - Innovative Pricing. We believe that the price of high-bandwidth circuits
       on transborder European routes is artificially high and not necessarily
       related to the cost of such circuits. We offer competitive pricing with
       tailored contract terms and volume discounts. This allows our customers
       to plan more efficiently the fixed costs of their service portfolio. Our
       customers can select varying capacity, access, guaranteed availability
       and contract terms at competitive prices. Customers purchasing capacity
       from public telecommunications operators generally choose from a narrow
       set of capabilities under inflexible pricing plans.

     For a discussion of the risks associated with our business strategy, see
"Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenue growth."

     PRICING AND DISTRIBUTION

     We primarily conduct sales of Hermes Railtel's services through Hermes
Europe Railtel (Ireland) Limited, a subsidiary.

     Currently, the price of cross-border pan-European calls is often
significantly higher than the underlying cost of transport and termination of
such calls and higher than the price of intra-country calls or transborder calls
to and from liberalized markets. The low cost of operating our network enables
us to attractively and competitively price services even as overall tariffs for
telecommunication services decline. Our low cost basis is a result of, among
other things, the application of new technologies to our network, which allows
us to operate our network with fewer employees than legacy networks.

                                       29
<PAGE>   34

     The term of a typical customer agreement currently ranges from one to three
years in length. The customer agrees to purchase, and we agree to provide,
cross-border transmission capacity. In general, the customer agrees to pay
certain non-recurring charges upfront 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, the customer is generally required
to pay us a cancellation charge equal to three months' service for every twelve
months remaining in the contract term. We guarantee transmission services to a
certain service level. If such levels are not met or we fail to deliver service
by the committed delivery date, the customer is eligible for a credit against
charges otherwise payable for the failed link.

     CUSTOMERS

     At March 3, 1999, 54 customers were under contract for service on Hermes
Railtel's network, including public telecommunications operators and other
carriers, global consortia, Internet service providers and resellers. As of
December 31, 1998, our customers were contractually obligated to pay us an
aggregate of $418 million for future services, provided our network performs in
accordance with contractual specifications. We believe that the type and quality
of our customers validate our business plan and network concept and illustrate
the type of customers we expect to be attracted to the full network. The success
of our network to date also demonstrates the demand for cross-border transport
services. We are targeting seven major market segments or customer groups, which
can be characterized as follows:

     - Existing Public Telecommunications Operators. This customer segment
       consists of the traditional European public telecommunications operators
       that generally participate in the standard bilateral agreements for
       cross-border connectivity. We provide a vehicle for public
       telecommunications operators to compete in non-domestic markets. As of
       January 1, 1998, all public telecommunications traffic can be transported
       by carriers other than the domestic public telecommunications operator,
       thus vastly expanding the potential demand from public telecommunications
       operators for our services.

     - Global Consortia of Telecommunications Operators. Many of the largest
       public telecommunications operators 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 was to
       provide pan-European services to multinational business customers,
       including X.25/frame relay (high speed data network) service and voice
       services for a closed user group. We believe that we provide an
       attractive alternative at better pricing in those environments where such
       a consortium does not already own its infrastructure. Furthermore, we
       believe that we are 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 targeted future
       customers include the United States regional Bell operating companies. We
       can provide these customers a pan-European distribution network to gather
       and deliver traffic to and from their own and other hubs.

     - Other Carriers.  This segment consists of other European carriers
       competing with existing public telecommunications operators, cable TV and
       mobile carriers and competitive access providers. These other carriers
       have chosen to compete with the incumbent public telecommunications
       operators in their respective countries. We believe that these other
       carriers will prefer to use the services of independent carriers like
       ourselves to meet their cross-border telecommunication transport needs.

     - Internet Backbone Networks.  Internet backbone networks are providers of
       large capacity international connectivity services between Internet nodes
       (points of interconnection between local Internet service providers).
       These networks are a fast-emerging segment and are expected to

                                       30
<PAGE>   35

       generate significant demand for the services we offer. The Internet
       segment is experiencing significant growth in demand for transmission
       capacity.

     - Resellers.  Resellers are telecommunications service providers that do
       not own transmission facilities, but obtain communications services from
       other carriers for resale to the public. Resellers are a growing segment
       of the market and are expected to increase in conjunction with the
       liberalization of the European telecommunications market. In the United
       States, for example, resellers were a significant factor in the expansion
       of competition.

     - Other Service Providers.  We also target 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. Their basic network
       transmission requirement is to connect data switches or processors, and
       they currently purchase their own international circuits and build
       additional resiliency into their network infrastructure. We expect to
       allow them to meet these needs cost-effectively and to extend their
       services to new markets or customers without substantial capital
       investment.

     We expect 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 for small and medium-sized
businesses and emerging broadband applications such as cable TV programming
distribution (other than broadcast) to the end-user.

     NETWORK DESIGN

     Network Architecture. Our network design is based on a layered architecture
that separates physical, optical and telecom layers of our network with standard
interfaces in order to optimize design and operation and provide flexibility for
introducing new technologies, such as IP.

     Physical Layer. The physical layer of our network is based on a mesh of
routes comprised of dark fiber, or fiber optic cable that is not yet equipped or
activated for commercial use. When the network is completed, the physical layer
will interconnect cities on the network via at least two or three different
paths to minimize service interruptions when fiber or equipment failures occur.
In each major city, we intend to locate two additional customer access sites for
maximum reliability.

     Optical Layer. The optical layer of our network is based on dense
wavelength division multiplexing. This is a cost-effective technology that
substantially increases the capacity of an existing fiber optic network by
multiplying the number of signals that it can carry simultaneously.
Specifically, this layer:

     - supports the provision of optical services directly to customers at 2.5
       gigabits per second, representing the speed for digital signal
       transmission expressed in billions of bits per second; and

     - provides for the operation of multiple synchronous digital hierarchy
       transmission networks and/or IP systems to run concurrently on a single
       fiber pair in a highly cost-efficient manner. Ciena 40 wavelength systems
       are currently installed on our network in five countries with a potential
       capacity of 100 gigabits per second on a fiber pair.

     Telecom Layer. The synchronous digital hierarchy layer of our network,
running via dense wavelength division multiplexing channels in the core of the
network, and directly on fiber elsewhere, supports the provision of
point-to-point services to customers at speeds of 2 Mbps up to 155 Mbps. The
synchronous digital hierarchy layer is itself a multi-layered architecture
consisting of multiple synchronous digital hierarchy rings, or cables, which are
optimized for different telecommunications traffic characteristics. Each
synchronous digital hierarchy ring supports fully automatic re-routing of
traffic in the case of a break in the ring.

                                       31
<PAGE>   36

     We expect to add an IP layer to our network starting in the second quarter
of 1999. This layer will support high capacity IP routers, or computer devices
for routing packet-switched data traffic, which can deliver IP services to
customers at speeds up to 2.5 gigabits per second. These routers will be
supported on the dense wavelength division multiplexing layer of the network
directly and/or through asynchronous transfer mode technology in the core of our
network and on top of the synchronous digital hierarchy layer elsewhere. These
changes will also enhance the services that Ebone can offer to its Internet
service provider customers. We plan to extend our enhanced IP transport
capabilities to all cities on our network by 2000. This layer will be able to
handle failures independently of the lower layers by re-routing at the IP level.

     Our network is controlled by a single active network operations center in
Brussels, Belgium. We maintain a backup center in Amsterdam, The Netherlands
that has equivalent management systems continuously synchronized with the
primary center.

     Our network operations center can pinpoint potential service problems and
deal with service re-routing much more effectively than other networks that are
controlled by multiple operators in different countries. Our advanced
operational support systems also provide comprehensive support for:

     - managing the large number of network components and local repair
       organizations required for an extensive international network of our
       size; and

     - providing advanced customer support for customer operational activities.

     Overall, our combination of backup paths and management components enable
recovery from individual failures at the optical, synchronous digital hierarchy
and IP layers. Our resilient approach provides for a high level of network
performance and reliability. As a result, we are able to enter into strong
performance commitments with our customers, and services on most routes of our
network have performed at or above 99.9% availability.

     We expect to operate our network and to own substantially all of our
network equipment as well as some segments of the fiber optic cable. A
substantial portion of the fiber is leased from third parties on a long-term
basis. Long-term leases for fiber are advantageous to us because they reduce or
eliminate the costly burden of building large quantities of capacity before they
can be fully utilized. Where we lease dark fiber, the owner of such fiber will
generally be responsible for maintaining such fiber optic cable. In general, we
will enter into agreements with equipment vendors and infrastructure providers
and other third parties to supply and/or maintain the necessary equipment for
our network. For a discussion of the risks associated with the Hermes Railtel
network technology, see "Risk Factors -- The technology of our Hermes Railtel
network could become obsolete and harm our competitiveness."

     NETWORK CAPACITY

     We are building our network to include Ciena 40 dense wavelength division
multiplexing systems on a majority of our routes. This allows for synchronous
digital hierarchy and IP systems of 2.5 gigabits per second to be installed only
when required, thus providing for efficient management of capital investment.

     Should capacity be required beyond the initial 100 gigabits per second on
the first fiber pair, we can bring additional fiber pair(s) into operation that
utilize either higher capacity dense wavelength division multiplexing systems at
2.5 gigabits per second or at 10 gigabits per second. Such systems have been
available on some routes on our network since 1998. The remaining routes are
planned to have this upgrade in 1999. We plan to have a minimum of two fiber
pairs on all routes. This approach will extend capacity as we implement it on
new paths and on selected existing paths over time.

     NETWORK AGREEMENTS

     We have entered into agreements and letters of intent with various
infrastructure providers for construction and/or leasing of dark fiber for
portions of our network. Our agreements for leases of portions of our network
typically require the infrastructure provider to provide a certain number of
pairs of dark

                                       32
<PAGE>   37

fiber and in some cases facilities along our network route commencing on dates
we provide. 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. We are allowed to use the cable for the transmission of
messages and other purposes, including increasing capacity. The infrastructure
provider is responsible for maintenance of the cable facilities. The
infrastructure provider may also provide space for the location of our equipment
and related maintenance. The agreements typically provide for termination by the
parties only for material breach, but allow the breaching party 90 days to cure
their breach. The agreements typically contain a transition period after
termination of the agreement to allow us to continue to serve our customers
until we can reach agreement with an alternative infrastructure provider. In
certain areas of our network where it is not possible to lease dark fiber, we
have signed agreements or letters of intent for the right to use managed
bandwidth. The terms of these agreements typically range from 10 to 25 years.
For a discussion of the risks associated with our network agreements, see "Risk
Factors -- Failure to obtain new leases of transmission capacity or renew
existing leases on our leased lines could cause us to incur losses on the leased
portions of our network" and "Risk Factors -- Failure to carry sufficient
traffic on our leased lines could cause us to incur losses on the leased portion
of our network."

     We are also deploying our network along the rights-of-way of a variety of
alternative sources, including railways, motorways, waterways, pipelines and
utilities. We constantly evaluate multiple alternative infrastructure suppliers
in order to maximize our flexibility. Many portions of our network utilize
long-term right-of-way agreements with landowners. As a result of our network
development activities to date, we have gained access to infrastructure for our
network routes which we believe will be difficult for competitors to duplicate.

     LOCAL ACCESS

     We expect to provide customer access to our network primarily through our
Access Services line of business using synchronous digital hierarchy access
lines in those cities where Access Services will be present and the Hermes
Railtel network has nodes. Arrangements with our Access Services line of
business are expected to be on an arms length basis. In each city, as one of our
points of presence is deployed, we may contract with one or more suppliers to
provide local access service to customer locations. Currently, we have
contracted with a number of unaffiliated local access providers to connect our
network to intra-city networks. Under these agreements, we can offer our carrier
customers service from their premises in one city to their premises in another
city. Various local access network suppliers may also be interested in linking
the business centers in which they are active to our network. Therefore, we
believe that the relationships between ourselves and local access network
suppliers can benefit both parties.

  TRANSOCEANIC SERVICES

     In January 1999, we signed an agreement with FLAG Telecom, to establish a
50/50 joint venture to build and operate the world's first transoceanic dual
cable system designed to carry voice, high-speed data and video traffic at
speeds up to 1.28 terabits or trillions of bits per second. The high-capacity
fiber optic link between Europe and the United States, to be known as FLAG
Atlantic-1, is expected to begin offering services in the last quarter of 2000.
The joint venture plans to offer a direct link between New York City, London and
Paris, with connections to numerous other cities in the United States, Europe
and other countries in the Middle East and Asia Pacific. The project is subject
to financing, the execution of related agreements and other conditions.

     Construction of the initial 160 Gbps portion of FLAG Atlantic-1 will cost
approximately US$1 billion. Financing will be provided by a combination of
equity contributions and capacity purchases by the joint venture participants,
customer sales, and non-recourse bank debt. A contract to build the cable has
been awarded to Alcatel Submarine Networks, the general contractor. The system's
design allows for 160 Gbps incremental upgrades as demand warrants. Under the
terms of the joint venture agreement, we will be responsible for the
construction and maintenance of the land-based portion of FLAG Atlantic-1.

                                       33
<PAGE>   38

     The two subsea sections of the cable are approximately 5,900 kilometers and
6,350 kilometers for each link, with an overall system length of approximately
12,500 kilometers. The joint venture will provide links from the European
landing points to the cities of Paris and London where plans are for customers
to be able to connect to Carrier Services' network as well as to other networks
that customers may choose.

     BUSINESS AND MARKETING STRATEGY

     We believe that a large portion of Carrier Services' market growth will
come in the form of IP-based voice and data services. Because a majority of the
world's IP traffic originates in the United States, our Carrier Services line of
business has chosen to invest in its own capacity infrastructure through
Transoceanic Services' participation in FLAG Atlantic Limited. We believe that
owning a large volume of capacity will provide us with a competitive low cost
position to serve existing and future customers. We also intend to utilize FLAG
Atlantic Limited as a lessor of transatlantic capacity to Hermes Railtel, thus
extending the Hermes Railtel network at favorable prices. Transoceanic Services
will also provide backhaul services which it will market through a newly
developed sales force. For a discussion of the risks associated with our
business strategy, see "Risk Factors -- We may encounter delays in implementing
key elements of our business strategy which could adversely affect our projected
revenue growth."

     CUSTOMERS

     In addition to selling capacity to Hermes Railtel, Transoceanic Services
intends to target customers, including emerging alternative carriers, incumbent
telecommunications carriers and Internet service providers that require high
quality dedicated transmission capacity to major commercial and financial
centers. Sales will be made with our direct sales forces, as well as through
indirect channels.

  IP SERVICES

     In order to capitalize on the projected growth in IP voice and data
transmission services and to take full advantage of Hermes Railtel's network, as
well as its Ebone subsidiary and transoceanic capacity, we intend to offer
IP-based services to telecommunications carriers, businesses and other high
usage customers. We have recently developed a strategic plan which envisions
progressing from a service offering focused on IP transport to one which focuses
on value-added IP-based service offerings.

     PRODUCTS AND SERVICES

     We intend to offer a broad array of competitively priced comprehensive IP
services to meet our customers' requirements.

     - Connectivity. Connectivity services may include dial-up and dedicated
       access, IP transport, voice over IP, fax over IP, virtual private
       networks and IP clearinghouse services;

     - Network and Management Services. These services may include security and
       network integration as well as router and server management, billing and
       information services to managed IP networks; and

     - Value Added Services. These services may include web hosting,
       collocation, unified messaging and basic Internet service provider
       services such as newsgroups, mail, groupware and directory services. We
       are also considering metering and billing services as well as e-commerce
       and call center applications.

     BUSINESS AND MARKETING STRATEGY

     We estimate that a large portion of our market growth will come in IP-based
voice and data services. These services will range from Internet access and IP
transport to value-added services such as

                                       34
<PAGE>   39

e-commerce and unified messaging. We expect to use a number of complementary
strategies to enter these service markets, including:

     - acquisition or partnership with emerging providers of value-added
       services and IP-based application companies;

     - expansion of Internet access and IP transport capabilities and service
       offerings;

     - development of a full web hosting capability either through acquisition,
       partnership or our own development; and

     - expansion of virtual private network, intranet and extranet service
       offerings.

     For a discussion of the risks associated with our business strategy, see
"Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenue growth."

GTS BUSINESS SERVICES

  OVERVIEW

     Through our Business Services line of business we provide high quality,
competitively priced long distance voice and fax services for retail business
customers to worldwide destinations and network management, access and
termination services to telecommunications service providers such as calling
card companies and resellers in the United Kingdom, Germany, The Netherlands,
Spain, France, Italy, Norway, Sweden, Belgium, Denmark and Ireland. We provide
these services using our switches, fiber optic cable and other infrastructure,
as well as leased lines and capacity provided by other carriers and service
providers. We established our Business Services customer base and sales network
and acquired additional switches, routers and other infrastructure through the
recent acquisitions of Esprit Telecom and NetSource.

     We are in the process of developing our plans for integrating Esprit
Telecom, NetSource and Omnicom into our Business Services, Carrier Services and
Wholesale Services lines of business. We may have one or more of our other
entities purchase assets from Esprit Telecom as part of our strategy. Any such
transaction must be effected in accordance with the applicable covenants in the
indentures governing the Esprit Telecom 11.5% senior notes due 2007 and 10.875%
senior notes due 2008. In addition, we may also decide in the future to execute
a tender or exchange offer or consent solicitations with respect to these notes,
if we determine that it is advisable to better integrate Esprit Telecom into our
overall corporate structure.


     The following discussion of GTS Business Services does not reflect the
effect of the Omnicom acquisition that we consummated on April 26, 1999. See
"Summary -- Recent Developments -- Omnicom Acquisition."


  PRODUCTS AND SERVICES

     We currently offer a range of telecommunications services to two targeted
business customer segments: (i) retail business customers consisting of small,
medium and large-sized businesses, governmental agencies and other organizations
with significant international traffic and (ii) telecommunications service
providers and resellers. We have recently introduced a new category of
service -- enhanced services -- to complement our established telecommunications
services and products. In some markets, we plan to target small and medium-sized
enterprises, small and home offices and high-value residential customers.

     Retail Services. The largest share of the business and corporate retail
market is currently international voice and fax transmission services. In most
of our Business Services markets, we also provide our retail clients with
national long distance services. As we integrate Esprit Telecom and NetSource
and build out local access in targeted metropolitan markets throughout Europe,
we intend to provide our retail clients with seamless national and international
city-to-city service through our Carrier

                                       35
<PAGE>   40

Services and Access Services infrastructure. We believe that customers have
selected us as a provider on the basis of competitive pricing, network quality,
responsive account management and customized services. See "-- Competition Faced
by Our Lines of Business."

     We distinguish our retail business customers between direct access retail
customers and indirect access retail customers. Our direct access customers use
our owned or dedicated leased lines, while our indirect access customers access
our services indirectly on a switched basis using the public telecommunications
operator network by means of an access code. Our direct access retail customers
are generally users of telecommunication services who generate relatively large
amounts of long distance traffic, with such traffic usually being important to
the execution of their core businesses. We offer retail direct access in all of
our existing Business Services markets.

     Our indirect access retail clients access our services by dialing an access
code, generally either using an auto dialer or via a code programmed directly
into their own switches so that it is transparent to the user. These customers
generally consist of small and medium-size businesses whose telecommunication
requirements do not warrant the costs associated with the dedicated leased lines
of direct access service. Contracts for both direct and indirect access are
typically for a period of one year. See "-- Business and Marketing Strategy
- -- Target High Users of Long Distance Traffic." For a discussion of regulatory
issues relating to the provision of retail indirect access services, see
"-- Licenses and Regulatory Issues."

     Service Provider/Reseller Services. We provide network management, access
and termination services to a number of telecommunications service providers,
such as calling card companies and Internet service providers, and to resellers
which distribute our telecommunication services to customers with average
monthly revenue levels below those that we currently target. These companies are
typically marketing-focused rather than network-focused, and we are able to
provide a high degree of telecommunication support to such providers, including
stationing their equipment at our switch sites, incoming call verification and
bill generation. In some cases, these customers use competitor carriers to
either seek lower costs overall or to have backup services. Contracts for our
service provider and reseller services are typically for a period of one year.

     Enhanced Services. We focus on developing new products and services which
address the specific needs of our customer base including calling cards, an
international toll free service and itemized billing, which we target to
organizations that require their customers or employees to be able to simply and
cost-effectively call them from other countries. We plan to introduce additional
services, including unified messaging, interactive voice services, prepaid
calling cards and prepaid mobile phone services. Our target customers include
calling card operators, hotels and information technology companies. In
addition, we provide itemized billing and detailed costing for accounting and
control purposes, national freephone services, as well as limited prepaid and
account-based calling card services in some markets, and limited data services
on a trial basis.

     Fixed-to-Mobile Traffic. This service allows our Business Services
customers with a router to place calls to cellular phone subscribers at more
favorable rates than if they were placed directly to the relevant cellular phone
service through the public telecommunications operator. Due to the relatively
high penetration of cellular phones throughout Europe, the cost of calls to such
phones is an increasingly significant part of companies' total telephony costs.
Consequently, we believe that this service will continue to prove attractive.

  BUSINESS AND MARKETING STRATEGY

     In order to achieve our objective of becoming one of the largest
pan-European independent telecommunications service providers to business and
other high-usage customers, we intend to implement the following strategies:

                                       36
<PAGE>   41

     TARGET HIGH USERS OF LONG DISTANCE TRAFFIC

     We have an established retail customer base of leading international
businesses, organizations and governmental agencies, including a number of
international financial institutions and large global hotel chains. We intend to
continue to focus a significant part of our retail marketing efforts on medium-
to large-sized businesses, governmental agencies and other organizations that
have extensive telecommunications needs and which typically generate long
distance telecommunications expenditures in excess of $5,000 per month. We will
increasingly focus our marketing efforts on small to medium-sized enterprises
that utilize significant amounts of long distance services, and plan to target
small offices and home offices and high value residential customers in certain
countries. We believe that these market segments offer significant
opportunities, because a substantial portion of them have traditionally been
under-served by the public telecommunications operators.

     PROVIDE CUSTOMER VALUE AND SERVICE

     We seek to offer our business services to our customers not only at a
discount to the prices charged by public telecommunications operators, but with
a level of service superior to that provided by such other service providers. We
believe that providing a high level of customer service is a key element in
establishing customer loyalty and attracting new customers. We focus on
providing individual attention to potential and current customers, beginning
early in the sales cycle and continuing throughout a customer's relationship
with us. We offer each client direct, personalized service to ensure full access
and a smooth transition to the services we provide.

     DEVELOP OUR PRODUCT AND SERVICES PORTFOLIO

     We seek to develop new products and services which address the specific and
changing needs of our current customer base and to attract and retain new
customers. Our infrastructure gives us the flexibility to offer new products and
services without undertaking major network modifications, and we believe that we
are well positioned, both from a technical and marketing perspective, to add
additional products and service offerings. The provision of national long
distance services is one of our rapidly growing businesses and we expect that
this will offer us major opportunities, as liberalization leads to more
favorable public telephone operator connection rates in Europe.

  NETWORK AND OPERATIONS

     Through our acquisitions of Esprit Telecom and NetSource, we have acquired
a core infrastructure network for providing services to business customers. This
consists of three components: the switching equipment, the transmission
infrastructure and network between those switches, and systems to support the
management of the network.

     SWITCHING EQUIPMENT

     We utilize advanced digital switching equipment and network routing
architecture from recognized industry manufacturers to form a reliable network
platform for the delivery of quality telecommunications transmissions. We own
and operate three switches at switching centers in London, Dusseldorf and
Amsterdam for switching national and international long distance calls. We own
and operate a switch in Mannheim, Germany and a switch in Dublin, Ireland for
switching national and international long-distance calls. We have has also
acquired additional switches, in Dusseldorf, Frankfurt and Hamburg. We have
installed and are currently testing additional switches which have been
installed in Paris and Barcelona. We will add more switches to the network as
traffic flows, capacity and business conditions warrant and as we expand into
new markets.

     We continuously evaluate developments in switching technology and products
offered by other companies, and will add different platforms which are
complementary and beneficial to our service network. We maintain our switches
with up-to-date software and ensure their compatibility with the large number of
signaling systems in use in the European and United States markets. Using
least-cost routing
                                       37
<PAGE>   42

technologies, each switch is programmed to select the most cost-efficient route
or carrier for the required destination. We also employ dynamic compression
equipment to improve utilization of our most costly transmission lines.

     TRANSMISSION INFRASTRUCTURE AND NETWORK

     We currently maintain network sites in 31 locations in 11 European
countries, 11 of which locations are primary switching centers and 20 are local
points of presence, as well as network connections to certain carriers located
in the United States. In most cases, network sites are situated at the site of
the sales offices. We intend to extend the reach of our services network by
linking new sales offices and terminating sites with a view to providing
seamless and cost-effective transmission. Overall management of our services is
carried out centrally from our network management center in the United Kingdom,
with additional support staff based locally to facilitate complete oversight of
all network functions. Thus, we are able to evaluate current and projected
traffic patterns in order to establish buildout priorities.

     One of our key services is least cost routing. The equipment required to
provide this service consists of a small programmable call router which is
connected to the PBX of a corporate customer or, in the case of a smaller office
without a PBX, connected directly to an outbound telephone cable. In certain
service areas such as The Netherlands, we also market telephone equipment with
routing technology already incorporated into the equipment (called a dialer). We
offer different types of routers depending on the market being served and local
technological requirements.

     MONITORING AND MAINTENANCE

     From our network management center in the United Kingdom, we monitor our
equipment and facilities and provide technical assistance and support 24 hours a
day, year-round. Various quality measures are monitored on an ongoing basis,
with the aim of identifying problems at an early stage before they affect the
customer. Through the use of sophisticated network management equipment, we are
able to effectively control bandwidth and provide diagnostic services. We use an
internal staff of technicians both to install and repair electronics and to
provide service to customers.

     NETWORK RESILIENCE

     Our network infrastructure is designed to provide resilience through
back-up power systems, automatic traffic re-routing and computerized automatic
network monitoring. If our network experiences a failure of one of its links,
the routing intelligence of the switch is designed to enable the call to be
transferred to the next choice route or, if all other routes are unavailable, to
the public switched telephone network, thus ensuring call delivery without
affecting the customer.

  SALES

     The local managing directors in each country are responsible for all local
sales activities and local marketing, local regulatory compliance and licensing
requirements, and the relationship with the local telecommunications companies.
A central marketing organization is responsible for coordinating the country
market initiatives, driving product development, market research and analysis,
and promotion and advertising. From our network management center in the United
Kingdom we provide transmission, technical support and billing services to each
of our sales offices and terminating sites. In addition, our network management
center is also responsible for the implementation, upgrading and functionality
of information technology systems (including the billing and management
information systems).

     Direct sales constitute our principal sales method in the United Kingdom,
Germany, Spain, France, Belgium, Luxembourg, Italy, Sweden, Norway, Denmark, The
Netherlands and Ireland. We support our direct sales effort by telemarketing and
telesales, and complement it to a lesser extent by independent sales
intermediaries and resellers. In Sweden, Denmark and Norway we market our
products and services principally through sales agents. In addition, because we
have begun to increase our focus on specific

                                       38
<PAGE>   43

industry groups, such as financial institutions, hotels, travel service
organizations and transport companies, we have assigned specialists to
particular industries.

     We currently operate in eleven countries that account for approximately 80%
of the international long distance telecommunications minutes that originated in
EU member states in the 1998 calendar year, and maintain sales offices in 42
cities. Each country's sales operation is run as a profit center by a country
manager, and varies from smaller operations in the early stages of development,
to fully operational businesses in the more developed markets consisting of
support and sales staff, as well as customer service personnel. The sales
operation in each country is responsible for originating and managing business
in its respective local market, and is staffed with employees who understand our
Business Services line of business, philosophy, products and systems and local
telecommunication systems and products, business practices, languages and
customs. As of December 31, 1998 we had approximately 245 direct sales people,
300 sales agents and 150 full-time equivalent telemarketing employees in our
Business Services line of business.

     The United Kingdom. From sales offices in London, Reading, the Midlands,
Manchester and Glasgow, we currently offer both direct and indirect retail
access and service provider and reseller services to all international and
national long distance destinations in our Business Services line of business.

     Germany. We offer both direct and indirect retail access and service
provider and reseller services to all international and national long distance
locations and through NetSource, we also provide services to small-office and
home-office and residential customers. In addition, we offer retail services to
businesses through six regional sales offices located in Frankfurt, Hamburg,
Berlin, Munich, Oberhausen and Stuttgart and through relationships with
third-party distributors. In June 1998, Esprit Telecom acquired the switch-based
telecommunications services business of Plusnet, which at that date offered
national and international long distance voice telephony to approximately 700
business customers.

     The Netherlands. We have sales offices in Amsterdam, Rotterdam, Leiden,
Zwolle, Eindhoven and Venray. We currently offer both direct and indirect retail
access, wholesale and service provider and reseller services to all
international and national long distance destinations.

     Scandinavia. We operate in Sweden, Norway and Denmark as a reseller,
providing our business customers with indirect retail access and service
provider and reseller services to all international and national long distance
destinations using least cost routing.

     Spain. We operate one of the few alternative telecommunications providers
currently operating in the Spanish market. From sales offices in Madrid,
Barcelona and Bilbao, we currently offer both direct and indirect retail access
and service provider and reseller services to all international and national
long distance destinations.

     France. We operate sales offices in Paris, Lille, Lyon, and Strasbourg. We
currently offer both direct and indirect retail access, wholesale and service
provider and reseller services to all international and national long distance
destinations.

     Belgium. From sales offices in Brussels and Antwerp, we currently offer
direct and indirect retail access wholesale and service provider and reseller
services to all international and national long distance destinations.

     Italy. From a sales office in Milan, we currently offer direct and indirect
retail access to all international and national long distance destinations.

     Ireland. From sales offices in Dublin and Cork, we offer both direct and
indirect retail access services to all international and national long distance
destinations.

  BILLING AND MANAGEMENT INFORMATION SYSTEMS

     Our detail records for customers we acquired through the acquisition of
Esprit Telecom are collected and backed-up locally and transmitted to the
internal billing center in the United Kingdom for processing.

                                       39
<PAGE>   44

Call records are transmitted electronically to Tel Labs Inc., a data processing
company in the United States, for final processing of customer records, which
are then returned for verification, printing and distribution to customers. In
1997, we began to consider an upgrade to our information and management systems,
which we believed to be required in order to provide the capability and
flexibility to support our anticipated growth. We have selected a new customer
care and billing system from Seville Systems, a billing system vendor
headquartered in Edmonton, Canada. The new system is undergoing final
customization and testing. The introduction of the new system will be
accompanied by additional systems designed to support the critical service
activation, customer care and service assurance processes. We expect that
investment will continue with major additional systems in the billing, customer
care, network management, product management, prospect management and
information systems areas being introduced over the next several years. We
expect to integrate the acquired legacy billing systems at NetSource and Esprit
Telecom into our new Business Services billing process by mid-1999. See "Risk
Factors -- We may not implement billing and management information systems
effectively and on schedule."

GTS WHOLESALE SERVICES

  OVERVIEW

     By utilizing the existing infrastructure of Esprit Telecom, we are creating
a sixth line of business to be known as Wholesale Services. Wholesale Services
will provide international traffic termination services to other
telecommunication carriers, including public telecommunications companies, new
operators, global alliances and regional telephone companies, to which it is
able to provide highly responsive and flexible services. Wholesale traffic will
enable us to benefit from greater purchasing power and higher network
utilization. Through our Wholesale Services line of business, we will integrate
the wholesale services activities of Esprit Telecom with the international
switching and transit service activities of GTS -- Monaco Access. At a later
date, our Wholesale Services line of business will also incorporate the
wholesale activities of NetSource.

     Through our Wholesale Services line of business, we offer 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. These services include:

     - international switched traffic;

     - international private lines;

     - facilities management, including billing, customer management and fault
       reduction systems;

     - resale distribution for Internet service providers; and

     - prepaid calling card platform services.

     Wholesale customers are other international and national carriers that
connect with Wholesale Services to carry their traffic to destinations where our
rates are competitive, both on the Hermes Railtel network and on other
off-network routes. Wholesale Services has contracts with these customers, but
they generally do not include minimum usage levels. Our wholesale customers
generally maintain relationships with a number of telecommunications providers.
In several cases, Wholesale Services will also use its wholesale customers as
suppliers for termination of its off-network calls. We believe that success in
the wholesale business is predicated on high network quality at a low cost base.
At present, the majority of our Wholesale Services' wholesale customers are
located throughout Europe. We expect that demand for our Wholesale Services line
of business will further increase in other European markets as these markets
mature. As we continue to increase the capacity of Hermes Railtel's network, we
anticipate that our resultant cost base will enable us to price our wholesale
services more competitively and therefore increase the volume of such services.

                                       40
<PAGE>   45

     Our partner in GTS-Monaco Access, SNF, is an investment fund designated by
the Principality of Monaco to represent its interests. We exercise operational
control of the joint venture, and provide managerial and financial support,
international telecommunications expertise and strategic planning. We have
entered into an agreement with SNF and Monaco Telecom to purchase for
approximately $5 million SNF's 50% interest in GTS-Monaco Access, terminate the
GTS-Monaco Access joint venture and transfer its customers and revenues to the
UK as we combine with Esprit Telecom's wholesale activities.

     By utilizing our Carrier Services and Access Services networks as well as
over 25 third-party carriers in London and 40 third-party carriers across Europe
and North America, we provide telecommunications termination to destinations
world-wide and a wide range of alternative routing paths that facilitate cost-
effective termination and ensure reliability and increased call/termination
success rates. Calls are carried from the entry switch point to the switch point
from which the call can be terminated most economically. If this exit switch
site is within the country of the termination, we consider the call to be an
"on-net" call, whereas we otherwise consider it to be an "off-net" call. Off-net
calls are passed on to other carriers for transmission and termination. In
general, we realize higher gross margins with respect to on-net calls because we
utilize our own infrastructure. We expect that the expansion of the our Carrier
Services and Access Services networks will allow us to increase the proportion
of on-net calls as well as further reduce the cost of these calls.

  BUSINESS AND MARKETING STRATEGY

     Our strategy for developing our Wholesale Services line of business
includes the following:

     - Develop Advanced Carrier Services Offerings. Wholesale Services may
       develop its "advanced carrier services" offerings to include global 0800
       services and international free phone services, which we believe will
       broaden customer relationships, enhance revenues and help to protect us
       from price-based competition.

     - Develop Relationships to Broaden Service Offerings. Our Wholesale
       Services line of business may develop relationships to broaden its
       service offerings. Wholesale Services has entered into agreements with
       UUNET, one of its gateway customers, to provide wholesale Internet access
       to Wholesale Services' carrier customers in a number of Western European
       countries. The agreement allows these services to use the same brand
       names as those of our 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.
       Wholesale Services intends to price its services competitively with the
       prevailing price for comparable inter-public telecommunications operators
       transit and gateway services. Wholesale Services is not bound by legacy
       systems, infrastructure and personnel levels and can, therefore, manage
       competitive cost operations.

     - Attractiveness of Independence. Because our Western European activities
       are not affiliated with any of the major consortia or large Western
       European telecommunications companies, our Wholesale Services line of
       business 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 Internal Opportunities. Wholesale Services may collaborate with
       our other companies in Europe and the CIS. Wholesale Services is expected
       to realize significant reductions in its cost structure through access to
       low-cost European transmission capacity through an alternative
       infrastructure provider such as Hermes Railtel. Wholesale Services will
       act as the international carrier for traffic generated by our other lines
       of business.

     For a discussion of the risks associated with our business strategy, see
"Risk Factors -- We may encounter delays in implementing key elements of our
business strategy which could adversely affect our projected revenue growth."

                                       41
<PAGE>   46

  TARGETED CUSTOMERS

     Targeted customers for our Wholesale Services line of business include:

      - Non-Affiliated Public Telecommunications Operators. We believe that
        various large American and Western European public telecommunications
        operators that lack adequate international switching and transport
        facilities of their own may be persuaded to purchase international
        services from Wholesale Services rather than from competing public
        telecommunications operators or consortia;

      - Mobile Carriers. We believe that some of the alternative mobile
        carriers, which currently provide only a small percentage of Western
        European mobile telecommunications traffic, may prefer the "independent"
        international gateway service offerings of Wholesale Services to those
        of their public telecommunications operator competitors;

      - Internet Service Providers. Growth in Internet usage creates a
        significant opportunity for a nonaligned Internet access provider such
        as Wholesale Services, since many Internet service providers will be in
        direct competition with public telecommunications operator-owned
        services in large European markets;

      - Second Carriers/Resellers. We believe that many second carriers will
        seek to enter new markets quickly without investing in international
        switching capacity; and

      - Established Public Telecommunications Operators. This customer segment
        will be a niche market for Wholesale Services. As markets are
        deregulated and carriers become increasingly competitive, opportunities
        may emerge to leverage our non-aligned status to route traffic between
        those new competitors.

GTS ACCESS SERVICES

  OVERVIEW

     Through Access Services, we intend to capitalize on our experience in
developing and operating local telecommunications networks in Russia and Central
Europe by building, acquiring or leasing technologically advanced fiber optic
networks in order to provide local access services in up to 12 metropolitan
markets throughout Europe, by 2001. We presently provide local telecommunication
access infrastructure and leased lines in several cities in Russia, the CIS and
Central Europe, including Moscow, St. Petersburg, Kiev, Prague and Budapest.
Currently, the regulatory regimes in Europe vary from country to country and
some countries do not permit alternative providers of local access to operate.

  PRODUCTS AND SERVICES

     Together with our Business Services line of business, we intend to offer
through Access Services 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 local access network interconnection services, virtual
private network services, video transmission services and IP-based services,
including voice over IP, web hosting and data transmission services. According
to industry sources, demand for data transmission in the United States is
currently growing much faster than voice, and we expect that this trend will
develop in Europe as competitively priced telecommunications services become
available. In addition, we intend to develop competitively priced value-added
telecommunications services that are tailored to the specific needs of
individual customers.

     The types of services that we intend to offer in combination with our
Business Services include:

     - Switched Services. Switched services involve the transmission of voice,
       data or video to locations specified by end-users or carriers. Through
       our Business Services, we have the technological capability to offer a
       full range of switched service, including local, national and
       international calls as

                                       42
<PAGE>   47

       well as enhanced services. We intend to own and operate switches and
       enter into interconnection agreements with other telecommunication
       service providers and carriers, including Hermes Railtel's network, in
       order to offer to customers cost-effective local, national and
       international calling services. Switched service features are expected to
       include, to the extent 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. Businesses
       commonly use this service to obtain a private direct link between
       multiple business facilities or to another end-user/carrier. We expect to
       provide high capacity, advanced technology to deliver customer traffic
       with a lower cost and higher reliability as compared to the local public
       telephone operator. Through a highly reliable and cost-efficient network
       that can carry significant amounts of capacity, we intend to provide
       non-switched voice, data and video transmission between (1) end users,
       (2) end users and carriers and (3) multiple carriers, allowing our
       customers the option to bypass the older, less efficient technology and
       higher priced services of the incumbent public telecommunications
       operators.

     - Other Services. We also intend to develop service offerings to take
       advantage of new market opportunities. We expect such services to include
       one or more of the following: high speed data transmission services,
       IP-based services, including Internet for multi-media applications, Web
       hosting, voice over IP, 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. We believe that there will be substantial demand for data and
       Internet services by large business and other high-usage customers, and
       that a bundled service offering of national and international data and
       voice services will be attractive to this targeted customer base.

  BUSINESS AND MARKETING STRATEGY

     We believe 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 the provision of local access to retail customers in metropolitan
markets throughout Europe.

     Our strategy for entering into a specific metropolitan market will be
determined through an analysis of a number of demographic and economic factors,
including:

     - business concentration;

     - presence of governmental, financial and business customers;

     - local economic trends and prospects;

     - demand and spending for switched and non-switched voice, data and video
       telecommunications services;

     - feasibility of construction;

     - presence of existing and potential competitors;

     - the regulatory environment;

     - the market's proximity to the Hermes Railtel network; and

     - the presence of local access companies that may be potential acquisition
       candidates.

In targeting cities in which our entry strategy will be the construction of a
fiber optic cable network, we will initially focus on cities in which there are
no competitive local exchange carrier competitors providing local access
services or only one other such competitor. Our current intention is to enter
two metropolitan markets by the end of 1999 and to provide services in up to 12
target metropolitan markets by 2001.

                                       43
<PAGE>   48

     We expect to use one or more of the following strategies to enter a market:

     - constructing a fiber-loop network;

     - purchasing or leasing fiber optic cable which has not been equipped or
       activated for commercial use;

     - obtaining licenses for telecommunications networks utilizing microwave
       transmissions; or

     - forming partnerships with or acquiring providers of local access services
       that own and operate their own fiber loops and network equipment.

  CUSTOMERS

     We plan to offer local access and other telecommunications services
primarily to telecommunications-intensive businesses for which reliable
telecommunications services are critical, as well as to our Carrier Services and
Business Services lines of business. We will use our fiber switches and other
equipment where available and/or reselling other carriers' equipment as needed.
These businesses include financial services companies, multi-national companies,
governmental agencies, resellers, Internet service providers and wireless
communications companies.

  NETWORK

     In those markets in which we determine to build our own fiber loops, we
intend 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. We believe that a base of uniform, reliable networks, which employ
the most current technology and support a broad array of high quality services,
will allow us to compete cost-effectively against products and services offered
by public telecommunications operators and, in certain markets, other
competitive providers of local access.

     Our plan for our basic transmission platform is fiber optic cable deployed
in rings, equipped with high-capacity synchronous digital hierarchy equipment.
These 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. These rings will finally connect to the
customer through customer-dedicated or shared electronics on or near the
customer premises.

     NETWORK CONSTRUCTION

     Prior to undertaking acquisition or construction of a network in a
particular market, we will undertake an analysis of a number of factors, as
discussed above, to determine whether the acquisition or construction is
economically justifiable. Wherever appropriate, we will seek to purchase or
lease fiber optic cable that is not equipped or has not been activated for
commercial use or utilize high-frequency short-haul microwave transmissions as a
method of accelerated entry into a selected market.

     We expect that we will contract construction and installation services to
independent contractors selected through a competitive bidding process. Our
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, we expect to commence generating revenue. Further expansion of the network
will be dictated by customer growth and customers' relative proximity to the
initial loop.

     Our initial capital requirement to develop our Access Services business in
Europe will be financed with a majority of the proceeds from our July 1998 stock
and convertible debt offerings. In addition, we contemplate that we will raise
additional financing, the proceeds of which will be applied toward the
construction of our local access infrastructure. We have not yet determined the
size and timing of such
                                       44
<PAGE>   49

financing. We cannot estimate with any degree of certainty the amount and timing
of our future capital requirements for the development of our Access Services
line of business, which will be dependent on many factors, including the success
of our Access Services business, the rate at which we expand our networks and
develop new networks, the types of services we offer, staffing levels,
acquisitions and customer growth, as well as other factors that are not within
our control including competitive conditions, regulatory developments and
capital costs. We believe that as we develop our Access Services line of
business, it is likely that we will need to raise additional capital. See "Risk
Factors -- We may be unable to raise the additional capital necessary to
implement our business strategy."

  SALES AND MARKETING

     In each of our target markets, we intend to establish our own direct sales
force. As we will be targeting large financial, corporate and governmental
customers with demanding telecommunications service requirements, we expect that
our internal sales force will include dedicated sales and customer service
representatives. Our Access Services sales force will offer direct local access
to Business Services customers in those metropolitan markets in which our Access
Services builds local fiber loops. In addition, our Access Services will work
closely with our Business Services to identify key customers and develop joint
service offerings.

  GTS ACCESS SERVICES IN CENTRAL EUROPE

     In Central Europe, 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 high-speed Internet access to business customers and operate an
international gateway and a data services network. In Hungary, we provide data
transmission services through a nationwide microwave network and a
satellite-based network installed at customer sites throughout the country. We
plan to develop two fiber loops in Budapest. Subject to certain regulatory
approvals, we have also obtained a license to provide international data
services in Poland and expect to begin operations during the first quarter of
1999.

     In January and February 1999, we acquired an interest in two Internet
providers in Central Europe, DataNet in Hungary and NetForce in the Czech
Republic. In addition, we also acquired interests in two of the largest Internet
service providers in Poland, Internet Technologies and ATOM.

     Our strategy in Central Europe is to expand our service offerings as the
regulatory environment permits, utilizing our existing infrastructure where
possible and providing a broad range of services to our target markets. The
establishment of competitive providers of local access in various Central
European cities is a major component of this strategy.

  BILLING AND MANAGEMENT INFORMATION SYSTEMS

     Sophisticated information and processing systems will be vital to the
success of Access Services. Specifically, we 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. We expect the development of our systems to require substantial
capital and management resources. See "Risk Factors -- We may not implement
billing and management information systems effectively and on schedule."

GTS BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS

     We provide digital voice, data, Internet and local services in Moscow
through our Sovintel, Sovam and TeleCommunications of Moscow ventures and
provide these same services to fourteen additional cities in the CIS through our
TeleRoss long distance network. We continue to evaluate the business environment
in Russia and the CIS for possible attractive opportunities for investments that
may complement our existing operations in Russia and the CIS. We are exploring
with our advisors a number of potential transactions, some of which may involve
the sale, including through a public offering, of certain of our

                                       45
<PAGE>   50

Russian businesses, or the contribution of these businesses in exchange for an
interest of equivalent or greater value in the surviving entity, if consummated,
may be material to our operations and financial condition. Our ability to carry
out these transactions is subject to political, economic, market and other
conditions, and we cannot assure you whether or when these transactions would
occur. We will effect any such transactions in compliance with the provisions of
the indenture governing our 9 7/8% senior notes.

  BACKGROUND ON THE POLITICAL, ECONOMIC AND TAX ENVIRONMENT IN RUSSIA

     Political. In recent years, Russia has been undergoing a substantial
political transformation. 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.

     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. For a description of political
risks our operations in Russia and the CIS face, see "Risk Factors -- Turmoil in
Russia and the CIS creates significant uncertainty for our operations."

     Economic. In May and early June 1998, the Central Bank of Russia 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. These measures failed to stabilize the economy or 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 rubles to the United
States 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/United States Dollar floor set on
that date. Although the 90-day moratorium has not been extended, the
consequences of the decision on August 17 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. For a
description of economic risks relating to our operations in Russia and the CIS
face, see "Risk Factors -- Turmoil in Russia and the CIS creates significant
uncertainty for our operations."

     Taxes. Generally, taxes payable by Russian companies are substantial. There
is no consolidation provision, and thus, 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. For a description of tax risks relating to our operations in Russia
and the CIS face, see "Risk Factors -- Turmoil in Russia and the CIS creates
significant uncertainty for our operations -- Our Russian tax burden may be
significantly greater than anticipated."

  OVERVIEW OF RUSSIAN TELECOMMUNICATIONS MARKET

     We believe 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, although recent political and
economic developments have created considerable uncertainty. 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

                                       46
<PAGE>   51

the public telephone network, has led to rapid growth in the telecommunications
sector in Russia and the other independent republics of the CIS.

     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.

     Despite the recent changes in the Russian telecommunications industry, the
level and quality of telecommunications service generally available from most
public operators in Moscow remains significantly below that available in cities
of Western Europe and the United States, although in recent years, the Moscow
local telephone infrastructure has benefitted from significant capital
investment. Outside Moscow (and to a lesser extent St. Petersburg), most
standard Russian telecommunications equipment is obsolete.

  MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN RUSSIA AND THE CIS

     We have a policy worldwide of complying with all applicable laws. However,
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 local 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 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, 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 and adopted a more rigorous Foreign
Corrupt Practices Act and applicable local laws compliance program.

     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.

     We believe that the special counsel review was properly conducted and
sufficient in scope and that the actions taken since the review to strengthen
our management, financial controls and legal compliance will be adequate to
address any possible deficiencies. However, we cannot assure you that all
potential deficiencies have been identified or that the control procedures and
compliance programs we have implemented will be effective. The audit committee
of our board recently reviewed our legal compliance procedures. We believe that
this continued oversight will help to ensure that any problems in these
procedures are addressed. For a discussion of the risks we face, see "Risk
Factors -- Our management, legal and financial controls may be inadequate to
ensure that we comply with applicable laws."

  GTS BUSINESS SERVICES - CIS

     OPERATIONS

     We provide a broad range of telecommunications services in Russia,
including international long distance services, domestic long distance services,
cellular services, high speed data transmission, Internet

                                       47
<PAGE>   52

access and local access services. Dedicated and leased capacity supplements our
own infrastructure, allowing us to bypass the severely congested and poorly
maintained local, domestic and long distance circuits of the Russian and
Ukrainian carriers.

     Our business units seek to integrate and co-market their service offerings,
utilizing TeleRoss as the long distance provider, Sovintel as the international
gateway, TeleCommunications of Moscow and Mobile Services for local access, and
Sovam Teleport as the data communications and Internet access network for
business applications and on-line services. This integrated marketing approach
enables us to provide comprehensive telecommunications solutions to
multinational corporations operating throughout Russia and the other independent
countries of the CIS. We have taken preliminary steps to combine
Telecommunications of Moscow, TeleRoss and Sovam. For a discussion of the risks
associated with our joint ventures, see "Risk Factors -- Turmoil in Russia and
the CIS creates uncertainty for our operations -- We may be overly dependent on
our joint ventures partners."

     Sovintel. We own 50% of Sovintel, a joint venture with Rostelecom, the
national long distance carrier. 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 our other Russian ventures,
including TeleRoss, TeleCommunications of Moscow and Sovam. 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.

     Telecommunications of Moscow. During the third quarter of 1998, we
increased our beneficial ownership of Telecommunications of Moscow to 95%.
Telecommunications of Moscow provides a licensed numbering plan and
interconnection to the Moscow city telephone network for carriers needing basic
local access service in Moscow. Telecommunications of Moscow is currently
licensed to provide 100,000 numbers in Moscow, of which over 78,000 have been
leased. Telecommunications of Moscow has completed agreements required to
construct and provide an additional 50,000 numbers. The construction started in
1998 and is expected to be completed by the end of 1999. Telecommunications of
Moscow's switching facilities are fully integrated with the networks of
Rostelecom, Sovintel, and Moscow city telephone network, allowing it to provide
high quality digital service to its customers.

     Telecommunications of Moscow acts as a local gateway by providing numbers
and ports to carriers in Moscow, including Sovintel, VimpelCom 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."

     TeleRoss. TeleRoss is a wholly owned subsidiary that operates a domestic
long distance network. In addition, TeleRoss has a 50% ownership interest in 14
joint ventures that originate traffic and provide local termination of calls.
The TeleRoss domestic long distance network serves 15 major Russian cities,
including Moscow and, through satellite 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 Telecommunications of Moscow's switching facilities.
Sovam uses the TeleRoss digital channels to provide regional data service and
has co-located its access facilities with TeleRoss.

      Sovam. Sovam provides high-speed data communications services, electronic
mail and database access over a high-speed packet/frame relay network to its
customers in a large number of major Russian and CIS cities. Sovam also offers
Russia On Line, the first Russian language Internet service. Russia on Line
(which is our registered trademark) provides direct access to the Internet as
well as access to a wide range of local and international information services
and databases. In addition to serving the Moscow and

                                       48
<PAGE>   53

St. Petersburg markets, Sovam offers its services in all TeleRoss cities, as
well as 32 additional cities in Russia and the CIS.

      Sovam employs a dedicated sales and marketing force. Sovam's sales efforts
are focused primarily on the banking and financial communities and large
multinational companies. We frequently market bundled service packages, which
include Sovam's data and Internet service, Sovintel's international service and
TeleRoss's long distance service in order to offer customers a comprehensive
telecommunications solution.

  GTS MOBILE SERVICES - CIS

     Our Mobile Services line of business operates cellular businesses in Russia
and the Ukraine. In Russia, we have a wholly owned subsidiary, Vostok Mobile,
which currently operates thirteen 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.
Unicel provides analog cellular telephone service based on the Advanced Mobile
Phone System, or AMPS technology. In addition, through Vostok Mobile, we
participate in PrimTelefone, a 50%-owned joint venture that operates an analog
network in Vladivostok and other cities in the Primorsky region of Russia based
on the Nordic Mobile Telephone System, or NMT technology. In April 1998,
PrimTelefone was also awarded a license to operate GSM-1800 in 14 regions of the
Russian Far East. In the Ukraine, we have an approximately 57% beneficial
interest in Golden Telecom, which operates a digital GSM-1800 cellular network
in Kiev, and an international overlay network in the Ukraine. Our Mobile
Services entities hold licenses covering major Russian and the Ukrainian markets
excluding Moscow and St. Petersburg, with an aggregate 1997 population of
approximately 42 million people.

COMPETITION FACED BY OUR LINES OF BUSINESS

     The European and international telecommunications industries are highly
competitive. Our competitors in these markets include the following entities,
many of which have substantially greater technical, financial, marketing and
other resources:

     - established national or regional public telecommunications operators and
       providers;

     - private multinational telecommunications carriers;

     - other private telecommunications developers and niche providers; and

     - consortia of telecommunications providers.

     Historically, the European public telecommunications operators monopolized
the provision of telecommunications services in their national or regional home
markets and designed their networks according to national rather than
international considerations. Between 1990 and 1997, however, the European Union
implemented a series of directives designed to open up European
telecommunications markets to competition. These directives required EU member
states to implement legislation liberalizing their respective telecommunications
markets to permit alternative telecommunications companies both to provide
telecommunications services and to access the existing telecommunications
infrastructure controlled by these national and regional providers. In response
to these European regulatory changes, a number of companies, including our
company, have emerged to compete with the European public telecommunications
operators. We believe that competition for telecommunications services in Europe
will continue to increase as a result of continuing liberalization.

     Accordingly, we compete primarily with national public telecommunications
operators and other providers which have established market presences,
fully-built networks and financial and other resources which are substantially
greater than ours and, in the case of many public telecommunications operators,
control over the intra-national transmission lines and connections to such
lines. Additionally, the ownership of such infrastructure provides them with
significant cost advantages. Since we utilize many of these

                                       49
<PAGE>   54

networks to provide our services, the failure to gain cost-oriented access to
such networks could have a material adverse impact on our business, results of
operations and financial condition.

     We believe that other competitors in the European markets will include
private multinational consortia such as Unisource, Concert and Global One, as
well as resellers, microwave and satellite carriers, mobile wireless
telecommunications providers, cable television companies, utilities and other
competitive local telecommunications providers. We also compete with other
medium-sized private carriers and resellers in Europe. These companies are
generally more aggressive than the public telecommunications operators and other
dominant providers and sometimes bring experience from more mature marketplaces.
Like ourselves, these providers often target medium-to large-sized business
customers and other big market segments. In addition, the development of new
technologies could give rise to significant new competitors.

     Competition in the European telecommunications industry is based upon
price, customer service, type and quality of services and customer
relationships. Our strategy is predicated on our ability to reduce our prices
below the prices charged by the public telecommunications operators or dominant
carriers in each of our markets, yet offer high-quality products and
telecommunications services. However, prices have decreased substantially over
the last few years in most of our markets. Some of our larger competitors may be
able to use their greater financial resources to cause severe price competition
in the countries in which we operate. We expect that prices will continue to
decrease for the foreseeable future and that public telecommunications operators
and other providers will continue to improve their product offerings. For a
discussion of the risks posed by our competitors' operations, see "Risk
Factors -- Established competitors with greater resources may make it more
difficult for us to effectively market our services, offer our services at a
profit and attract and retain customers and "Risk Factors-- Our competitive
position may be compromised by our dependence on other telecommunications
service providers."

     We have outlined below the competitive environment with respect to each of
our six lines of business.

  GTS CARRIER SERVICES

     The success of our Carrier Services line of business depends upon our
ability to compete with a variety of other telecommunications providers offering
or seeking to offer cross-border services, including (1) the respective public
telecommunications operator in each country in which Hermes Railtel's network
operates, (2) global alliances among some of the world's largest
telecommunications carriers, and (3) global operators. We expect that some of
these current and future competitors may also become our customers. We also
believe that the ongoing liberalization of the European telecommunications
market will attract additional entrants to the carrier's carrier market and
increase the intensity of competition. Competitors in this market compete
primarily on the basis of price and quality. We intend to focus on these factors
and on service innovation as well. Our Carrier Services business plan
anticipates substantial direct and indirect competition. For a discussion of the
risks associated with our Carrier Services line of business, see "Risk
Factors -- Our Access Services and Business Services activities may cause our
Carrier Services line of business to lose customers" and "Risk Factors -- The
technology of our Hermes Railtel network could become obsolete and harm our
competitiveness."

     Various telecommunications companies, including MCI/WorldCom, Inc., Viatel,
Inc., KPN-Qwest, Deutsche Telekom AG, 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. Some of these networks include, or their promoters have expressed
their intentions to include, transatlantic connectivity.

  GTS BUSINESS SERVICES

     We have not achieved and we do not expect to achieve a significant market
share for our services in any of Business Services' markets. We expect that
prices for our Business Services line of business will continue to decrease for
the foreseeable future. In addition, certain of our customers, in particular
wholesale carriers, may sometimes use more than one service provider and may
reduce their use of our services and switch to other providers.
                                       50
<PAGE>   55


     The following discussion of GTS Business Services does not reflect the
effect of the Omnicom acquisition that we consummated on April 26, 1999. See
"Summary -- Recent Developments -- Omnicom Acquisition."


     In each of our current Business Services markets we compete primarily with
the national public telecommunications providers. Other competitors of Business
Services include private multinational consortia as well as microwave and
satellite carriers, mobile wireless telecommunications providers, cable
television companies, utilities and competing local telecommunications providers
and other medium-sized carriers and resellers in Europe. Some of these carriers
have established their own switch sites and operate their own networks.
Competitors in this segment include MCI/WorldCom, COLT, Viatel and RSL, which
compete in multiple countries, and country-specific competitors such as Energis
(UK), Arcor (Germany), Telfort (The Netherlands), Retevision (Spain), Infostrada
(Italy) and Cegetel (France). These providers are generally more entrepreneurial
than the public telecommunications operators and other dominant providers and
sometimes bring experience from more mature markets. Like us, these providers
often target small, medium and large-sized business customers or other market
niches.

  GTS WHOLESALE SERVICES

     Our Wholesale Services line of business will face competition from a
consortia of telecommunications operators, large public telecommunications
operators and other international telephone operators with advanced network
infrastructures, access to large quantities of long-haul capacity and
established customer bases. Public telecommunications operators 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 Wholesale Services.

     With deregulation of the telecommunications markets, opportunities for the
establishment of international gateways will likely develop and, as a result,
competition in the market for our Wholesale Services will increase. We intend to
relocate and consolidate our Wholesale Services operations in London, which is
served by the Hermes Railtel network. This will allow us to route our Wholesale
Services customers' traffic through the Hermes Railtel network and incur reduced
transmission expenses, thereby enhancing the competitiveness of Wholesale
Services' operations.

  GTS ACCESS SERVICES

     Public telecommunications operators often offer both local and long
distance services and benefit greatly from their position as sole historic
provider in the markets they serve. We believe that the market for the provision
of local services is sufficiently attractive to cause additional competitive
local exchange carriers, including multi-national carriers, to enter the market
to offer products and services which would compete with ours.

     We will compete with public telecommunications providers and, in certain
markets, competitive local exchange carriers, including, 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. We believe, based on our
experience in Western and Central Europe, Russia and the CIS, that we have the
knowledge and ability to develop products and services which will be competitive
with other competitive local exchange carriers in terms of content, quality and
price.

  GTS BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS

     We face significant competition in virtually all of our existing
telecommunications businesses in Russia and the other independent countries of
the CIS. We believe that we have certain competitive advantages in each of these
markets because of our operating history, our ability to bundle a broad range of
telecommunications services in the region and our ability to make rapid
decisions in pursuing new business opportunities and addressing customer service
needs. We also believe that our local partnerships

                                       51
<PAGE>   56

and reliance on nationals in the management of its businesses and joint ventures
provide us with better knowledge of local political and regulatory structures,
cultural awareness and access to customers.

LICENSES AND REGULATORY ISSUES

  OVERVIEW

     The regulation of the European telecommunications industry is in the midst
of significant changes. In 1987, a policy document, the EC Green Paper on
Telecommunications, charted the course for the current changes in the EU
telecommunications industry by advancing principles such as separation of
operators from regulators, transparency of procedures and information, cost
orientation of tariffs, access to monopoly public telephone operator networks
and the liberalization of services. In 1990, the EU member states approved two
directives that established these principles in EU law: the Open Network
Provision Framework Directive and the EU Services Directive. Combined, these two
directives set forth the basic rules for access to public telephone networks and
the liberalization of the provision of all telecommunications services within
the EU except for certain reserved services, including voice telephony.

     In 1992, the EU approved the Open Network Provision Leased Line Directive,
which requires the incumbent operators to lease lines to competitors and end
users, and to establish cost accounting systems for these products by the end of
1993. The national regulatory authorities were to use this cost information to
set cost-orientated tariffs for leased lines. Even though most EU member states
have established regulatory frameworks requiring public telecommunications
operators to lease lines to competitors and end users, we believe that, in some
EU member states, such lines are not yet being offered at cost-orientated
prices.

     In 1996, the EU issued the Full Competition Directive, which requires EU
member states to permit the provision of telecommunications services, other than
reserved services, over (1) networks established by the provider of the
services, (2) network infrastructure provided by third parties or (3) by means
of sharing of networks from July 1996. Since then, there has been an increasing
supply of such capacity offered at attractive prices from such alternative
suppliers. The Full Competition Directive also established January 1, 1998 as
the date by which all EU member states must remove all remaining restrictions on
the provision of telecommunications services, including voice telephony.
However, the following EU member states were granted a delay in implementing
this liberalization directive:

          - Greece, through December 31, 2000;

          - Ireland, through January 1, 2000;

          - Luxembourg, through July 1, 1998;

          - Portugal, through January 1, 2000; and

          - Spain, until November 30, 1998.

     Ireland implemented the Full Competition Directive in December 1998.
Subject to the foregoing, each EU member state is obliged, under EU law, to
enforce the terms of the Full Competition Directive in such a manner so as to
ensure that its aim and purpose is carried out. Enforceability of the Full
Competition Directive may be challenged at the EU level or at the EU member
state level. In practice, implementation and enforcement of the directive has
been and may also continue to be delayed on a country by country basis.

     As a complement to the Full Competition Directive, the European Parliament
and Council of Ministers in June 1997 adopted a directive which governs the
manner in which public network operators and service providers interconnect with
the public telecommunications operators' public networks. Among other things,
this directive requires EU member states to ensure that public
telecommunications operators with significant market power should provide
interconnection on the basis of cost-oriented charges.

     In April 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

                                       52
<PAGE>   57

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 scarce resources,
such as radio frequencies or numbers.

     In February 1998, the European Parliament and the Council of Ministers
adopted a directive on the application of the Open Network Provision to voice
telephony and on universal service.

     Despite these regulatory initiatives supporting the liberalization of the
telecommunications market, most EU member states are still in the initial stages
of liberalizing their telecommunications markets and establishing competitive
regulatory structures suitable for a competitive environment. For example, most
EU member states have only recently established a national regulatory authority.
In addition, the implementation, interpretation and enforcement of EU directives
differs significantly among the EU member states. While some EU member states
have embraced the liberalization process and achieved a high level of openness,
others have delayed the full implementation of the directives and maintain
several levels of restrictions on full competition.

     Member states of the EU are also bound as a matter of international law to
comply with certain multilateral trade rules and regulations. On February 15,
1997, over 60 members of the World Trade Organization committed to open their
telecommunications markets for basic telecommunications services to foreign
competition and ownership and to adopt regulatory measures designed to protect
foreign telecommunications providers against anticompetitive behavior by
domestic public telecommunications operators. For most signatories to this World
Trade Organization Telecommunications Agreement, these commitments took effect
on February 5, 1998 (including the EU member states). We believe that the World
Trade Organization Telecommunications Agreement will contribute to the creation
of a more competitive environment internationally. Specifically, it will result
in downward pressure on call termination charges outside the EU. For a
discussion of the regulatory risks involved, see "Risk Factors -- Delays in
regulatory liberalization in EU member states could adversely affect our service
offerings in those countries."

     As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services. Local laws and regulations and the interpretation of such laws and
regulations differ significantly among the jurisdictions in which we operate.
For a discussion of the regulatory risks we face, see "Risk Factors -- Delays in
regulatory liberalizations in EU member states could adversely affect our
service offerings in those countries."

     We are in the process of reviewing the licenses, permits and authorizations
that we obtained through our acquisition of NetSource and Esprit Telecom. It may
be possible for us to use certain of these licenses to provide services through
our Carrier Services, Business Services or Access Services lines of business.

  GTS CARRIER SERVICES

     HERMES RAILTEL

     A summary discussion of the regulatory framework in certain countries where
Hermes Railtel has developed and is developing its network is described 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. We believe 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 where we currently operate.

     Hermes Railtel requires licenses, authorizations or registrations in almost
all countries to operate the network. Licenses, authorizations or registrations
have been obtained in Belgium, France, Germany, Italy,

                                       53
<PAGE>   58

Luxembourg, The Netherlands, Spain, Sweden, Switzerland, the UK and the United
States. No license or authorization is required to operate a network in Denmark.
Hermes Railtel intends to file applications in other countries in anticipation
of service launch in accordance with the network roll-out plan.

     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 continued to work with the system of provisional licenses. Hermes
Railtel 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. Hermes Railtel
also had an authorization to provide liberalized services using alternative
infrastructure. The liberalization legislation requires all previously licenced
operators to apply for new licenses or authorizations. Hermes Railtel applied
for a new license in October 1998 and was granted its license to build and
operate its network under the new regulatory framework on January 26, 1999.

     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,
Hermes Railtel 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, Hermes Railtel obtained authorization to operate its network in
specific regions of France. In August 1998, Hermes Railtel 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 Hermes Railtel 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.
Hermes Railtel was granted a license by the German regulatory authorities on
July 18, 1997. The license permits Hermes Railtel 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, Hermes Railtel
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 and universal service
have been approved. Hermes Railtel was granted a license by the Italian
authorities in August 1998, enabling the development of its network in the
northwest region of Italy and the offering of services in 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.
Hermes Railtel applied to the Luxembourg regulatory authority for a license to
build and operate its network in Luxembourg in October 1998. On February 11,
1999, we were granted a license to build and operate a public telecommunications
network.

     The Netherlands. On July 1, 1997, the Dutch government abolished the
prohibition on the use of fixed infrastructure for the provision of public voice
telephony, thereby complying with the requirements of the Full Competition
Directive six months ahead of schedule. On August 1, 1996, Hermes Railtel was

                                       54
<PAGE>   59

granted an authorization for the installation, maintenance and use of a fixed
telecommunications infrastructure.

     A new Telecommunications Act came partly into force on December 15, 1998.
The new Act confirms the full liberalization of the telecommunications market
according to European Community standards. When the new Telecommunications Act
entered into force, the authorization held by Hermes Railtel ceased to exist.
Under the new Telecommunications Act, Hermes Railtel has an obligation to
register its activities. A request for registration with the Dutch regulatory
authority ("OPTA") was filed in February 1999 and the OPTA granted Hermes
Railtel its registration as a public telecommunications operator on March 3,
1999.

     Spain. Spain was granted the right to a delay in liberalizing its
telecommunications market until November 30, 1998. 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. Hermes Railtel 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
authorization regime for certain services. Hermes Railtel registered with
Swedish authorities and 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 Hermes Railtel 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. Hermes Railtel 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 Hermes Railtel
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, we cannot assure you that this will be the case or that the new
licenses will not contain terms or conditions unfavorable to Hermes Railtel.

     United States. Hermes Railtel 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 (subject to the terms and
conditions imposed by the law and authorization), effective October 23, 1998.
The 214 authorization does not allow Hermes Railtel to offer US services to or
from Hungary, Poland, the Czech Republic, Romania, Monaco, Russia, Ukraine,
Kazakhstan, Uzbekistan, Azerbaijan, China and India.
                                       55
<PAGE>   60

     Hermes Railtel 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 Hermes Railtel
network roll-out plan. With the exception of Austria and Portugal, which are
members of the EU and whose laws must comply with EC Directives, these countries
have not generally liberalized their telecommunications sector. We cannot assure
you that they will do so in a timely manner or at all. In addition, the terms
and conditions of Hermes Railtel's licenses, authorizations or registrations may
limit or otherwise affect Hermes Railtel's scope of operations. We cannot assure
you that (1) Hermes Railtel will be able to obtain, maintain or renew licenses,
authorizations or registrations to provide the services it currently provides
and plans to provide, (2) such licenses, authorizations or registrations will be
issued or renewed on terms or with fees that are commercially viable, or (3) the
licenses, authorizations or registrations required in the future can be obtained
by Hermes Railtel. The loss of, or failure to obtain, these licenses,
authorizations or registrations or a substantial limitation upon the terms of
these licenses, authorizations or registrations could have a material adverse
effect on Hermes Railtel.

     TRANSOCEANIC SERVICES

     A summary discussion of the regulatory framework in the United Kingdom,
United States and France that will apply to Transoceanic Services has already
been provided in the section on Hermes Railtel above. Transoceanic Services,
like Hermes Railtel, will require licenses, authorizations or registrations to
operate its own network in the United Kingdom, United States and France. Since
Hermes Railtel has obtained similar licenses, authorizations or registrations in
the United Kingdom, United States and France, Transoceanic Services will
endeavor to use the same (where allowed by national licensing frameworks) in
order to build its initial network, while it obtains its own licenses,
authorizations and registrations. Alternatively, Transoceanic Services may seek
to benefit from Hermes Railtel's licenses to the extent that they may be
transferred from Hermes Railtel to GTS Carrier Services. The transfer of these
licenses could be undertaken in the event that the Hermes Railtel network and
Transoceanic Services can be operated under one license. Such a transfer
initially may be envisaged in France where licenses may be transferred subject
to ministerial approval. The regulatory framework in the United Kingdom and
United States, however, would require GTS Carrier Services to obtain new
licenses, authorizations or registrations.

     In addition, the terms and conditions of the licenses, authorizations or
registrations may limit or otherwise affect Transoceanic Services' scope of
operations. We cannot assure you that Transoceanic Services will be able to
obtain such licenses, authorizations or registrations or that Transoceanic
Services' operations will not become subject to other regulatory, authorization
or registration requirements in the countries in which it plans to operate. For
a discussion of these risks, see "Risk Factors -- Delays in regulatory
liberalization in EU member states could adversely affect our service offering
in those countries."

     IP SERVICES

     At present there is no general consensus on the regulatory position of IP
services in Europe and the United States. At the moment IP services are
generally treated as unregulated or, in some European countries, as a
telecommunications service subject to minimal regulatory requirements. We cannot
assure you that IP services will not be regulated in the future in Europe or the
United States. We will continue to monitor regulatory developments that may
impact IP services' operations.

  GTS BUSINESS SERVICES

     A summary discussion of the regulatory framework in the countries in which
Business Services operates has already been provided in the section on Hermes
Railtel above.


     The following discussion of GTS Business Services does not reflect the
effect of the Omnicom acquisition that we consummated on April 26, 1999. See
"Summary -- Recent Developments -- Omnicom Acquisition."


                                       56
<PAGE>   61

     UNITED KINGDOM

     The telecommunications services which we provide through Business Services
are subject to and affected by licenses issued by the United Kingdom's
Department of Trade and Industry and regulations introduced by Oftel, the United
Kingdom telecommunications regulatory authority. Business Services' UK
subsidiary received an international simple resale license from the Department
of Trade and Industry in 1993, which permitted us to provide international
telecommunications services by way of resale of other carriers' facilities. In
December 1996, Business Services' UK subsidiary was among the first recipients
of an international facilities license, which permits us to purchase, lease or
build our own international infrastructure and to interconnect to the public
network. In December 1997, we were granted a domestic public telephone operator
license that will enable us to build out our network and obtain more favorable
interconnect terms from British Telecom.

     Business Services' UK subsidiary also holds a license issued by the U.S.
Federal Communications Commission under Section 214 of the United States
Communications Act of 1934, as amended. Subject to certain restrictions, the
Section 214 authorization permits us to originate and terminate facilities-based
and resold private line and switched telecommunications services in the United
States, including among other things, reselling international private lines
interconnected at both ends to the public switched telephone network on the
United States-United Kingdom route for the provision of switched services. Under
the FCC's rules, such interconnected private lines may at present be used only
for switched traffic that either:

          (1) originates in the United Kingdom and terminates in the United
     States or vice versa;

          (2) originates in the United States, the United Kingdom, Canada, New
     Zealand, Australia, Sweden, The Netherlands, France, Germany, Belgium,
     Denmark, Norway, Luxembourg, Austria, Switzerland, Japan, Italy, Ireland
     and Hong Kong and terminates in another of those countries, having been
     routed through the third country via private lines; or

          (3) uses the interconnected international private lines to reach a
     switching hub.

     This third routing arrangement, termed "switched hubbing," may involve
several configurations:

          (1) traffic originates in the United States, is carried via private
     lines to the United Kingdom and is routed through a switch to points beyond
     the United Kingdom;

          (2) traffic originates in the United Kingdom, is carried over private
     lines to the United States, and is routed through a switch to points beyond
     the United States; or

          (3) traffic originates in points beyond the United States or the
     United Kingdom and is routed via a United States or United Kingdom switch
     to terminate in another country (provided that no traffic originates or
     terminates in a country that we are not authorized to serve). With respect
     to switched hubbing traffic originated or terminated on the Esprit Network
     at switches in EU member states other than the United Kingdom, domestic
     laws of such EU member states require that the leased lines be
     interconnected with the public switched telephone network at one end only.
     In addition, the FCC has not made any pronouncement about the legality of
     switched hubbing arrangements where the carrier in the destination country
     does not consent to receiving traffic indirectly from the originating
     country and does not realize the traffic it receives from the "hub" country
     is actually originating from a different country.

     GERMANY

     Our German subsidiaries have authority to provide value-added
telecommunications services throughout Germany. In June 1997, we also received
Type 3 and Type 4 licenses authorizing us to build, acquire and operate
infrastructure and to provide public voice telephony services and to
interconnect with the incumbent public telecommunications operators' network.
These licenses applied initially to restricted areas within Dusseldorf but have
since been expanded to the whole Dusseldorf area and to permit connection to a
cable landing station in northern Germany. In addition, the acquisition of
Plusnet has

                                       57
<PAGE>   62

provided us with a national network licensed to provide point-to-point service
on 55 national routes and 300 local routes. We have also been granted a carrier
select code to provide Indirect Access to our retail services. We entered into
an interconnect agreement with Deutsche Telekom in November 1997. Pursuant to
this agreement, we interconnect with Deutsche Telekom's network in five
locations, while Plusnet's network interconnects with Deutsche Telekom's network
in six locations.

     NetSource received a Type 4 license and entered into interconnect
agreements in February 1998.

     FRANCE

     In March 1998, our French subsidiary was granted a public voice telephony
and public network operator license permitting us to serve all of France. This
license permits us to provide all services, including managed bandwidth on the
London-Paris ring. They also facilitate our building out the fiber optic ring to
Belgium. In July 1998, our French subsidiary was granted the right to receive
one of the seven available one digit access codes. After a challenge by a
disappointed applicant, the Conseil d'Etat, the French high court, affirmed the
ART's decision. In July 1998, our license was amended to impose certain network
deployment obligations on us. We are now in the process of building out a
national network.

     THE NETHERLANDS

     NetSource is qualified as a telecommunications provider and obtained a
carrier selection code license in September 1997.

     BELGIUM

     The Belgian regulator, BIPT, has granted our Belgian subsidiary provisional
national voice telephony and network operator licenses, and our Belgian
subsidiary was the first independent operator to achieve interconnection with
the incumbent public telephone operator, Belgacom. Following the recent adoption
of final legislation, our Belgian subsidiary has filed an application for
definitive national voice telephony and network operator licenses and expects to
receive the same shortly. NetSource plans on using the Esprit Telecom licenses
for its Belgian operations.

     SPAIN

     On December 3, 1998, Business Services' Spanish subsidiary was granted
class B1 licenses for Madrid, Barcelona and Gerona. We were also granted similar
licenses for Bilbao and Valencia. These licenses permit us to provide public
telephony services and operate a network in those cities. A C1 license allowing
the installation of a national network was granted on December 17, 1998.

     ITALY

     Our Italian subsidiary received a closed user group voice telephony license
in May 1998. We filed an application for authorization to install infrastructure
and provide services on a national basis in March 1999.

     IRELAND

     Through NetSource we received a general telecommunications license to
operate in Ireland in December 1998.

     NORWAY

     Through NetSource, we are registered as a public telecommunications
provider. We expect to enter into interconnection agreements shortly.

                                       58
<PAGE>   63

     DENMARK

     Under Danish rules, we do not require any regulatory approvals to install
or operate a network in Denmark. Through a subsidiary of NetSource, we are
registered as a public telecommunications provider. We expect to enter into
interconnection agreements shortly.

     SWEDEN

     Through NetSource, we were registered as a public telecommunications
provider in October 1998 and we entered into interconnection agreements in
January 1999.

     LUXEMBOURG

     Through NetSource, we have applied for licenses to operate in Luxembourg.

  WHOLESALE SERVICES

     Currently, GTS-Monaco Access's telecommunications activities in Monaco
require no telecommunications license. 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 our existing and target markets, there are laws and regulations which affect
the number and types of customers which we 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, 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, we cannot assure you 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. We are currently reviewing licenses we will need in connection
with our transfer of the business of GTS-Monaco Access to the United Kingdom.

  ACCESS SERVICES

     Access Services has been granted Type 3 (infrastructure) and Type 4 (voice
telephony) licenses authorizing it to serve seven major cities in Germany. In
April 1999, we were granted licenses authorizing us to install local access
networks and to provide voice telephony services in Geneva and Zurich. We are
currently evaluating Access Services' ability to build out fiber loops and
provide access services in its target metropolitan markets under existing
infrastructure licenses and authorizations to provide telephony services held by
our Business Services line of business.

     Our determination as to which markets we may enter will depend in part on
our 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 us from entering a particular market or
offering our services in any European market, restrict the types of services
offered by us, constrain our deployment of its networks or otherwise adversely
affect our operations.

     We cannot assure you that Access Services will be able to obtain the
necessary regulatory approvals on a timely basis or that we will not otherwise
be affected by regulatory developments, either of which may have a material
adverse effect on us.

                                       59
<PAGE>   64

  BUSINESS SERVICES - CIS AND MOBILE SERVICES - CIS

     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, 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 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 influencing 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.


     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. Our Ukrainian joint venture
agreements provide us 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. We 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 -- Turmoil in Russia and the CIS creates significant uncertainty for our
operations."


                                       60
<PAGE>   65

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     JP Advisors, a Delaware limited liability company ("JP Advisors"), entered
into a consulting agreement with the Company dated as of February 22, 1999,
whereby JP Advisors provides services in the identification, assessment,
evaluation of potential acquisition targets. W. James Peet, the sole member of
JP Advisors, is a member of the Board of Directors of the Company. JP Advisors
may also assist in the negotiation, documentation and consummation of certain
acquisitions as agreed from time to time. The agreement has no specified
duration and may be terminated by either party at will. During the term of the
agreement, the Company will pay JP Advisors $25,000 per month and upon
consummation of a transaction with certain target companies, a success fee of
(A) 0.5% of the transaction's value up to $100 million or (B) 0.25% of the
transaction's value in excess of $100 million, plus $500,000. However, in no
event will the fee paid in connection with any single transaction exceed $1
million. Upon mutual agreement, instead of cash, fees may be paid in stock,
warrants, options or other form of consideration.

                                       61
<PAGE>   66

                          DESCRIPTION OF CAPITAL STOCK


     Our authorized capital stock consists of 135,000,000 shares of common
stock, par value $0.10 per share, of which 81,221,352 shares were issued and
outstanding as of March 31, 1999, and 10,000,000 shares of preferred stock, par
value $0.0001 per share, of which none were issued and outstanding as of March
31, 1999.


     In addition, we:

     - agreed to issue up to 4,037,500 shares of common stock in connection with
       our 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 additional
       shares of common stock may be issued, at our option, contingent on
       NetSource achieving certain performance targets in the first two quarters
       of 1999),

     - expect to issue an additional 1,784,205 shares of common stock to holders
       of Esprit Telecom stock options upon their exercise of these options and


     - issued 1,850,497 shares of common stock as consideration for the 52% of
       the shares of Omnicom which we acquired on April 26, 1999.


     For a discussion of the risks associated with these additional issuances of
stock, see "Risk Factors -- Substantial resales of our common stock may depress
our stock price and dilute your ownership interest."


     On April 23, 1999, we issued 100,000 shares of the convertible preferred
stock.


     In our annual shareholders meeting scheduled for June 16, 1999, we intend
to seek approval to increase our authorized capital stock from 135,000,000
shares of common stock to 270,000,000 shares of common stock. The vote of the
holders of at least a majority of the issued and outstanding shares of common
stock, voting together as a single class is required to approve the increase in
the authorized common stock. We believe the increase in the number of authorized
shares of common stock will provide flexibility in connection with financings,
acquisitions of other companies, other investment opportunities, stock dividends
or splits, and for other corporate purposes that our board of directors deems
advisable.

     The following summary of the rights, privileges, restrictions and
conditions of each of the classes of shares we issue 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.

OUR 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 all
dividends that are declared from time to time by the board of directors out of
funds legally available for that purpose. For more information, we refer you to
"Dividend Policy." Upon dissolution, holders of common stock are entitled to
share pro rata in our assets remaining after payment in full of all of our
liabilities and obligations, including payment of the liquidation preference, if
any, of any preferred stock then outstanding.

OUR PREFERRED STOCK

     The board of directors may authorize the issuance of one or more additional
series of preferred stock having rights, including voting, conversion and
redemption rights, and preferences, including dividend and liquidation
preferences, that our board of directors may determine, without further action
by our stockholders subject to the certificate of designations with respect to
the convertible preferred stock.

     The issuance of preferred stock by the board of directors could adversely
affect the rights of the holders 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

                                       62
<PAGE>   67


liquidation and that could, upon conversion or otherwise, have all the rights
appurtenant to the common stock. As of March 31, 1999, we have authorized
200,000 shares of Series A junior participating preferred stock, par value
$.0001 per share. Other than our convertible preferred stock, no other series of
preferred stock has been issued. There are no issued and outstanding shares of
Series A preferred stock and no Series A preferred stock is being offered by
this prospectus. A right to purchase shares of Series A preferred stock,
however, is attached to each share of common stock. We have authorized 200,000
shares of Series A preferred stock initially for issuance upon exercise of those
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 we may issue. 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.

     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.


     See "Description of Convertible Preferred Stock" for a summary of certain
terms of the convertible preferred stock offered under this prospectus.


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). A corporation may indemnify that person if he or she is or was a
director, officer, employee or agent of the corporation. A corporation may also
indemnify that person if he or she 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. That person may recover
the following from the corporation:

     - expenses (including attorneys' fees);

     - judgments;

     - fines; and

     - amounts paid in settlement actually and reasonably incurred by him or her
       in connection with any action, suit or proceeding if he or she acted in
       good faith and in a manner he or she 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
       or her conduct was unlawful.

     Section 145 further provides that a corporation similarly may indemnify any
person serving in any capacity described above 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.
This person may recover expenses (including attorneys' fees) actually and
reasonably incurred in connection with the defense or settlement of the action
or suit if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation.

                                       63
<PAGE>   68

However, no indemnification shall be made in respect of any claim, issue or
matter as to which this person shall have been adjudged to be liable but in view
of all the circumstances of the case, this person is fairly and reasonably
entitled to indemnity for the 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:

     - for any breach of the director's duty of loyalty to the corporation or
       its stockholders,

     - for acts or omission not in good faith or which involve intentional
       misconduct or a knowing violation of law,

     - under Section 174 of the DGCL (relating to unlawful payment of dividends
       and unlawful stock purchase and redemption), or

     - for any transaction from which the director derived an improper personal
       benefit.

     Our Certificate of Incorporation provides that our directors shall not be
liable to us or our 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 the
preceding paragraph. Our Certificate of Incorporation and our By-laws further
provide that we will indemnify our directors and officers to the fullest extent
permitted by the DGCL.

     Our directors and officers are covered under directors' and officers'
liability insurance policies that we maintain.

CERTAIN CHARTER AND BY-LAW PROVISIONS

     Shareholders' rights and related matters are governed by the DGCL, the
Certificate of Incorporation and By-laws. 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 our board of directors. Such provisions may also adversely
affect prevailing market prices for the common stock which is discussed in the
section "Risk Factors -- We have anti-takeover provisions that could delay or
prevent a change in control, even if it would benefit shareholders."

     Classified Board of Directors and Related Provisions. Our Certificate of
Incorporation provides that our board of directors 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 our 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 those 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 terminates on the date of the
       1999 annual meeting of stockholders.

     - The term of the initial class III directors terminates 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 our outstanding voting stock from obtaining

                                       64
<PAGE>   69

control of the board of directors until the second annual shareholders meeting
following the date that party obtains the controlling interest.

     Subject to the rights of the holders of any series of preferred stock or
any other class of our capital stock (other than common stock) then outstanding,
directors may only be removed for cause by a majority vote of our holders of
capital stock 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.  Our
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 our
By-laws. Our 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.
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 our capital stock 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." An interested stockholder is
defined as a person who, together with any affiliates or associates of that
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.

     Section 203 further provides that under certain circumstances, business
combinations are allowed, such as when:

     - the business combination is approved by the corporation's board of
       directors prior to the date the interested stockholder becomes an
       interested stockholder,

     - 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

     - 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, our Certificate of Incorporation grants the board of directors
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 the issued
preferred stock without any further vote or action by the stockholders. The
provisions of Section 203 of the DGCL described above and our Certificate of
Incorporation, and any issuance of preferred stock with voting or conversion
rights, may adversely affect your voting power and may have the effect of
delaying or preventing a change of control of GTS or adversely affect the market
price of our common stock.

                                       65
<PAGE>   70

SHAREHOLDER RIGHTS AGREEMENT AND SHAREHOLDER RIGHTS BY-LAW

     Shareholder Rights Plan.  We have entered into a rights agreement. In
connection with the rights agreement, our board of directors declared a
distribution of one right for each outstanding share of common stock, each share
of common stock offered by this prospectus and each share of our common stock
issued (including shares distributed from treasury) thereafter and prior to a
distribution date. Each right will entitle the registered holder, subject to the
terms of the rights agreement, to purchase from us 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:

     - 10 days following a public announcement that a person or group of
       affiliated or associated persons (other than us, any of our subsidiaries
       or any of our employee benefit plans) 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

     - 10 business days (or any later date determined by action of the board of
       directors prior to the time any person makes that type of announcement)
       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
being an acquiring person described above under the rights agreement unless they
increase the aggregate percentage of their ownership interest in us to 20%.

     Until a distribution date:

     - the rights will be evidenced by common stock certificates and will be
       transferred with and only with such common stock certificates,

     - 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

     - 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 those certificates.

     The rights will not be exercisable until a distribution date and will
expire at the close of business on the tenth anniversary of the rights agreement
unless we redeem them earlier.

     In the event that:

     - we are the surviving corporation in a merger with an acquiring person
       described above and shares of common stock shall remain outstanding,

     - a person becomes an acquiring person,

     - an acquiring person engages in one or more "self-dealing" transactions as
       set forth in the rights agreement, or

     - during the time when there is an acquiring person, an event occurs which
       results in that 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 the acquiring
person) will then have the right to receive, upon exercise, units of Series A
preferred stock (or, in some circumstances, our common stock, cash, property or
other securities) having a value equal to two times the exercise price of the
right. The
                                       66
<PAGE>   71

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 a stock acquisition date:

     - we are acquired in a merger or other business combination transaction and
       we are not the surviving corporation (other than a merger described in
       the preceding paragraph),

     - any person consolidates or merges with us and all or part of our common
       stock is converted or exchanged for securities, cash or property of any
       other person, or

     - 50% or more of our assets or earning power is sold or transferred,

each holder of a right (other than an acquiring person) shall then have the
right to receive, upon exercise, common stock of the ultimate parent of that
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:

     - in the event of a stock dividend on, or a subdivision, combination or
       reclassification of, the Series A preferred stock,

     - if holders of the Series A preferred stock are granted 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

     - 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 a stock acquisition date,
either

     - 75% of our board of directors, or

     - a majority of our board of directors and a majority of the continuing
       directors,

may redeem the rights in whole, but not in part, at a nominal price. Immediately
upon the action of a majority of our 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 the redemption price.

     As used in the rights agreement, a continuing director means any person
(other than a person attempting to acquire us or an affiliate or associate of
such a person or a representative of such 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:

     - 75% of our board of directors, or

     - a majority of our board of directors and a majority of the continuing
       directors, may exchange each right for (1) one unit of Series A preferred
       stock or (2) the number of units of Series A preferred stock that will
       equal the spread between the market price of each unit to be issued and
       the purchase price of that unit described in the rights agreement.

                                       67
<PAGE>   72

     Any of the provisions of the rights agreement may be amended without the
approval of either:

     - 75% of our board of directors, or

     - a majority of our 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; but 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 our outstanding shares of common stock for cash or
marketable securities at a price that is at least 40 percent greater than the
average closing price of such shares on the principal exchange on which those
shares are listed during the 30 days prior to the date on which the offer is
first published or sent to security holders 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 date of an offer, 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; but, if prior to the expiration of the nine-month
period, the board of directors determines that it is in the best interests of
the shareholders to undertake efforts to sell us, that period shall be extended
as long as the board of directors continues its efforts to solicit, evaluate and
negotiate alternative bids to acquire us. 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.

                                       68
<PAGE>   73

                        DESCRIPTION OF DEPOSITARY SHARES

     Each depositary share represents 1/100 of a share of convertible preferred
stock deposited under the deposit agreement dated as of April 23, 1999, among
GTS, The Bank of New York as depositary, and all holders from time to time of
depositary receipts issued under the deposit agreement. Subject to the terms of
the deposit agreement, each owner of a depositary share is entitled,
proportionately, to all the rights, preferences and privileges of the shares of
convertible preferred stock represented by those depositary shares (including
dividend, conversion, voting, and liquidation rights), and is subject to all of
the limitations of the fractional shares of convertible preferred stock
represented by those depositary shares, which are summarized above under
"Description of Convertible Preferred Stock" or "Description of Capital Stock."
The depositary shares are evidenced by depositary receipts.

     As more fully described below, the holders of the depositary shares

     - have the option to convert the convertible preferred stock represented by
       those depositary shares into our common stock,

     - are entitled to receive dividends, and

     - are entitled to vote in certain circumstances.

DTC will act as securities depositary for the depositary shares.

     The following summary of the terms and provisions of the deposit agreement,
depositary shares and depositary receipts is not intended to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the deposit agreement, copies of the form of deposit agreement may be
obtained from us or the depositary upon request.

ISSUANCE OF DEPOSITARY RECEIPTS AND WITHDRAWAL OF CONVERTIBLE PREFERRED STOCK

     Immediately following our issuance of the convertible preferred stock, we
deposited the convertible preferred stock with the depositary, which then issued
and delivered the depositary receipts to the initial purchasers. Depositary
receipts will be issued evidencing only whole depositary shares.

     Upon surrender of depositary receipts at the corporate office of the
depositary, the owner of the depositary shares evidenced on those shares is
entitled to delivery, at that corporate office, of certificates evidencing the
number of shares of convertible preferred stock (but only in whole shares) and
any money and other property represented by those depositary receipts. If the
depositary receipts delivered by the holder evidence a number of depositary
shares in excess of the number of whole shares of convertible preferred stock to
be withdrawn, the depositary will deliver to the holder at the same time a new
depositary receipt evidencing the excess number of depositary shares.

     We do not expect that there will be any public trading market for the
convertible preferred stock except as represented by the depositary shares. In
addition, we do not expect that there will be any public market initially for
the depositary shares.

CONVERSION PROVISIONS

     As described under "Description of Convertible Preferred
Stock -- Conversion Rights," the convertible preferred stock may be converted,
in whole or in part, into shares of our common stock at the option of the
holders of the convertible preferred stock. The depositary shares may, at the
option of holders of the depositary shares, be converted into shares of our
common stock on the same terms and conditions as the convertible preferred
stock, except that the number of shares of common stock received upon conversion
of each depositary share will be equal to the number of shares of our common
stock received upon conversion of each share of convertible preferred stock
divided by 100.

     To effect that type of optional conversion, a holder of depositary shares
must deliver depositary receipts evidencing the depositary shares to be
converted, together with a written notice of conversion and a proper assignment
of the depositary receipts to us, to any transfer agent for the depositary
shares, or in
                                       69
<PAGE>   74

blank (and, if applicable, payment of an amount equal to the dividend payable on
those depositary shares), to the depositary or its agent.

     Each optional conversion of depositary shares will be deemed to have been
taken place immediately prior to the close of business on the date on which the
described requirements are satisfied. The conversion shall be at the conversion
rate in effect at that time and on that date, adjusted to reflect the fact that
100 depositary shares are the equivalent of one share of convertible preferred
stock.

     To the extent that depositary shares are converted into shares of our
common stock and all of those shares of our common stock cannot be distributed
to the record holders of depositary receipts without creating fractional
interests in those shares, the depositary may, with our consent, sell those
shares of common stock, and the net proceeds of any sale shall be distributed or
made available for distribution to the record holders that would otherwise have
received fractional interest in those shares of common stock.

PAYMENT AND CONVERSION

     All amounts payable in cash with respect to the depositary shares will be
payable in United States dollars at our office or agency maintained for that
purpose within the City of New York or, at our option, payment of dividends and
additional dividends (if any) may be made by check mailed to the holders of the
depositary shares at their addresses listed in the register of holders of the
depositary shares maintained by the transfer agent, but we will make all cash
payments with respect to depositary shares the holders of which have given wire
transfer instructions to us by wire transfer of immediately available funds to
the accounts specified by those holders.

     Any payment on the depositary shares due on any day that is not a business
day need not be made on that day, but may be made on the succeeding business day
with the same force and effect as if made on the due date.

DIVIDENDS AND OTHER DISTRIBUTIONS

     The depositary will distribute all cash dividends or other cash
distributions received on the convertible preferred stock to the record holders
of depositary shares in proportion, insofar as possible, to the number of
depositary shares owned by those holders, subject to obligations of holders to
file proofs, certificates and other information and to pay certain charges and
expenses to the depositary. If we pay all or any part of a dividend in our
common stock, we must deliver to the depositary a sufficient number of shares
that, upon resale by the depositary, will result in net cash proceeds to the
depositary to make the quarterly dividend payments in cash to the holders of
depositary shares.

     All shares of common stock received by the depositary from us or dividends
on the convertible preferred stock will be promptly resold by the depositary on
behalf of the holders of the depositary shares and the holders of the depositary
shares will not receive any of those shares. If the proceeds from that resale do
not result in a sufficient amount of cash to pay a dividend, we will promptly
provide cash to the depositary in an amount equal to the difference between the
amount of the dividend and the proceeds received from such resale.

     In the event of a distribution other than cash in respect of the
convertible preferred stock, the depositary will distribute property received by
it to the record holders of depositary shares in proportion, insofar as
possible, to the number of depositary shares owned by that holder, subject to
obligations of holders to file proofs, certificates and other information and to
pay certain charges and expenses to the depositary, unless the depositary
determines that it is not feasible to make a distribution, in which case the
depositary may, with our approval, sell the property and distribute the net
proceeds from the sale to the holders.

                                       70
<PAGE>   75

RECORD DATE

     Whenever:

     - any cash dividend or other cash distribution shall become payable or,
       instead, any common stock distributed, any other distribution shall be
       made, or any rights, preferences, or privileges shall be offered with
       respect to the convertible preferred stock, or

     - the depositary shall receive notice of any meeting at which holders of
       convertible preferred stock are entitled to vote or of which holders of
       convertible preferred stock are entitled to notice,

the depositary shall, in each instance, fix a record date (which shall be the
same date as the record date for the convertible preferred stock) for the
determination of the holders of depositary receipts (1) who shall be entitled to
receive the dividend, distribution, rights, preferences, or privileges, or the
net proceeds of the sale thereof or (2) who shall be entitled to give
instructions for the exercise of voting rights at the meeting or to receive
notice of the meeting.

VOTING OF CONVERTIBLE PREFERRED STOCK

     Upon receipt of notice of any meeting at which the holders of convertible
preferred stock are entitled to vote, the depositary will mail the information
contained in the notice of meeting to the record holders of depositary shares.
Each record holder of depositary shares on the record date (which will be the
same date as the record date for the convertible preferred stock) will be
entitled to instruct the depositary as to the exercise of voting rights
pertaining to the number of shares of convertible preferred stock (or fraction
thereof) represented by that holder's depositary shares. The depositary will
endeavor, insofar as practicable, to vote the number of shares of convertible
preferred stock (or fractions thereof) represented by those depositary shares in
accordance with those instructions, and we have agreed to take all action which
may be deemed necessary by the depositary in order to enable the depositary to
do so. The depositary will abstain from voting the convertible preferred stock
to the extent it does not receive specific written instructions from the holders
of depositary shares representing that convertible preferred stock.

     Each depositary share shall entitle the holder to instruct the depositary
to cast 1/100 of the vote of a share of convertible preferred stock on each
matter submitted to a vote of our preferred stockholders.

AMENDMENT OF DEPOSIT AGREEMENT

     The form of depositary receipts and any provision of the deposit agreement
may at any time be amended by agreement between us and the depositary. However,
any amendment that materially and adversely alters the rights of the holders of
depositary shares will not be effective unless that amendment has been approved
by the holders of at least 66 2/3% of the depositary shares then outstanding.
Every holder of depositary receipts at the time any amendment of that type
becomes effective shall be deemed to consent and agree to the amendment and to
be bound by the deposit agreement.

CHARGES OF DEPOSITARY

     We will pay all transfer and other taxes and governmental charges that
arise solely from the existence of the depositary arrangements and the initial
deposit of the convertible preferred stock. Holders of depositary shares will
pay all other transfer and other taxes and governmental charges, and, in
addition, any other charges expressly provided in the deposit agreement to be
for their accounts.

RESIGNATION AND REMOVAL OF DEPOSITARY; TERMINATION OF THE DEPOSIT AGREEMENT

     The depositary may resign at any time by delivering to us notice of its
election to do so, and we may at any time remove the depositary. Any resignation
or removal will take effect upon the appointment of a successor depositary and
its acceptance of appointment. A successor depositary will be appointed by us
within 45 days after delivery of the notice of resignation or removal.

                                       71
<PAGE>   76

     The deposit agreement may be terminated by us or by the depositary if:

     - there has been a final distribution in respect of the convertible
       preferred stock in connection with any liquidation, dissolution or
       winding up of GTS and such distribution has been distributed to the
       holders of depositary receipts, or

     - each share of convertible preferred stock shall have been converted into
       shares of our common stock.

BOOK-ENTRY-ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY

     DTC will continue to act as securities depository for the depositary
shares. The information in this section concerning DTC and DTC's book-entry
system is based upon information obtained from DTC. The depositary shares will
be issued only as fully-registered depositary receipts registered in the name of
Cede & Co. (as nominee for DTC). One or more fully-registered global depositary
receipts will be issued, evidencing in the aggregate the total number of
depositary shares, and will be deposited with DTC.

     DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under to the provisions of Section 17A of the Exchange Act. DTC holds
securities that its participants deposit with DTC. DTC also facilitates the
settlement among participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thus eliminating the need for physical
movement of securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Access to the DTC system is also available to other
indirect participants such as securities brokers and dealers, banks and trust
companies that clear through or maintain a direct or indirect custodial
relationship with a direct participant.

     Purchases of depositary shares within the DTC system must be made by or
through direct participants, which will receive a credit for the depositary
shares on DTC's records. The ownership interest of each actual purchaser of a
depositary share, which shall be referred to as a beneficial owner, is in turn
to be recorded on the direct or indirect participants' records. Beneficial
owners will not receive written confirmation from DTC of their purchases, but
beneficial owners are expected to receive written confirmations providing
details of the transactions, as well as periodic statements of their holdings,
from the direct or indirect participants through which the beneficial owners
purchased depositary shares. Transfers of ownership interests in depositary
shares are to be accomplished by entries made on the books of participants
acting on behalf of beneficial owners.

     DTC has no knowledge of the actual beneficial owners of the depositary
shares; DTC's records reflect only the identity of the direct participants to
whose accounts those depositary shares are credited, which may or may not be the
beneficial owners. The participants will remain responsible for keeping account
of their holdings on behalf of their customers.

     Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to those will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.

     Dividend payments on the depositary shares will be made to DTC. DTC's
practice is to credit direct participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on that payment date.
Payments by participants to beneficial owners will be governed by standing
instructions and customary practices and will be the responsibility of that
participant and not of DTC or us, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of dividends to DTC
is our responsibility, disbursement of payments described above to direct
participants is the responsibility of

                                       72
<PAGE>   77

DTC, and disbursement of those payments to the beneficial owners is the
responsibility of direct and indirect participants.

     No depositary shares evidenced by global depositary receipts may be
exchanged in whole or in part for depositary receipts registered, and no
transfer of global depositary receipts in whole or in part may be registered, in
the name of any person other than DTC or any nominee of DTC unless DTC has
notified us that it is unwilling or unable to continue as depositary for such
global depositary receipts. All depositary shares evidenced by one or more
global depositary receipts will be registered in the names that DTC directs.

     The laws of some jurisdictions require that certain potential purchasers of
depositary shares take physical delivery of the depositary shares they purchase
in definitive form. These laws may impair the ability to transfer beneficial
interests in depositary shares so long as the depositary shares are evidenced by
global depositary receipts.

     As long as DTC, or its nominee, is the registered owner of the global
depositary receipts, DTC or its nominee, as the case may be, will be considered
the sole owner and holder of the global depositary receipts and all depositary
shares for all purposes under the depositary shares. Except in the limited
circumstances referred to above, owners of beneficial interests in global
depositary shares will not be entitled to have the global depositary receipts
evidencing their shares or their depositary shares registered in their names,
will not receive or be entitled to receive physical delivery of depositary
shares in exchange for the depositary receipts and will not be considered to be
owners or holders of such global depositary receipts or any depositary shares
for any purpose under the depositary shares.

MISCELLANEOUS

     The depositary will, with our approval, appoint a registrar for
registration of the depositary receipts or depositary shares in accordance with
any requirements of any applicable stock exchange on which the depositary
receipts or the depositary shares are listed. The registrar will maintain books
at the corporate office for the registration and registration of transfer of
depositary receipts or at any other place that is approved by us and of which
the holders of depositary receipts are given reasonable notice.

     We will deliver to the depositary and the depositary will forward to
holders of depositary shares all notices and reports required by law, the rules
of any national securities exchange on which the convertible preferred stock,
the depositary shares or the depositary receipts are listed or are required by
our amended certificate of incorporation or by-laws to be furnished by us to
holders of the convertible preferred stock.

     Neither the depositary nor we will be liable if either is prevented by law
or certain other circumstances beyond its control from or delayed in performing
its obligations under the deposit agreement. Neither the depositary nor we
assume any obligation or will be subject to any liability under the deposit
agreement to holders of depositary receipts other than to use its best judgment
and good faith in the performance of such duties as are specifically set forth
in the deposit agreement. The depositary will not be obligated to appear in,
prosecute or defend any legal proceeding in respect of any depositary shares or
any shares of convertible preferred stock unless satisfactory indemnity is
furnished. We and the depositary may rely on advice of counsel or accountants,
or information provided by persons presenting shares of convertible preferred
stock for deposit, holders of depositary shares or other persons believed to be
authorized or competent and on documents believed to be genuine.

     The depositary will act as transfer agent and registrar for, and paying
agent for the payment of dividends with respect to, the depositary shares.

                                       73
<PAGE>   78

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

     The owners of the depositary shares will be treated for federal income tax
purposes as if they were the owners of the shares of convertible preferred stock
which they represent. Accordingly, the tax treatment for the owners of the
depositary shares will be the same as the tax treatment for the owners of shares
of convertible preferred stock described below. In addition, no gain or loss
will be recognized on the withdrawal of shares of convertible preferred stock in
exchange for depositary shares under the deposit agreement, an owner's tax basis
in the withdrawn shares of convertible preferred stock will be the same as the
tax basis in the depositary shares surrendered, and the owner's holding period
of the withdrawn securities will include the period during which the owner held
the surrendered depositary shares.

                                       74
<PAGE>   79

                   DESCRIPTION OF CONVERTIBLE PREFERRED STOCK

GENERAL

     The following is a summary of certain terms of the convertible preferred
stock offered under this prospectus. The terms of the convertible preferred
stock are contained in the Certificate of Designations, Preferences and
Relative, Participating, Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions which shall be referred to as
the certificate of designations. This summary is not intended to be complete and
is subject to, and qualified in its entirety by reference to, the certificate of
designations, including the definitions contained in those certificates of
certain terms used below. Copies of the certificate of designations will be made
available as set forth under "Available Information."

     Under the certificate of designations, 100,000 shares of convertible
preferred stock with a liquidation preference of $5,000 per share have been
authorized for issuance. The convertible preferred stock is fully paid and
nonassessable, and the holders have no preemptive rights in connection with
those shares. Each depositary share represents 1/100 of a share of convertible
preferred stock. We do not expect that there will be any trading market for the
convertible preferred stock except as represented by the depositary shares.

     The convertible preferred stock:

     - ranks junior in right of payment to all of our existing and future debt
       obligations and to each senior class or series of our capital stock, and
       pari passu or senior to all of our other capital stock

     - has a liquidation preference of $5,000 per share ($50 per depositary
       share) plus accrued and unpaid dividends and additional dividends,

     - is convertible at the option of the holder into shares of our common
       stock at a rate of 72.46 shares of common stock per share of convertible
       preferred stock (.7246 shares of common stock per depositary share) and
       is subject to restrictions as described below, and

     - is redeemable in whole or in part, at our option at any time on or after
       March 15, 2002 at the prices described below, plus accrued and unpaid
       dividends, if any, to the redemption date.

     The holders of convertible preferred stock (and the corresponding
depositary shares):

     - will have no voting rights except as required by law and as specified in
       the certificate of designation unless the events described below happen,
       and

     - may require, upon a change of control event, us to repurchase all of a
       portion of his or her convertible preferred stock (and the corresponding
       depositary shares).

     There can be no assurance that any trading market for the depositary shares
will develop. If any such market does develop, the liquidation preference of the
convertible preferred stock per depositary share is not necessarily the price at
which depositary shares will actually trade, and the depositary shares may trade
at lower prices. The market price of the depositary shares can be expected to
fluctuate with changes in the financial markets and economic conditions, the
market price of our common stock, our financial condition and prospects and
other factors that generally influence the market prices of securities. See
"Risk Factors -- Absence of Public Market for Convertible Preferred Stock and
Depositary Shares."

     The transfer agent for the convertible preferred stock is The Bank of New
York unless and until we select a successor. The offices of the transfer agent
are located in New York City at 101 Barclay Street, New York, New York 10286.

RANKING

     The convertible preferred stock will rank:

     - junior in right of payment to all of our existing and future debt
       obligations upon our liquidation, dissolution or winding up, including
       the 9 7/8% Senior Notes due 2005, the 8 3/4% Convertible Senior
                                       75
<PAGE>   80

       Subordinated Debentures due 2000 and the 5 3/4% Convertible Senior
       Subordinated Debentures due 2010,

     - junior in right of payment to each class or series of our capital stock
       that has terms which expressly provide that the class or series of
       capital stock will rank senior to the convertible preferred stock as to
       dividends and upon our liquidation, dissolution or winding up, which
       shall be referred to as senior capital stock,

     - pari passu in right of payment with each class of capital stock or series
       of preferred stock, established by our board of directors that has terms
       which expressly provide that the class or series will rank on a parity
       with the convertible preferred stock as to dividend rights and upon our
       liquidation, winding up or dissolution, which shall be referred to as
       parity capital stock and

     - senior in right of payment to our common stock and any of our capital
       stock that expressly provides that it will be junior to the convertible
       preferred stock, which shall be referred to as junior capital stock.

     The certificate of designations provides that we may not, without the
consent of the holders of at least 66 2/3% of the outstanding shares of
convertible preferred stock, authorize, create (by way of reclassification or
otherwise) or issue any senior capital stock or any obligation or security
convertible or exchangeable into or evidencing a right to purchase, shares of
any class or series of senior capital stock.

DIVIDENDS

     The holders of shares of the convertible preferred stock are entitled to
receive cumulative preferential dividends, when, as and if dividends are
declared by the board of directors out of our funds legally available for that
purpose, from the issue date of the convertible preferred stock accruing at the
rate of $3.625 per depositary share ($362.50 per share of convertible preferred
stock) per annum, or $.90625 per depositary share ($90.625 per share of
convertible preferred stock) per quarter, payable quarterly in arrears on March
15, June 15, September 15 and December 15 of each year or, if any such date is
not a business day, on the next succeeding business day (each of which shall be
referred to as a dividend payment date), to the holders of record as of the next
preceding March 1, June 1, September 1 and December 1 (each of which shall be
referred to as a record date).

     Accrued but unpaid dividends, if any, may be paid on the dates determined
by the board of directors. The cash necessary to pay dividends on the depositary
shares will come from our dividend payments on the convertible preferred stock
which, at our option, may be paid in cash, common stock or a combination of cash
and common stock; but we will be obligated to make our dividend payments in cash
if the common stock paid as a dividend would not, at the time the dividend
payment is made, be freely transferable under the Securities Act.

     If we pay all or any part of a dividend in common stock, we must deliver to
the depositary a sufficient number of shares of common stock that, upon resale
by the depositary or its nominee, will result in net cash proceeds to allow the
depositary to make the quarterly dividend payments in cash to the holders of the
depositary shares. All shares of common stock received by the depositary from us
as dividends on the convertible preferred stock will be promptly resold by the
depositary or its nominee on behalf of the holders of the depositary shares and
the holders of the depositary shares will not receive any shares.

     If the proceeds from the resale do not result in a sufficient amount of
cash to pay a dividend, we will promptly provide cash to the depositary in an
amount equal to the difference between the amount of the dividend and the
proceeds received from the resale. Dividends payable on the convertible
preferred stock (and the corresponding depositary shares) will be computed on
the basis of a 360-day year of twelve 30-day months and will be deemed to accrue
on a daily basis.

     The term "closing price" means on any day the reported last sale price on
that day or in case no sale takes place on that day, the average of the reported
closing bid and ask prices on the principal national securities exchange (which
shall include the Nasdaq National Market) on which that stock is listed or

                                       76
<PAGE>   81

admitted to trading (and if the common stock is listed or admitted to trading on
more than one U.S. national or non-U.S. securities exchange, we shall determine,
in our reasonable discretion, the principal securities exchange on which our
common stock is listed or admitted to trading) or, if not listed or admitted to
trading on any securities exchange, the average of the closing bid and ask
prices as furnished by any independent registered broker-dealer firm, selected
by us for that purpose, in each case adjusted for any stock split during the
relevant period.

     Dividends on the convertible preferred stock (and the corresponding
depositary shares) accrue whether or not we have earnings or profits, whether or
not there are funds legally available for the payment of dividends and whether
or not dividends are declared. Dividends accumulate to the extent they are not
paid on the dividend payment date for the quarter to which they relate.
Accumulated unpaid dividends accrue and cumulate dividends at the yearly rate
contained on the cover page of this prospectus. The certificate of designations
provides that we will take all actions required or permitted under Delaware law
to permit the payment of dividends on the convertible preferred stock.

     No dividend whatsoever shall be declared or paid on, or any sum set apart
for the payment of dividends on, any outstanding share of the convertible
preferred stock (and the corresponding depositary shares) with respect to any
dividend period unless all dividends for all preceding dividend periods have
been declared and paid upon, or declared and a sufficient sum set apart for the
payment of that dividend upon, all outstanding shares of convertible preferred
stock.

     Unless full cumulative dividends on all outstanding shares of convertible
preferred stock due for all past dividend periods shall have been declared and
paid, or declared and a sufficient sum for the payment thereof set apart, then:

     - no dividend (other than, in the case of junior capital stock, a dividend
       payable solely in shares of junior capital stock or options, warrants or
       rights to purchase junior capital stock) shall be declared or paid upon,
       or any sum set apart for the payment of dividends upon, any shares of
       parity capital stock or junior capital stock,

     - no other distribution shall be declared or made upon, or any sum set
       apart for the payment of any distribution upon, any shares of junior
       capital stock,

     - no shares of parity capital stock or junior capital stock or any
       warrants, rights, calls or options exercisable for or convertible into
       any parity capital stock or junior capital stock shall be purchased,
       redeemed or otherwise acquired or retired for value (excluding an
       exchange for shares of other parity capital stock or junior capital stock
       or a purchase, redemption or other acquisition from the proceeds of a
       substantially concurrent sale of parity capital stock or junior capital
       stock) by us or any of our subsidiaries, and

     - no monies shall be paid into or set apart or made available for a sinking
       or other like fund for the purchase, redemption or other acquisition or
       retirement for value of any shares of parity capital stock or junior
       capital stock or any warrants, rights, calls or options exercisable for
       or convertible into any parity capital stock or junior capital stock by
       us or any of our subsidiaries.

Holders of the convertible preferred stock (and the corresponding depositary
shares) will not be entitled to any dividends, whether payable in cash, property
or stock, in excess of the full cumulative dividends as herein described.

     No full dividends may be declared or paid or funds set apart for the
payment of dividends on any parity capital stock for any period unless full
cumulative dividends shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash, a
sum in cash sufficient for that payment is set apart for that payment on the
convertible preferred stock. If full dividends are not so paid, the convertible
preferred stock will share dividends pro rata with the parity capital stock.
Dividends on account of arrears and dividends in connection with any optional
redemption may be declared and paid at any time, without reference to any
regular dividend payment date, to holders of record on that date, not more than
45 days prior to the payment of the dividends, as may be fixed by our board of
directors.
                                       77
<PAGE>   82

LIQUIDATION RIGHTS

     Upon any voluntary or involuntary liquidation, dissolution or winding up of
our affairs and after payment in full of our outstanding debt obligations and
the liquidation preference (and any accrued and unpaid dividends) on any senior
capital stock, each holder of shares of the convertible preferred stock (and the
corresponding depositary shares) will be entitled to payment out of our assets
available for distribution of an amount equal to the liquidation preference per
share of the convertible preferred stock (or per depositary share) held by that
holder, plus accrued and unpaid dividends and additional dividends (if any) to
the date fixed for that liquidation before any distribution is made on any
junior capital stock, including, without limitation, our common stock. After
payment in full of the liquidation preference and all accrued and unpaid
dividends and additional dividends (if any), to which holders of convertible
preferred stock (and the corresponding depositary shares) are entitled, those
holders will not be entitled to any further participation in any distribution of
our assets.

     However, neither the voluntary sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or our assets nor our consolidation or merger
with or into one or more corporations will be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of GTS, unless the sale,
conveyance, exchange, transfer, consolidation or merger shall be in connection
with our liquidation, dissolution or winding up.

     The certificate of designations does not contain any provision requiring
funds to be set aside to protect the liquidation preference of the convertible
preferred stock, although the liquidation preference will be substantially in
excess of the par value of the shares of the convertible preferred stock.

VOTING RIGHTS

     Holders of record of shares of the convertible preferred stock (and the
corresponding depositary shares) have no voting rights, except as required by
law and as provided in the certificate of designations. The certificate of
designations provides that upon the accumulation of accrued and unpaid dividends
on the outstanding convertible preferred stock in an amount equal to six full
quarterly dividends, whether or not consecutive (such an event and any event
with a similar effect under the terms of any other series of preferred stock
upon which like rights have been conferred, shall be referred to as a voting
rights triggering event), the number of members of our board of directors will
be immediately and automatically increased by two (unless previously increased
under the terms of any other series of preferred stock upon which like rights
have been conferred). Subsequently, the holders of a majority of the outstanding
shares of convertible preferred stock, voting together as a class (pro rata,
based on liquidation preference) with the holders of any other series of
preferred stock upon which like rights have been conferred and are exercisable,
will be entitled to elect two members to our board of directors. Voting rights
arising as a result of a voting rights triggering event will continue until the
time at which all dividends in arrears on the convertible preferred stock are
paid in full. However, this right to elect directors will expire when the number
of shares of convertible preferred stock outstanding is reduced to 10% or less
of the shares issued under this prospectus.

     In addition, as provided above under "-- Ranking" we may not authorize,
create (by way of reclassification or otherwise) or issue any senior capital
stock, or any obligation or security convertible into or evidencing the right to
purchase any senior capital stock, without the affirmative vote or consent of
the holders of 66 2/3% of the then outstanding shares of the convertible
preferred stock.

     The owners of depositary shares are entitled to direct the voting of the
shares of convertible preferred stock represented by their depositary shares.

CONVERSION RIGHTS

     The convertible preferred stock is convertible at the option of the holder,
into shares of common stock at any time, unless previously redeemed or
repurchased, at a conversion rate of .7246 shares of common stock per depositary
share (72.46 shares of common stock per share of the convertible preferred
stock)

                                       78
<PAGE>   83

equivalent to a conversion price of $69.00 per share of common stock, subject to
the adjustments described below.

     The right to convert a share of the convertible preferred stock called for
redemption or delivered for repurchase will terminate at the close of business
on the redemption date for those convertible preferred stock or the repurchase
date, as the case may be. Convertible preferred stock (and the corresponding
depositary shares) for which a holder has delivered a change of control purchase
notice, as described below, exercising the option of that holder to require us
to purchase those convertible preferred stock (and the corresponding depositary
shares) may be converted only if that notice is withdrawn by a written notice of
withdrawal delivered by the holder to the paying agent prior to the close of
business on the business day prior to the change of control purchase date in
accordance with the certificate of designations.

     The right of conversion attaching to any depositary share may be exercised
by the holder of that depositary share by delivering the depositary share to be
converted to the office of the conversion agent, accompanied by a signed and
completed notice of conversion in form reasonably satisfactory to the conversion
agent. The conversion date will be the date on which the depositary share and
the signed and completed notice of conversion are so delivered. As promptly as
practicable on or after the conversion date, we will issue and deliver to the
conversion agent a certificate or certificates for the number of full shares of
common stock issuable upon conversion, with any fractional shares rounded up to
full shares or, at our option, payment in cash instead of any fraction of a
share, based on the closing price of the common stock on the trading day
preceding the conversion date.

     Notwithstanding the above, if a number of depositary shares that is not
divisible by 100 (without remainder) is submitted for conversion, any fractional
share otherwise issuable upon the conversion will be rounded down. Such
certificate or certificates will be delivered by the conversion agent to the
appropriate holder on a book-entry basis or by mailing certificates evidencing
the additional shares to the holders at their respective addresses set forth in
the register of holders maintained by the transfer agent. All shares of common
stock issuable upon conversion of the depositary shares will be fully paid and
nonassessable and will rank equal with the other shares of common stock
outstanding from time to time. No payment or adjustment will be made for
dividends or distributions with respect to shares of common stock issued upon
conversion of depositary shares.

     Except as otherwise provided in the certificate of designations, dividends
accrued shall not be paid on depositary shares converted; but dividends accrued
through March 15, 2002 shall be paid on any depositary shares called for
redemption and converted before March 15, 2002. If any holder surrenders a
depositary share for conversion between a record date and the related dividend
payment date, then notwithstanding the conversion, the dividend payable on the
dividend payment date will be paid to the holder on the record date. However, in
that event, unless the depositary share has been called for redemption, the
depositary share, when surrendered for conversion, must be accompanied by
delivery by the holder of a check or draft payable in an amount equal to the
dividend payable on the dividend payment date on the portion so converted.
Holders of common stock issued upon conversion will not be entitled to receive
any dividends payable to holders of common stock as of any record time before
the close of business on the conversion date.

     Under current federal law, a holder delivering depositary shares for
conversion will not be required to pay any taxes or duties in respect of the
issue or delivery of common stock on conversion but will be required to pay any
tax or duty that may be payable in respect of any transfer involved in the issue
or delivery of the shares of common stock in a name other than that of the
holder of the depositary shares. Certificates representing shares of common
stock will not be issued or delivered unless all taxes and duties, if any,
payable by the holder have been paid.

     The conversion rate is subject to adjustment in certain events, including,
without duplication:

     - the issuance of shares of common stock as a dividend or distribution on
       the common stock,

     - the subdivision or combination of the outstanding common stock,

                                       79
<PAGE>   84

     - the issuance to all or substantially all holders of common stock of
       rights or warrants to subscribe for or purchase common stock (or
       securities convertible into common stock) at a price per share less than
       the then current market price per share,

     - the distribution to all or substantially all holders of common stock of
       shares of our capital stock (other than common stock), evidences of
       indebtedness or other non-cash assets (including securities of any
       company other than GTS),

     - the distribution to all or substantially all holders of common stock of
       rights or warrants to subscribe for its securities (other than those
       referred to in the third bullet point above), and

     - the distribution to all or substantially all holders of common stock of
       cash in an aggregate amount that (together with all other cash
       distributions to all or substantially all holders of common stock made
       within the preceding 12 months not triggering a conversion rate
       adjustment) exceeds an amount equal to 12.5% of our market capitalization
       on the business day immediately preceding the day on which we declare the
       distribution.

     We from time to time may reduce the conversion price by any amount for any
period of time if the period is at least 20 days or any longer period required
by law and if the reduction is irrevocable during the period; but the conversion
price may not be less than the par value of a share of common stock. No
adjustment of the conversion price or the corresponding conversion rate will be
required to be made until the cumulative adjustments amount to 1.0% or more of
the conversion price or the corresponding conversion rate.

     We will provide to holders of the depositary shares reasonable notice of
any event that would result in an adjustment to the conversion rate under the
foregoing paragraph so as to permit the holders to effect a conversion of
depositary shares into shares of common stock prior to the occurrence of that
event.

     If at any time we make a distribution of property to our stockholders that
would be taxable to such stockholders as a dividend for United States federal
income tax purposes (e.g., distributions of evidences of indebtedness or our
assets of, but generally not stock dividends on common stock or rights to
subscribe for common stock) and, under the antidilution provisions of the
certificate of designations, the number of shares into which the convertible
preferred stock is convertible is increased, that increase may be considered for
United States federal income tax purposes to be the payment of a taxable
dividend to holders of the depositary shares. See "Certain U.S. Federal Income
Tax Considerations -- Adjustment of Conversion Price."

     "Market price," as of any date, means the average of the daily closing
price for the five consecutive trading days ending on such date.

     "Trading day" means, in respect of any securities exchange or securities
market, each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day
on which securities are not traded on the applicable securities exchange or in
the applicable securities market.

REDEMPTION

  Optional Redemption

     The convertible preferred stock (and corresponding depositary shares) may
not be redeemed prior to March 15, 2002. The convertible preferred stock (and
corresponding depositary shares) may be redeemed, in whole or in part, at our
option on or after March 15, 2002, at the redemption prices specified below
(expressed as percentages of the liquidation preference for those shares), in
each case, together with accrued and unpaid dividends and additional dividends
(if any), to the date of redemption (which shall be

                                       80
<PAGE>   85

referred to as a redemption date), upon not less than 15 nor more than 60 days'
prior written notice, during the 12-month period commencing on March 15 of each
of the years listed below:

<TABLE>
<CAPTION>
                                                               REDEMPTION
YEAR                                                              RATE
- ----                                                           ----------
<S>                                                            <C>
2002........................................................    105.075%
2003........................................................    104.350%
2004........................................................    103.625%
2005........................................................    102.900%
2006........................................................    102.175%
2007........................................................    101.450%
2008........................................................    100.725%
2009 and thereafter.........................................    100.000%
</TABLE>

     On and after any redemption date, provided that we have made available at
the office of the transfer agent a sufficient amount of cash to effect the
redemption, dividends will cease to accrue on the convertible preferred stock
(and corresponding depositary shares) called for redemption (except that, in the
case of a redemption date after a record date and prior to the related dividend
payment date, holders of convertible preferred stock (and corresponding
depositary shares) on the record date will be entitled on that dividend payment
date to receive the dividend payable on their shares, as described above), their
shares shall no longer be deemed to be outstanding and all rights of the holders
of those shares as holders of convertible preferred stock (and corresponding
depositary shares) shall cease except the right to receive the cash deliverable
upon such redemption, without interest from the redemption date.

TRANSFER AGENT, PAYING AGENT, CONVERSION AGENT

     We have initially appointed the transfer agent to act as the paying agent
and conversion agent. We may at any time terminate the appointment of any paying
agent or conversion agent and appoint additional or other paying agents and
conversion agents, provided that until the convertible preferred stock (and the
corresponding depositary shares) has been delivered to us for cancellation, or
moneys sufficient to pay the liquidation preference and accrued dividends and
additional dividends (if any) on the convertible preferred stock (and the
corresponding depositary shares) have been made available for payment and either
paid or returned to us as provided in the certificate of designations, it will
maintain an office or agency in the Borough of Manhattan in The City of New York
for surrender of convertible preferred stock (and the corresponding depositary
shares) for conversion.

     Dividends payable on the convertible preferred stock (and the corresponding
depositary shares) on any redemption date or repurchase date that is a dividend
payment date will be paid to the holders of record as of the immediately
preceding record date.

     All moneys held by us or deposited with any paying agent in trust for the
payment of the liquidation preference and dividends or additional dividends (if
any) on any shares of the convertible preferred stock (and the corresponding
depositary shares) which remain unclaimed at the end of two years after the
payment has become due and payable will be repaid to us, and the holder of those
shares of the convertible preferred stock (and the corresponding depositary
shares) will thereafter be entitled to look only to us for payment.

CHANGE OF CONTROL

     In the event of a change of control, each holder will have the right to
require us to purchase all or a portion of his or her convertible preferred
stock (which shall be referred to as a change of control offer) as of the date
that is 30 business days after the occurrence of that change of control (which
shall be referred to as a change of control purchase date) for a purchase price
equal to 100% of the liquidation preference together with accrued and unpaid
dividends to but not including the change of control purchase date. We will not
pay any funds under a change of control offer before we repurchase all
securities ranking senior to

                                       81
<PAGE>   86

the convertible preferred stock and requiring repurchase under the change of
control provisions governing those senior securities.

     Within 10 business days after the occurrence of a change of control, we
shall mail to all holders of record of the depositary shares a notice of the
change of control describing, among other things, the terms and conditions, and
the procedures required for exercise of, the holder's right to require the
purchase of that holder's convertible preferred stock. To exercise the purchase
right upon a change of control, the holder of a depositary share will be
required to deliver, on or before the 10th day prior to the change of control
purchase date, written notice to us (or an agent designated by us for that
purpose) of the holder's acceptance (which shall be referred to as a change of
control purchase notice), together with the certificates evidencing the
depositary share with respect to which the offer is being accepted, duly
endorsed for transfer.

     If a holder does not exercise the right to require us to purchase his or
her convertible preferred stock, each share of his or her convertible preferred
stock (and the corresponding depositary shares) shall thereafter be convertible
into the right to receive the consideration receivable as a result of the change
of control by a holder of the number of shares of common stock into which his or
her convertible preferred stock was convertible immediately prior to the change
of control.

     A change of control shall be deemed to have occurred if:

     - any person or group, other than the permitted holders, is or becomes
       owner, directly or indirectly, of shares of our capital stock
       representing 50% or more of the total voting power of all shares of our
       capital stock of or has the power, directly or indirectly, to elect a
       majority of the members of our board of directors;

     - we consolidate with, or merge with or into, another person or we dispose
       of all or substantially all of our assets, or any person consolidates
       with, or merges with or into, GTS, other than under a transaction in
       which the person or persons that "beneficially owned," directly or
       indirectly, shares of our capital stock of representing a majority of the
       total voting power of all classes of our capital stock immediately prior
       to that transaction, "beneficially own," directly or indirectly, shares
       of our capital stock representing a majority of the total voting power of
       all classes of capital stock of the surviving or transferee person;

     - during any consecutive two year period, individuals who at the beginning
       of the period constituted our board of directors (together with any new
       directors whose election by our board of directors or whose nomination
       for election by our stockholders was approved by a vote of a majority of
       the directors then still in office who were either directors at the
       beginning of that period or whose election or nomination for election was
       previously so approved) cease for any reason (other than by action of the
       permitted holders) to constitute a majority of our board of directors
       then in office; or

     - we shall liquidate or dissolve.

     For purposes of this definition,

     - "group" has the meaning under Section 13(d) and 14(d) of the Exchange Act
       or any successor provision to either of the above, including any group
       acting for the purpose of acquiring, holding or disposing of securities
       within the meaning of Rule 13d-5(b)(1) under the Exchange Act, and

     - a "beneficial owner" shall be determined in accordance with Rule 13d-3
       under the Exchange Act promulgated by the SEC under the Exchange Act,

except that the number of shares of our capital stock entitling the holders of
those shares to vote generally in the election of directors shall be deemed to
include, in addition to all outstanding shares of our capital stock of entitling
the holders of those shares to vote generally in the election of directors and
unissued shares deemed to be held by the person with respect to which the change
of control determination is being made, all unissued shares deemed to be held by
all other persons.

                                       82
<PAGE>   87

          "Unissued shares" means shares of capital stock not outstanding that
     are subject to options, warrants, rights to purchase, or conversion
     privileges exercisable within 60 days of the date of determination of a
     change of control and that, upon issuance, will entitle the holders of
     those shares to vote generally in the election of directors.

     For purposes of the definition of "change of control," "permitted holders"
means:

     - Alan B. Slifka and any entity controlled by him,

     - one or more of George Soros, Soros Fund Management LLC, Purnendu
       Chatterjee or Chatterjee Management Company or affiliates of any of them,
       and any person or entity for which any such person or entity acts as
       investment advisor or investment manager, and

     - charitable organizations controlled by or affiliated with any of the
       persons named in the above two clauses.

     Notwithstanding the above, a change of control will be deemed not to have
occurred:

     - if the last sale price of the common stock for any five trading days
       during the ten trading days immediately preceding the change of control
       is at least equal to 105% of the conversion price in effect immediately
       preceding the change of control or

     - if at least 90% of the consideration (excluding cash payments for
       fractional shares or cash payments for appraisal rights) in the
       transaction or transactions constituting the change of control consists
       of shares of common stock or securities convertible into shares of common
       stock that are, or upon issuance will be, traded on a national securities
       exchange.

AMENDMENT, SUPPLEMENT AND WAIVER

     We may amend the certificate of designations with the consent of the
depositary, who will consent if so instructed by the holders of a majority of
the depositary shares then outstanding, (including consents obtained in
connection with a tender offer or exchange offer for the convertible preferred
stock or the corresponding depositary shares) and any past default or failure to
comply with any provisions of the certificate of designations may also be waived
with the consent of those holders.

     Notwithstanding the above, however, without the consent of each holder
affected, an amendment or waiver may not (with respect to any shares of the
convertible preferred stock held by a non-consenting holder):

     - alter the voting rights with respect to the convertible preferred stock
       or reduce the number of shares of the convertible preferred stock whose
       holders must consent to an amendment, supplement or waiver,

     - reduce the liquidation preference of any share of the convertible
       preferred stock or adversely alter the provisions with respect to the
       redemption of the convertible preferred stock,

     - reduce the rate of or change the time for payment of dividends on any
       share of the convertible preferred stock,

     - waive a default in the payment of dividends or additional dividends (if
       any) on the convertible preferred stock,

     - make any share of the convertible preferred stock payable in money other
       than U.S. dollars,

     - make any change in the provisions of the certificate of designations
       relating to waivers of the rights of holders of the convertible preferred
       stock to receive the liquidation preference, dividends or additional
       dividends (if any) on the convertible preferred stock, or

     - make any change in the above amendment and waiver provisions.

                                       83
<PAGE>   88

     Notwithstanding the above, without the consent of any holder of the
convertible preferred stock, we may (to the extent permitted by Delaware law)
amend or supplement the certificate of designations to cure any ambiguity,
defect or inconsistency, to provide for uncertificated shares of the convertible
preferred stock in addition to or in place of certificated shares of the
convertible preferred stock or to make any change that would provide any
additional rights or benefits to the holders of the convertible preferred stock
or to make any change that the board of directors determines, in good faith, is
not materially adverse to holders of the convertible preferred stock.

ADDITIONAL INFORMATION

     Anyone who receives a copy of this prospectus may obtain a copy of the
certificate of designations or the registration rights agreement without charge
by writing to Global TeleSystems Group, Inc., 1751 Pinnacle Drive, North
Tower -- 12th Floor, McLean, Virginia 22102, Attention: General Counsel.

SHELF REGISTRATION; ADDITIONAL DIVIDENDS

     On April 19, 1999, we entered into the registration rights agreement with
the initial purchasers and the depositary. Under the registration rights
agreement, we agreed to file this registration statement with the SEC. Each
depositary share or share of the convertible preferred stock or common stock
issuable upon conversion of those securities or paid as dividends on those
securities until the earlier of:

     - the date on which that depositary share or share of convertible preferred
       stock or common stock has been effectively registered under the
       Securities Act and disposed of in accordance with the shelf registration
       statement, or

     - the date on which that depositary share or share of convertible preferred
       stock or common stock is eligible to be distributed to the public under
       Rule 144(k) under the Securities Act

shall be referred to as a transfer restricted security.

     The registration rights agreement provides that we will use our
commercially reasonable best efforts to maintain the effectiveness of the shelf
registration statement until all depositary shares, shares of convertible
preferred stock and shares of common stock issued upon conversion of those
securities or as dividends on those securities that are not held by affiliates:

     - may be resold without restriction under Rule 144(k) under the Securities
       Act, or

     - have been sold under the shelf registration statement

subject to the our right to notify holders that the prospectus ceases to be
accurate and complete as a result of material business developments for up to
180 days during any two-year period, however (1) no single period may exceed 60
days and (2) those periods, in the aggregate, may not exceed 90 days in any
calendar year.

     If the shelf registration statement ceases to be effective or usable in
connection with resales of transfer restricted securities during the periods
specified in the registration rights agreement (that event will be referred to
as a registration default), then we will pay to each holder of the convertible
preferred stock which are transfer restricted securities (and the corresponding
depositary shares), with respect to the first 90-day period immediately
following the occurrence of a registration default, additional dividends in an
amount equal to $0.25 per year per depositary share ($25.00 per year per $5,000
in liquidation preference of the convertible preferred stock) held by that
holder (which shall be referred to as additional dividends). The amount of the
additional dividends will increase by an additional $0.25 per year per
depositary share ($25.00 per year per $5,000 in liquidation preference of the
convertible preferred stock) with respect to any subsequent period until all
registration defaults have been cured. We will pay all accrued additional
dividends on each dividend payment date.

     The cash necessary to pay additional dividends may be paid at our option in
cash, common stock or a combination of cash and common stock; but we must pay
additional dividends in cash if the common
                                       84
<PAGE>   89

stock paid as additional dividends would not, at the time the payment for
additional dividends is made, be freely transferable under the Securities Act.
If we pay all or any part of any additional dividends in common stock, we must
deliver to the depositary a sufficient number of shares of common stock that,
upon resale by the depositary or its nominee, will result in net cash proceeds
to the depositary to pay the additional dividends in cash to the holders of the
depositary shares.

     All shares of common stock received by the depositary from us as additional
dividends will be promptly resold by the depositary or its nominee on behalf of
the holders of the depositary shares, and the holders of the depositary shares
will not receive any such shares. If the proceeds from a resale do not result in
a sufficient amount of cash to pay the additional dividends, we will promptly
provide to the depositary cash in an amount equal to the difference between the
amount of the additional dividends and the proceeds received from the resale on
the common stock by the depositary. Following the cure of a registration
default, the accrual of additional dividends will cease. Notwithstanding
anything to the contrary herein contained, during any period, we will not be
required to pay additional dividends with respect to more than one registration
default.

     This summary of certain provisions of the registration rights agreement is
not complete and is subject to, and is qualified in its entirety by reference
to, all the provisions of the registration rights agreement, a copy of which is
available upon request to us.

REISSUANCE

     Shares of the convertible preferred stock redeemed for or converted into
common stock or otherwise acquired by us will assume the status of authorized
but unissued preferred stock and may thereafter be reissued in the same manner
as the other authorized but unissued preferred stock, but not as the convertible
preferred stock.

                                       85
<PAGE>   90

                        SHARES ELIGIBLE FOR FUTURE SALE

     As of March 31, 1999, 81,221,352 shares of common stock were outstanding,
excluding

     - 16,443,464 shares of common stock that are issuable pursuant to 4,386,313
       exercisable warrants and the exercise of 12,057,151 options under GTS'
       option plans, of which 4,190,792 options are exercisable,


     - 5,875,700 shares of common stock into which the 8.75% senior subordinated
       bonds are convertible,


     - 8,481,417 shares of common stock into which the 5 3/4% convertible senior
       subordinated debentures are convertible,

     - 163,795 of additional shares of common stock to be issued resulting from
       the NetSource acquisition and an additional 1.4 million shares of common
       stock which may be issued, subject to NetSource meeting certain
       performance targets during the first two quarters of 1999,

     - 7,246,000 shares of our common stock issuable on conversion of the
       convertible preferred stock, not including an indeterminate number of
       shares of common stock, may be issued as dividends on the convertible
       preferred stock or as a result of anti-dilution provisions of the
       convertible preferred stock, and

     - 1,850,497 shares of common stock issued in the Omnicom acquisition.

     Of the 81,221,352 outstanding shares of our 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 are freely tradable without
restriction under the Securities Act. However those 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 2,000,000 shares have been resold or may be resold under Rule 144
subject to volume and manner of sale limitations. In addition, the 8,481,417
shares into which the debentures are convertible will be freely tradable without
restriction under the Securities Act. We are obligated to register 7,246,000
shares of our common stock issuable on the conversion of the convertible
preferred stock in a registration statement, of which this prospectus is a part.

     In addition, we have filed three registration statements which the SEC has
declared effective. One registration statement covers the resale of the
convertible bonds and the shares of our common stock into which the convertible
bonds are convertible. Two registration statements on Form S-8 cover the resale
of shares of our common stock issued to employees, officers and directors under
our employee benefit plans.

     Furthermore, on April 19, 1999 the SEC declared effective a shelf
registration statement, covering 24.1 million shares of our common stock held by
a number of our stockholders, including 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. These persons have agreed, in consideration for our
filing of the shelf registration statement, that they may sell up to only 75% of
their shares up to July 1999. The Soros associates have expressed to us that 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 United States securities law. We have expressed to them our view
that such restrictions continue to apply. This shelf registration statement
contained a prospectus supplement for an underwritten public offering of
4,265,224 shares owned by Apax Funds Nominees Limited and 1,962,642 shares owned
by Warburg, Pincus Ventures L.P.

     Certain former limited partners of partnerships formerly affiliated with
Alan B. Slifka and dissolved in October 1998 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 our
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.

                                       86
<PAGE>   91

     On April 19, 1999, the SEC declared effective a 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. Up to 4,037,500
shares, plus up to an additional 1.4 million shares issuable contingent on
NetSource achieving certain performance targets during the first two quarters of
1999, may be issued by us in connection with this acquisition. This shelf
registration statement also includes shares issued to Apax Funds Limited and
Warburg, Pincus Ventures, L.P., two institutional shareholders of Esprit
Telecom, upon the closing of our offer for Esprit Telecom. We issued
approximately 6.2 million shares of common stock to these two Esprit Telecom
shareholders when our offer closed.

     We are obligated to file a registration statement with respect to the
1,850,497 shares of our common stock issued in the Omnicom acquisition by
October 1, 1999.

     We cannot predict what effect, if any, that future sales of common stock or
the availability of common stock for sale will 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 -- Substantial resales of our common stock may depress our stock price
and dilute your ownership interest."

     In general, under Rule 144 as currently in effect, a person (or persons
whose GTS shares 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 GTS 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.

                                       87
<PAGE>   92

                               TAX CONSIDERATIONS

     The following is a summary of the material United States federal income and
estate tax considerations with respect to the ownership and disposition of
shares of our convertible preferred stock and shares of our common stock. This
summary is based on the Internal Revenue Code of 1986, as amended, existing and
proposed Treasury regulations thereunder and administrative and judicial
interpretations thereof (all as of the date hereof and all of which are subject
to change, possibly with retroactive effect). This summary does not address all
United States federal income and estate tax consequences that may be relevant to
a holder in light of its particular circumstances or to certain holders that may
be subject to special treatment under United States federal income tax laws,
such as banks, insurance companies, tax-exempt entities and certain United
States expatriates. Furthermore, the following discussion does not discuss any
aspects of foreign, state or local taxation.

     For purposes of this summary, you are a "United States Holder" if you are a
beneficial owner of convertible preferred stock or common stock that for United
States federal income tax purposes is:

     - a citizen of the United States or an individual who is a resident of the
       United States,

     - a corporation or partnership created or organized under the laws of the
       United States or any political subdivision thereof,

     - an estate, the income of which is subject to United States federal income
       taxation regardless of its source, or

     - a trust, if both (1) a court within the United States is able to exercise
       primary supervision over the administration of the trust, and (2) one or
       more United States persons have the authority to control all substantial
       decisions of the trust.

     You are a "Non-United States Holder" if you are a beneficial owner or
convertible preferred stock or common stock and you are not a United States
Holder.

     EACH PROSPECTIVE PURCHASER 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 OUR CONVERTIBLE PREFERRED STOCK AND SHARES OF
COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
STATE, LOCAL OR OTHER TAXING JURISDICTION.

UNITED STATES HOLDERS

  The Convertible Preferred Stock

     We have the option of making certain dividend payments to you by issuing
shares of our common stock to the depositary, who will distribute the cash
proceeds of their sale to you (together with any top up payment, if necessary).
For United States federal income tax purposes, we will treat the payment of such
proceeds (together with any such top up payments) as the payment of a cash
dividend to you by us, although no assurances can be given that the Internal
Revenue Service will not assert different treatment.

     Dividends. If you are a United States Holder, dividends paid to you on the
convertible preferred stock will be taxable as ordinary income to the extent of
our current or accumulated earnings and profits as determined for United States
federal income tax purposes. To the extent a dividend is not attributable to our
current or accumulated earnings and profits, that dividend will first reduce
your tax basis in the convertible preferred stock, and then be treated as
capital gain to the extent that the amount exceeds that basis. We do not believe
that we have current or accumulated earnings and profits at this time.
Accordingly, until such time as we have current or accumulated earnings and
profits for United States federal income tax purposes, dividends paid on the
convertible preferred stock will reduce your tax basis in the convertible
preferred stock or be treated as capital gain.

     Dividends Received Deduction. Dividends on the convertible preferred stock
will not be eligible for the dividends received deduction unless and until we
have current or accumulated earnings and profits for United States federal
income tax purposes. At that time, subject to certain exceptions and
limitations, if

                                       88
<PAGE>   93

you are a corporation, you may be entitled to a dividends received deduction
equal to 70 percent of the amount of any dividend attributable to our current or
accumulated earnings and profits. However, this deduction may be restricted,
eliminated or offset by other tax rules that limit the availability of the
dividends received deduction.

     The dividends received deduction is reduced if you have incurred
indebtedness that is directly attributable to your investment in the convertible
preferred stock or do not meet certain holding requirements. Under the holding
period requirements, you must hold the convertible preferred stock for more than
45 days during the 90 day period surrounding the ex-dividend date or, in the
event of certain arrearages, 90 days during the 180 day period surrounding the
ex-dividend date. For these purposes, the holding period does not include any
period during which you have diminished your risk of loss with respect to the
convertible preferred stock.

     Further, if a dividend

     - equals or exceeds five percent of your adjusted tax basis in the
       convertible preferred stock (treating all dividends having ex-dividend
       dates within an 85-day period as one dividend) or

     - exceeds 20 percent of your adjusted tax basis in the convertible
       preferred stock (treating all dividends having ex-dividend dates within a
       365-day period as one dividend),

the dividend may constitute an "extraordinary dividend" that requires you to
reduce your adjusted tax basis in the convertible preferred stock by the amount
of the dividend excluded from income under the dividends received deduction
provisions.

     You should also consider the effect of the corporate alternative minimum
tax, which imposes a minimum tax of 20 percent of a corporation's alternative
minimum taxable income for a taxable year. For purposes of the corporate
alternative minimum tax, alternative minimum taxable income is increased by 75
percent of the amount by which a corporation's adjusted current earnings in the
taxable year exceeds its alternative minimum taxable income prior to the
addition of an item. The amount of any dividend on the convertible preferred
stock that is included in adjusted current earnings will not be reduced by any
dividends received deduction that is allowed with respect to such dividend.

     Sale or Other Disposition. Subject to the discussion in the following
paragraph, you generally will recognize capital gain or loss on a sale or other
disposition of your convertible preferred stock in an amount equal to the
difference between your amount realized and your adjusted tax basis in the
convertible preferred stock. Your adjusted tax basis will initially be your
cost, and will be reduced by any dividends you receive on the convertible
preferred stock to the extent such dividends are not attributable to our current
or accumulated earnings and profits. If you are an individual United States
Holder and your holding period for the convertible preferred stock is more than
one year, capital gains in respect of that stock will be subject to tax at a
maximum rate of 20 percent.

     Redemption. A redemption or other purchase by us of your convertible
preferred stock for cash will be treated, depending on the facts and
circumstances, as (1) a distribution on our stock or (2) a taxable exchange of
your convertible preferred stock.

     Such a transaction will be treated as a taxable exchange of your
convertible preferred stock if the transaction results in either:

     - a complete termination of your interest in our stock,

     - in general, a greater than 20 percent decrease in your percentage
       ownership in our voting stock, or

     - a "meaningful reduction" (as determined under Section 302 of the Code) of
       your interest in our stock.

     In determining whether any of these has occurred, you will be deemed to own
stock that is owned by persons that are treated as related to you for United
States federal income tax purposes or that is the subject of an option held by
you (including your conversion option) or by such a related person.
                                       89
<PAGE>   94

     If the redemption or other purchase is not treated as a taxable exchange,
the amounts received by you will be treated in the same manner as dividends paid
on the convertible preferred stock, as described above.

     Conversion. The conversion by you of your convertible preferred stock into
common stock will not give rise to the recognition of income, gain or loss at
the time of conversion, assuming that you do not receive cash from us at that
time and that none of the common stock you receive is attributable to accrued
but unpaid dividends. Cash received in lieu of fractional shares of common stock
will be treated as if you received the fractional share and exchanged it for
cash; the excess, if any, of such cash over your adjusted tax basis attributable
to the fractional share should be treated as capital gain. You will have an
aggregate adjusted tax basis in the common stock that is equal to your aggregate
adjusted tax basis in your convertible preferred stock at the time of
conversion.

The Common Stock

     Dividends on the common stock will be taxable to you in the manner and
under the circumstances described for dividends on the convertible preferred
stock above. If you are a corporation, you will be eligible for the dividends
received deduction in the manner and under the circumstances described with
respect to the convertible preferred stock above, and generally subject to the
same limitations. In addition, upon a redemption, sale or other disposition by
you of the common stock, you will be taxable in the same manner and under the
circumstances described for the convertible preferred stock above. Your holding
period of common stock received on conversion will include your holding period
for the preferred convertible stock in respect of which the common stock was
received, and your initial tax basis in such stock will be as described in
"Conversion" above.

NON-UNITED STATES HOLDERS

Dividends

     If you are a Non-United States Holder, dividends that are paid to you by a
United States corporation and that are not effectively connected with a trade or
business carried on by you in the United States (and, if one or more of certain
tax treaties apply, are not attributable to a permanent establishment in the
United States maintained by you) generally are subject to United States
withholding tax at a rate of 30%. An exemption from such withholding exists with
respect to dividends paid to you by a United States corporation 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 (which shall be
referred to as an 80/20 company). Under the provisions of the Code applicable to
80/20 companies, the proportion of such company's dividends equal to such
company's total gross income from foreign sources over its total gross income is
exempt from United States withholding tax. At present, we believe that we
qualify as an 80/20 company.

     However, the 80% active foreign business income test is applied on a
periodic basis, and our operations and business plans may change in subsequent
taxable years. Therefore, we cannot assure you of our future status as an 80/20
company. If, for any period or periods, we fail to satisfy the applicable
requirements, 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 our 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 our reasonable estimate of the extent to which the distribution will be
out of such earnings and profits. You could, however, apply for refunds if your
stock's share of our earnings and profits is less than the amount of the
distributions. Additionally, the rate of withholding may be reduced to the
extent provided by a tax treaty between the United States and the country of
which you are a resident for tax purposes.

     In order to claim the benefit of an applicable tax treaty rate, you may
have to file with us or our dividend paying agent an exemption or reduced treaty
rate certificate or letter in accordance with the terms of such treaty. Under
United States Treasury regulations currently in effect, for purposes of

                                       90
<PAGE>   95

determining whether tax is to be withheld at a 30% rate or at a reduced rate as
specified by an income tax treaty, we ordinarily will presume that dividends
paid to an address in a foreign country are paid to a resident of such country
absent knowledge that such presumption is not warranted. However, as of January
1, 2000, if you seek a reduced rate of withholding under an income tax treaty,
you generally would be required to provide to us a valid Internal Revenue
Service Form W-8 certifying that you are 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-United States 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. If you are eligible for a reduced withholding rate, you may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the Internal Revenue Service.

     In the case of dividends that are effectively connected with your conduct
of a trade or business with the United States (and, if an income tax treaty
applies, attributable to a United States permanent establishment that you
maintain), you generally will be subject to regular United States federal income
tax in the same manner as if you were a United States Holder. If you are a
non-United States corporation receiving effectively connected dividends, you
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 your "effectively connected earnings and
profits," subject to certain adjustments.

  Conversion

     The conversion by you of your convertible preferred stock into common stock
will not give rise to the recognition of income, gain or loss at the time of
conversion, assuming that you do not receive cash from us at that time. Cash
received in lieu of fractional shares of common stock will be treated as if you
received the fractional share and exchanged it for cash; the excess, if any, of
such cash over your adjusted tax basis attributable to the fractional share
should be treated as capital gain and taxable in the manner described below.

  Gain on Disposition of Our Stock

     You generally will not be subject to United States federal income tax with
respect to gain realized on a sale or other disposition of our stock unless

     - the gain is effectively connected with a trade or business that you carry
       on in the United States (and, if an income tax treaty applies,
       attributable to a United States permanent establishment that you
       maintain) or

     - if you are a non-resident alien individual and hold the common stock as a
       capital asset, you are present in the United States for 183 or more days
       in the taxable year of the disposition and certain other conditions are
       met.

ADJUSTMENT TO CONVERSION RATIO

     Adjustments to the conversion ratio of the convertible preferred stock may
result in a dividend to you pursuant to Section 305 of the Code if the
adjustment has the effect of increasing your proportionate interest in our
earnings and profits or assets. Such dividend would be taxable to you in the
manner described below depending on whether you are a United States Holder or a
Non-United States Holder. In general, anti-dilution adjustments are not treated
as resulting in deemed distributions. However, adjustments considered to
compensate for taxable cash or property distributions to other shareholders
would result in a taxable deemed distribution to you.

FEDERAL ESTATE TAX

     An individual Non-United States Holder who is treated as the owner of or
has made certain lifetime transfers of an interest in our stock will be required
to include the value thereof in his gross estate for

                                       91
<PAGE>   96

United States federal estate tax purposes, and may be subject to United States
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 United States federal estate tax
imposed on the first $60,000 of the taxable estate.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

     Under the United States Treasury regulations, we must report annually to
the Internal Revenue Service and to you the amount of dividends paid to you and
any tax withheld with respect to such dividends. These information reporting
requirements apply regardless of whether withholding is not required because the
dividends were effectively connected with a trade or business in the United
States that you carry on or withholding was reduced 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 you are a resident under the provisions of an applicable income tax treaty
or agreement.

     United States 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 United States information reporting requirements)
generally will not apply to:

     - dividends paid to you if you are subject to the 30% withholding discussed
       above (or that are not so subject because a tax treaty applies that
       reduces such 30% withholding), or

     - under current law, dividends paid to you at an address outside of the
       United States.

However, as of January 1, 2000, you generally will be subject to United States
withholding tax at a 31% rate unless certain certification procedures (or, in
the case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures) are satisfied, directly or
through a foreign intermediary.

     Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of our 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 our stock to or through
the United States office of a broker is subject to both backup withholding and
information reporting unless the disposing holder, under penalty of perjury,
certifies as to its status as a Non-United States Holder or otherwise
establishes an exception. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office of
a non-United States 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 United States if the payment is made through an office outside the
United States of a broker that is one of the following:

     - a United States person,

     - a foreign person that derives 50% or more of its gross income for certain
       periods from the conduct of a trade or business in the United States;

     - a "controlled foreign corporation" for United States federal income tax
       purposes, or

     - effective January 1, 2000, but probably not prior to such date, a foreign
       broker that is either (1) a foreign partnership, one or more of whose
       partners are United States 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 United
       States, and such broker fails to maintain documentary evidence that the
       holder is a Non-United States Holder and that certain conditions are met,
       or that the holder otherwise is entitled to an exemption.
                                       92
<PAGE>   97

     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.

     The above discussion is included for general information only. Accordingly,
each prospective purchaser is urged to consult his or her tax advisor with
respect to the United States federal income tax and estate tax consequences of
the ownership and disposition of our convertible preferred and common stock,
including the application and effect of the laws of any state, local, foreign,
or other tax jurisdiction.

                                       93
<PAGE>   98

                              PLAN OF DISTRIBUTION

     We will not receive any of the proceeds from the sale of the securities
offered under this prospectus. You may sell the securities directly from time to
time to purchasers. Alternatively, you may from time to time offer the
securities through brokers, dealers or agents who may receive compensation in
the form of discounts, concessions or commissions from you and/or the purchasers
of the securities. You and any brokers, dealers or agents who participate in the
sale of the securities may be considered "underwriters," and any profits on the
sale of the securities by them and any discounts, commissions or concessions
received by any such brokers, dealers or agents might be considered underwriting
discounts and commissions under the Securities Act. To the extent you may be
considered underwriters, you may be subject to certain statutory liabilities of
the Securities Act, including, but not limited to, Section 11, 12 and 17 of the
Securities Act and Rule 10b-5 under the Exchange Act.

     You may sell the securities offered under this prospectus 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. The securities may be sold in different ways including by one or more of
the following methods:

     - a block trade in which the broker or dealer so engaged will attempt to
       sell the securities as agent but may position and resell a portion of the
       block as principal to facilitate the transaction,

     - purchases by a broker or dealer as principal and resale by that broker or
       dealer for its account pursuant to this prospectus,

     - ordinary brokerage transactions and transactions in which the broker
       solicits purchasers,

     - an exchange distribution in accordance with the rules of that exchange,

     - face-to-face transactions between sellers and purchasers without a
       broker-dealer, and

     - through the writing of options.

     At any time a particular offer of the securities is made, a revised
prospectus or prospectus supplement, if required, will be distributed which will
contain the amount and type of securities being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents,
any discounts, commissions and other items constituting compensation from you
selling securities and any discounts, commissions or concessions allowed or
reallowed or paid to dealers. A prospectus supplement and, if necessary, a
post-effective amendment to the registration statement of which this prospectus
is a part, will be filed with the SEC to reflect the disclosure of additional
information with respect to the distribution of the securities. In addition, the
securities covered by this prospectus may be sold in private transactions or
under Rule 144 rather than under this prospectus.

     To the best of our knowledge, there are currently no plans, arrangements or
understandings between any holders and any broker, dealer, agent or underwriter
regarding the sale of the securities. There is no assurance that any holder will
sell any or all of the securities offered under this prospectus or that any
holder will not transfer, devise or gift the securities by other means not
described in this prospectus.

     You and any other person participating in such distribution will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
the Exchange Act, including, Regulation M, which may limit the timing of
purchases and sales of any of the securities by you and any other such person.
Furthermore, under Regulation M under the Exchange Act, any person engaged in
the distribution of the securities may not simultaneously engage in
market-making activities with respect to the particular securities being
distributed for certain periods prior to the commencement of or during such
distribution. All of the above may affect the marketability of the securities
and the availability of any person or entity to engage in market-making
activities with respect to the securities.

     Under the registration rights agreement entered into in connection with our
offer and sale of the depositary shares, we and the holders selling securities
under this prospectus will be indemnified by the

                                       94
<PAGE>   99

other against specific liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection with those
liabilities.

     We have agreed to pay substantially all of the expenses incidental to the
registration, offering and sale of the securities to the public other than
commissions, fees and discounts of underwriters, brokers, dealers and agents.

     If we pay all or any part of a dividend in our common stock, we must
deliver to the depositary a sufficient number of shares that, upon resale by the
depositary, will result in net cash proceeds to the depositary to make the
quarterly dividend payments in cash to the holders of depositary shares. All
shares of common stock received by the depositary from us or dividends on the
convertible preferred stock will be promptly resold by the depositary on behalf
of the holders of the depositary shares and the holders of the depositary shares
will not receive any of those shares. This common stock may be resold by the
depositary under this prospectus as described above.

                                 LEGAL MATTERS


     The validity of the securities offered hereby have been passed upon for us
by Shearman & Sterling, New York, New York.


                                    EXPERTS

     The consolidated financial statements and schedules of Global TeleSystems
Group, Inc. as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998 appearing in Global TeleSystems Group, Inc.'s
Annual Report (Form 10-K) for the year ended December 31, 1998, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein which is based in part on the report of
PricewaterhouseCoopers, independent accountants, and incorporated herein by
reference. The consolidated financial statements and schedules referred to above
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.

                      WHERE YOU CAN FIND MORE INFORMATION

     We file reports, proxy statements and other information with the Securities
and Exchange Commission. 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 this 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.
Our common stock is listed on Nasdaq and Easdaq and reports and other
information concerning us 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.

                                       95
<PAGE>   100

               INCORPORATION OF INFORMATION WE FILE WITH THE SEC

     This prospectus incorporates certain documents about us by reference which
are not presented in this prospectus or delivered with this prospectus. We
incorporate by reference the documents listed below which were filed with the
SEC under the Exchange Act:


     - our Quarterly Report on Form 10-Q for the three month period ended March
       31, 1999, filed on May 17, 1999;


     - our Annual Report on Form 10-K for the fiscal year ended December 31,
       1998, filed on March 23, 1999; and

     - our Current Reports on Form 8-K filed on January 13, 1999, March 9, 1999
       and April 28, 1999 and our Amendment to our Current Reports on Form 8-K/A
       filed on January 20, 1999.

     We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before all the
depositary shares offered by this prospectus have been sold:

     - reports filed under Sections 13(a) and (c) of the Exchange Act;

     - definitive proxy or information statements filed under Section 14 of the
       Exchange Act in connection with any subsequent stockholders' meeting; and

     - any reports filed under Section 15(d) of the Exchange Act.

     You may request a copy of any filings referred to above (excluding
exhibits), at no cost, by contacting us at the following address:

     Global TeleSystems Group, Inc.
     1751 Pinnacle Drive
     North Tower - 12th Floor
     McLean, VA 22102
     (703) 918-4573

                                       96
<PAGE>   101

                                                                       EXHIBIT A

                        SUPPLEMENTAL EASDAQ INFORMATION

APPROVAL BY THE BELGIAN COMMISSION FOR BANKING AND FINANCE

     This prospectus will be submitted for approval by the Belgian Banking and
Finance Commission ("Commissie voor bet Banken Financiewezen/Commission Bancaire
et Financiere") ("BFC") in accordance with Article 29ter. sec. 1. par.1 of Royal
Decree No. 185 of July 9, 1935 and Article 11 of the Royal Decree of 31 October,
1991 on the publication of prospectuses in connection with public issues of
securities. The approval of this prospectus by the BFC does not imply any
judgement as to the appropriateness of the quality of the common stock offered
under this prospectus nor of the situation of GTS.

     On December 23, 1997, the Market Authority of EASDAQ approved the admission
to trading of all of the common stock on EASDAQ under the symbol "GTSG."
Admission to EASDAQ is subject to certain adequacy and liquidity requirements
determined by the EASDAQ Market Authority. Companies applying for admission to
trading on EASDAQ are required to publish relevant financial and other
information regularly and to keep the public informed of all events likely to
affect the market price of their securities. Price sensitive information is made
available to investors in Europe through the EASDAQ Reuters Regulatory Company
Reporting System and international information vendors.

     The documents referred to above will also be made available to Belgian
investors upon prior written request addressed to the principal executive office
of GTS.

PERSONS RESPONSIBLE FOR THE PROSPECTUS AND DECLARATION

     GTS, represented by Mr. William H. Seippel, Chief Financial Officer, takes
responsibility for the contents of this prospectus.

     GTS, having made all reasonable inquiries, accepts responsibility for, and
confirms that this prospectus contains all information with regard to GTS and
the common stock of GTS that is material in the context of the offering and sale
of the common stock, that the information contained in this prospectus is true
and correct in all material respects and is not misleading, that the opinions
and intentions of GTS expressed herein are honestly held and that there are no
other facts the omission of which makes this prospectus as a whole or any of
such information or the expression of any such opinions or intentions materially
misleading.

     Global TeleSystems Group, Inc.
     by William H. Seippel
     Chief Financial Officer

THE CLEARING SYSTEMS

     INTERSETTLE

     Transactions executed on EASDAQ will be settled by delivery through
INTERSETTLE. INTERSETTLE holds securities for its direct participants, which
include banks, securities brokers and dealers, other professional intermediaries
and foreign depositories, and facilitates the clearance and settlement of
securities transactions between INTERSETTLE participants through electronic
book-entry changes in the accounts of INTERSETTLE participants. Book-entry
settlement is mandatory for all financial instruments traded on EASDAQ. Physical
certificates cannot be used to settle a market transaction. Investors must hold
a securities account with a financial institution which directly or indirectly
has access to INTERSETTLE's clearing and settlement system. INTERSETTLE conducts
a real-time gross payment system in connection with its clearance operation,
payments being made simultaneously with the book-entry transfers between
securities accounts.

                                       A-1
<PAGE>   102

     DTC

     DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934. DTC was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organization, some of whom (and/or their representatives) own
DTC. Access to the DTC book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. DTC
agrees with and represents to its participants that it will administer its
book-entry system in accordance with its rules and by-laws and requirements of
law.

TRANSFERS BETWEEN INTERSETTLE AND DTC PARTICIPANTS

     Common stock of GTS will be held through DTC. Common stock held directly or
indirectly by INTERSETTLE participants will be registered on the books of DTC in
the name of the nominee company of Brown Brothers Harriman, acting as custodian
for INTERSETTLE.

     Transfers of common stock will be effected in the following manner:

     (i) transfers of common stock between INTERSETTLE participants will be
         effected in accordance with procedures established for this purpose by
         INTERSETTLE;

     (ii) transfer of common stock between DTC participants will be effected in
          accordance with procedures established for the purpose by DTC; and

     (iii) transfers of common stock between INTERSETTLE participants and DTC
           participants will be effected by an increase or a reduction of the
           quantity of common stock held in INTERSETTLE's account at Brown
           Brothers Harriman and a corresponding reduction or increase of the
           quantity of common stock held by the other relevant DTC participant
           or participants.

     Investors should inquire with the financial intermediary with whom the
investor has opened a securities account for the purpose of holding and trading
common stock, as to the cost of such trading as well as the terms and conditions
on which the financial service of the common stock will be delivered by such
financial intermediary.

     The common stock has the following identification number:
          CUSIP 379 36 U104, ISIN US379 36 U1043

     The clearing costs, if any, will be at the cost of the investors. Investors
are requested to inform themselves about such costs.

POSSIBILITY OF SHARE REPURCHASES

     GTS is not prohibited by its Certificate of Incorporation, By-laws or
Delaware General Corporation Law from repurchasing or otherwise acquiring
outstanding shares of common stock and, accordingly, GTS may exercise its right
to repurchase common stock.

AUTHORIZATION OF INCREASE IN AUTHORIZED CAPITAL OF GTS; AUTHORIZATION OF THE
ISSUANCE OF COMMON STOCK IN THE STOCK OFFERINGS

     Effective December 1, 1997, the board of directors and stockholders of GTS
approved amendments to the Certificate of Incorporation which (i) increased the
authorized number of shares of capital stock to 145,000,000 (of which
135,000,000 shares are common stock and 10,000,000 shares are preferred stock)
and (ii) effected a 3-for-2 stock split of all then-outstanding shares of the
common stock of GTS. In

                                       A-2
<PAGE>   103

addition, the board of directors of GTS has adopted a resolution approving the
offering and issuance of 12,765,000 shares of common stock in the IPO and
2,801,000 shares of common stock in the stock offerings.

                         TAXATION OF BELGIAN INVESTORS

     The following generally summarizes the material Belgian tax consequences of
the sequisition, ownership and disposition of common stock. It is based on the
tax laws applicable in Belgium and France as in effect at the date of this
prospectus, and is subject to changes in Belgium and French law, including
changes that could have retroactive effect. The following summary does not take
into account or discuss the tax laws of any country other than Belgium and
France nor does it take into account the individual circumstances of each
investor. The summary uses the term "Eligible Belgian Holders" to refer to
beneficial owners of common stock who hold directly less than 10% of the share
capital of GTS and whose ownership of such common stock is not attributable to a
permanent establishment or a fixed base in France, are considered residents of
Belgium for purposes of the income tax convention between Belgium and France
dated March 10, 1964 (the "Belgian-French Treaty") and are fully entitled to
benefits under the Belgian-French Treaty.

     There are currently no procedures available for holders of common stock
that are not U.S. residents to claim or receive from the French tax authorities
any tax treaty benefits in respect of dividends (including payment of avoir
fiscal and availability of a reduced withholding tax rate) that a holder may be
entitled to receive pursuant to the Belgian-French Treaty.

     Prospective Belgian investors in common stock are advised to consult their
own tax advisers as to the Belgian and other tax consequences of the
acquisition, ownership and disposition of common stock.

TAXATION OF DIVIDENDS ON COMMON STOCK

  French tax considerations

     Dividends paid to non-residents of France generally are subject to French
withholding tax at a 25% rate and are not eligible for the benefit of the avoir
fiscal (a tax credit available to French residents equal to 50% of the amount of
dividends received from French companies such as GTS). However, under the
Belgian-French Treaty, Eligible Belgian holders can claim the benefit of a
reduced withholding tax rate on dividends of 15%.

     An individual Eligible Belgian Holder generally will also be entitled to
receive a payment of the avoir fiscal, after deduction of withholding tax of
15%. This payment will not be made available to such individual Eligible Belgian
Holder until after the close of the calendar year in which the dividend was paid
and only upon receipt by the French tax authorities of a claim made by the
individual Eligible Belgian Holder for such payment in accordance with the
procedure set forth below.

     A Belgian company that is an Eligible Belgian Holder under the
Belgian-French Treaty (a "Belgian Resident Company") will not benefit from the
refund of the avoir fiscal but will be entitled to obtain from the French tax
authorities a refund of any precompte paid in cash in respect of such dividends
less the 15% French withholding tax. Amounts distributed as dividends by French
companies out of profits which have been taxed at the ordinary corporate income
tax rate or which have been earned and taxed more than five years before the
distribution and which give rise to the avoir fiscal are subject to a
"precompte" or prepayment by such companies. The precompte is paid by the
distributing company to the French tax authorities and is equal to one-half of
the nominal dividend distributed.

     Dividends paid to an individual Eligible Belgian Holder will be subject to
the reduced withholding tax rate of 15% at the time the dividend is paid if (i)
such holder duly completes and provides the French tax authorities with French
Treasury Form 5200 RFI Belgique (the "Form") duly certified by the Belgian tax
authorities before the date of payment of the relevant dividend, or (ii) if
completion of the Form is not possible prior to the payment of dividends, such
holder duly completes and provides the French tax

                                       A-3
<PAGE>   104

authorities with a simplified certificate (the "Certificate") duly certified by
the Belgian tax authorities stating that (a) such holder is a Belgian resident
as defined under the provisions of the Belgian-French Treaty, (b) such holder's
ownership of the common stock is not effectively connected with a permanent
establishment or fixed base in France, and (c) such holder meets all the
requirements of the Belgian-French Treaty for obtaining the benefit of the
reduced rate of withholding tax and the right to payment of the French avoir
fiscal. For example, GTS pays a dividend of 100, an individual Eligible Belgian
Holder will initially receive 85, but will be entitled to an additional payment
of 42.50, consisting of the avoir fiscal of 50, less a 15% withholding tax on
that amount (equal to 7.5). Dividends paid to an individual Eligible Belgian
Holder that has not filed a completed Form or Certificate before the dividend
payment date will be subject to French withholding tax at the rate of 25%. Such
a holder may claim a refund of the excess withholding tax and the avoir fiscal
by completing and providing the French tax authorities with the Form before
December 31st of the calendar year following the year during which the dividend
is paid.

     Dividends paid to a Belgian Resident Company will be subject to the reduced
withholding tax rate of 15% at the time the dividend is paid if such holder duly
completes and provides the French tax authorities with French Treasury 5207 RF2
Belgique form before the date of payment of the relevant dividend duly certified
by the Belgian tax authorities. Dividends paid to such Belgian Resident Company
that has not filed a completed form before the dividend payment date will be
subject to French withholding tax at the rate of 25%. Such a holder may claim a
refund of the excess withholding tax by completing and providing the French tax
authorities with such 5207 RF2 Belgique form before December 31st of the
calendar year following the year during which the dividend is paid. The claim
for refund of the precompte is made on the form RF 5207 RF2 Belgique referred to
above.

  Belgian withholding tax

     Dividends distributed on common stock are subject in Belgium to a
withholding tax at the rate of 25%, when paid or attributed through a
professional intermediary in Belgium. However, no dividend withholding tax is
due if the Eligible Belgian Holder is a company subject to Belgian corporate
income tax.

     In a case where dividends are paid outside Belgium without any intervention
of a paying agent in Belgium, no dividend withholding tax is, in principle, due.
However, where the Eligible Belgian Holder is a Belgian resident entity subject
to the legal entities tax (e.g. a pension fund), the holder itself has to pay
the dividend withholding tax at the rate of 25%.

     In certain cases the above-mentioned 25% rate of dividend withholding tax
will be reduced to 15%. The reduced rate applies in particular to (i) dividends
distributed on shares publicly issued after January 1, 1994 and (ii) dividends
distributed on shares that have been privately issued after January 1, 1994 in
exchange for cash contributions, provided the shares are registered or bearer
shares placed in open custody to a financial institution in Belgium as of the
date of their issuance. This reduced rate should in principle also apply to
dividends on shares issued by GTS. GTS may however irrevocably reject the
application of the reduced withholding tax rate.

  Income tax for Belgian resident individuals

     In the hands of an Eligible Belgian Holder who is an individual holding
common stock as a private investment, the Belgian dividend withholding tax is a
final tax and the dividends need not be reported in the individual's annual
income tax return. If no withholding tax has been levied (i.e. in case of
payment or attribution outside Belgium), the individual has to report the
dividends in his tax return. Such holder will be taxed at the separate rate of
25%, to be increased with a municipal surcharge (varying, as a rule, from 6% to
9%).

     In the hands of an individual Eligible Belgian Holder whose holding of
common stock is effectively connected with a business, the dividends are taxable
at the ordinary rates for business income (i.e. varying from 25% to 55% to be
increased with the municipal surcharge and a crisis contribution of 3% of the
tax

                                       A-4
<PAGE>   105

due). Any Belgium withholding tax is creditable against the final income tax
due, provided that the holder has the full ownership of the common stock at the
time of payment of the dividends.

  Income tax for Belgian Resident Companies

     Dividends received by Belgian Resident Companies are, in principle, subject
to corporate income tax at the rate of 40.17% (i.e. the standard rate of 39%
increased by the additional tax of 3% of the corporate income tax due).

     However, provided that the dividends benefit from the so-called
"dividend-received deduction", only 5% of the dividends received will be
taxable. In order to benefit from the deduction, GTS must not fall within one of
the categories which are expressly excluded from the "dividend received
deduction" (e.g. tax haven companies) and the beneficiary should hold, at the
time of payment of the dividends, a participation of at least 5% in GTS or a
participation which has a acquisition value of at least BEF 50 million.

     Any Belgian dividend withholding tax can, in principle, be credited against
the company's final income tax, provided that the company has the full ownership
of the shares at the time of payment or attribution of the dividends and
provided that the dividend distribution does not entail a reduction in value or
capital loss on the shares.

  Income tax for Belgian resident entities subject to the Belgian legal entities
tax (pension funds, etc.)

     The Belgian dividend withholding tax is a final tax.

CAPITAL GAINS TAXATION

  French tax considerations

     In general, a Belgian holder who is a resident of Belgium under the
Belgian-French Treaty will not be subject to French tax on any capital gain
derived from the sale or exchange of common stock, unless the gain is
attributable to a permanent establishment or fixed place of business maintained
by the holder in France.

  Belgian tax considerations

     Individual Eligible Belgian Holders holding the common stock as a private
investment and entities subject to legal entities tax are not subject to the
Belgian capital gains taxation on the disposal of the common stock.

     Individual Eligible Belgian Holders may, however, be subject to a 33% tax
(to be increased with the municipal surcharge and the crisis contribution) if
the capital gain is deemed to be "speculative."

     Individual Eligible Belgian Holders whose holding of common stock is
effectively connected with a business are taxable at the ordinary rates on any
capital gains realized on the disposal of common stock.

     Belgian resident companies are not subject to capital gains taxation
provided that the dividends received on the shares qualify for the "dividend
received deduction" (except for the minimum holding requirement).

FRENCH ESTATE AND GIFT TAX

     Under the estate tax convention between Belgium and France, a transfer of
common stock by reason of the death of an individual Eligible Belgian Holder
entitled to benefits under that convention will not be subject to French
inheritance tax, unless the decedent was domiciled in France at the time of his
or her death.

                                       A-5
<PAGE>   106

FRENCH WEALTH TAX

     The French wealth tax (impot de solidare sur la fortune) does not apply to
an Eligible Belgian Holder.

BELGIAN INDIRECT TAXES

  Stamp tax on securities transactions

     In principle, a stamp tax is levied upon the subscription of shares of
common stock and the purchase and sale in Belgium of common stock through a
professional intermediary. The rate applicable to subscriptions of new shares of
common stock is 0.35% but there is a limit of BEF 10,000 per transaction. The
rate applicable for secondary sales and purchases in Belgium of common stock
through a professional intermediary is 0.17% but there is a limit of BEF 10,000
per transaction.

     An exemption is available to professional intermediaries (e.g. credit
institutions), insurance companies, pension funds and collective investment
vehicles who are acting for their own account. A non-resident holder of common
stock who is acting for his own account will also be entitled to an exemption
from this stamp tax, provided that he delivers to the issuer or the professional
intermediary in Belgium, as the case may be, an affidavit confirming his
non-resident status in Belgium.

  Tax on delivery of bearer securities

     A tax is levied upon the physical delivery of common stock pursuant to
their subscription or their acquisition for consideration through a professional
intermediary. This tax is also due upon the delivery of common stock pursuant to
a withdrawal of these common stock from "open custody."

     The tax is due, at the rate of 0.2%, on the sums payable by the subscriber
or the acquiror in case of subscription or acquisition or the sales value of the
common stock, as estimated by the custodian in case of withdrawal from "open
custody."

     However, an exemption is available for deliveries to recognized
professional intermediaries (such as credit institutions) acting for their own
account. An exemption is also available for delivery of common stock, which are
held in "open custody", to a non-resident.

                                       A-6
<PAGE>   107

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

10,000,000 DEPOSITARY SHARES EACH REPRESENTING 1/100 OF A SHARE OF 7 1/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK, 100,000 SHARES OF 7 1/4% CUMULATIVE
CONVERTIBLE PREFERRED STOCK, AND 8,746,000 SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF, OR PAYABLE AS DIVIDENDS ON, THE DEPOSITARY SHARES OR THE 7 1/4%
CUMULATIVE CONVERTIBLE PREFERRED STOCK.

                     [GLOBAL TELESYSTEMS GROUP, INC. LOGO]
                         GLOBAL TELESYSTEMS GROUP, INC.

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

                                   PROSPECTUS
                            -----------------------


                                 JUNE    , 1999


- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   108

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

     The following table sets forth the estimated expenses to be borne by GTS in
connection with the offering of the securities being hereby registered.


<TABLE>
<CAPTION>
                            ITEM
                            ----
<S>                                                           <C>
SEC Registration Fee........................................  $174,249
Accounting Fees and Expenses................................    20,000
Legal Fees and Expenses.....................................    20,000
Printing Expenses...........................................    50,000
Miscellaneous...............................................    10,751
                                                              --------
          TOTAL.............................................  $270,000
                                                              ========
</TABLE>


ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

     Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.

     Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omission not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.

     GTS' Certificate of Incorporation (the "Certificate") provides that the
GTS' Directors shall not be liable to the Company 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 the GTS'

                                      II-1
<PAGE>   109

By-Laws further provide that the Company shall indemnify its directors and
officers to the fullest extent permitted by the DGCL.

     The directors and officers of GTS are covered under directors' and
officers' liability insurance policies maintained by GTS.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

     The foregoing reflects a 3-for-2 common stock split and an increase in the
par value per share of common stock to $0.10 effective December 1997.

     Within the past three years GTS issued securities which were not registered
under the Securities Act of 1933, as amended (the "Securities Act") as follows:

     On March 13, 1995, GTS issued 400,000 shares of common stock, par value
$0.10 per share, pursuant to a stock purchase agreement. The shares were issued
to CIBV Liquidating B.V., a closed company with limited liability organized
under the laws of the Netherlands in exchange for the interest of GTS in
PrimTelefone. No underwriter or underwriting discount was involved in the
offering. Exemption from registration was claimed under Section 4(2) of the
Securities Act regarding transactions by an issuer not involving any public
offering.

     On June 21, 1995, GTS issued 5,090,876 shares of common stock, par value
$0.10 per share, at a purchase price of $9.00 per share, for an aggregate
offering price of $45.8 million, pursuant to a stock purchase agreement. In
addition to (i) certain investment funds and (ii) certain individual private
investors, these shares were issued to certain members of management and various
entities affiliated with certain members of management. No underwriter or
underwriting discount was involved in the offering. Exemption from registration
was claimed under Section 4(2) of the Securities Act regarding transactions by
an issuer not involving any public offering.

     On January 19, 1996, and June 6, 1996, GTS granted the Soros associates an
aggregate of 4,444,443 warrants, each warrant to purchase one share of common
stock, par value $0.10 per share, at an exercise price of $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 were issued in connection with GTS' issuance for cash of $40 million of
notes to the Soros associates, which notes bear interest at a rate of 10% per
annum and mature on March 3, 2001. No underwriter or underwriting discount was
involved in the offering. Exemption from registration was claimed under Section
4(2) of the Securities Act regarding transactions by an issuer not involving any
public offering.

     On February 2, 1996, GTS granted affiliates of Capital Research
International an aggregate of 3,333,333 warrants, each warrant to purchase one
share of common stock, par value $0.10 per share, at an exercise price of $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 were issued in connection with GTS' issuance for cash
of $30 million of notes to affiliates of Capital Research International, which
notes bear interest at a rate of 10% per annum and mature on March 31, 2001. No
underwriter or underwriting discount was involved in the offering. Exemption
from registration was claimed under Section 4(2) of the Securities Act regarding
transactions by an issuer not involving any public offering.

     On July 23, 1996, July 31, 1996, August 8, 1996, August 22, 1996 and
September 12, 1996 GTS issued an aggregate of 8,348,532 shares of common stock,
par value $0.10 per share, at a purchase price of $13.33 per share, for an
aggregate offering price of $111 million, pursuant to a stock purchase
agreement. In addition to (i) certain investment funds and (ii) certain
individual private investors, these shares were issued to certain members of
management and various entities affiliated with certain members of management.
Exemption from registration was claimed under Section 4(2) of the Securities Act
regarding transactions by an issuer not involving any public offering.

                                      II-2
<PAGE>   110

     On July 14, 1997 and July 31, 1997, GTS issued an aggregate $141,295,000 of
its Senior Subordinated Convertible Bonds due 2000, convertible into the common
stock, par value $0.10 per share, at a purchase price of 100%, pursuant to a
subscription agreement. UBS Securities LLC, Donaldson, Lufkin & Jenrette
Securities Corporation and Merrill Lynch & Co. acted as managers in the offering
and the aggregate discount was $5,651,800. The securities were sold to a limited
number of qualified institutional buyers as defined in Rule 144A under the
Securities Act and to non-U.S. persons outside the United States. Exemption from
registration was claimed under Rule 144A and Regulation S of the Securities Act.

     On August 15, 1997, August 29, 1997 and September 5, 1997, GTS issued an
aggregate 2,502,686 shares of common stock, par value $0.10 per share, at a
purchase price of $15.67 per share, for an aggregate offering price of $39.2
million, pursuant to a stock purchase agreement. In addition to (i) certain
investment funds and (ii) certain individual private investors, these shares
were issued to certain members of management and various entities affiliated
with certain members of management. Exemption from registration was claimed
under Section 4(2) of the Securities Act regarding transactions by an issuer not
involving any public offering.

     On August 29, 1997, GTS issued $3.5 million of its Senior Subordinated
Convertible Bonds due 2000, convertible into the common stock, par value $0.10
per share, at a purchase price of 100%. In addition to (i) certain investment
funds and (ii) certain individual private investors, these shares were issued to
certain members of management and various entities affiliated with certain
members of management. Exemption from registration was claimed under Section
4(2) of the Securities Act regarding transactions by an issuer not involving any
public offering.

     In connection with the acquisition of NetSource discussed in Item 2 of this
report on December 31, 1998, GTS issued 3,873,705 shares of its common stock to
holders of NetSource stock who accepted, as of October 30, 1998, GTS' offer to
purchase the NetSource stock owned by such holders. GTS received the NetSource
shares tendered as consideration for the common stock. No underwriters were
involved in the issuance of the common stock. GTS issued the common stock
pursuant to Rule 903 under the Securities Act and GTS' offer was made
exclusively to non-U.S. persons, within the meaning of Rule 902 under the
Securities Act, not in the United States. GTS extended its offer to purchase the
NetSource stock to December 15, 1998 and, consequently, additional shares of the
GTS's common stock will be issued pursuant to this transaction. That additional
issuance also will be effected in accordance with Rule 903 of the Securities Act
and will be disclosed in a subsequent filing with the SEC.

     In connection with the acquisition of Omnicom, GTS issued 1,850,497 shares
of its common stock as partial consideration for the purchase of 52% of the
shares of Omnicom.

ITEM 16. EXHIBITS

     The following is a list of exhibits filed as a part of this registration
statement.

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1***         -- Offer Agreement dated as of December 8, 1998 between the
                            Registrant and Esprit Telecom Telecom Group plc
          2.2***         -- Irrevocable Undertaking by Walter Anderson dated as of
                            December 8, 1998
          2.3***         -- Irrevocable Undertaking by Apax Funds Nominees Limited
                            dated as of December 8, 1998
          2.3(a)***      -- Amendment to the Irrevocable Undertaking by Apax Funds
                            Nominees Limited dated as of December 8, 1998, dated
                            December 12, 1998
          2.4***         -- Irrevocable Undertaking by Gold & Appel Transfer S.A.
                            dated as of December 8, 1998
</TABLE>

                                      II-3
<PAGE>   111


<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.5***         -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
                            dated as of December 8, 1998
          2.6***         -- Irrevocable Undertaking by Sir Robin Biggam dated as of
                            December 8, 1998
          2.7***         -- Irrevocable Undertaking by John McMonigall dated as of
                            December 8, 1998
          2.8***         -- Irrevocable Undertaking by Roy Merritt dated as of
                            December 8, 1998
          2.9***         -- Irrevocable Undertaking by David Oertle dated as of
                            December 8, 1998
          2.10***        -- Irrevocable Undertaking by Michael Potter dated as of
                            December 8, 1998
          2.11***        -- Irrevocable Undertaking by Dominic Shorthouse dated as of
                            December 8, 1998
          3.1**          -- Certificate of Incorporation of SFMT, Inc.
          3.2**          -- Certificate of Correction to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on October 8, 1993
          3.3**          -- Certificate of Ownership and Merger Merging San
                            Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
                            with the Delaware Secretary of State on November 3, 1993
          3.4**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on January 12, 1995
          3.5**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on February 22, 1995
          3.6**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on October 16, 1996
          3.7**          -- By-laws of SFMT, Inc.
          3.8**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on December 1, 1997
          3.9**          -- Form of Amended and Restated By-laws of Global
                            TeleSystems Group, Inc. (supersedes By-laws of SFMT, Inc.
                            filed as Exhibit 3.7)
          3.10+          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on January 29, 1998
          3.11+          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on February 9, 1998.
          3.12+          -- Certificate of Designation of the Series A Preferred
                            Stock of Global TeleSystems Group, Inc.
          3.13#          -- Certificate of Designation of the 7 1/4% Cumulative
                            Convertible Preferred Stock of Global TeleSystems Group,
                            Inc.
          4.1**          -- Form of Specimen Stock Certificate for Common Stock of
                            the Registrant
          4.2**          -- Indenture dated as of July 14, 1997 between Global
                            TeleSystems Group, Inc. and The Bank of New York
                            (including the form of Senior Subordinated Convertible
                            Bond due 2000 as an exhibit thereto)
          4.3**          -- Registration Rights Agreement, dated as of July 14, 1997,
                            between Global TeleSystems Group, Inc. and UBS Securities
                            LLC.
</TABLE>


                                      II-4
<PAGE>   112


<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          4.4**          -- Indenture dated as of August 19, 1997 between Hermes
                            Europe Railtel B.V. and The Bank of New York (including
                            the form of 11 1/2% Senior Note due 2007 as an exhibit
                            thereto)
          4.5**          -- Registration Rights Agreement dated as of August 19, 1997
                            between Hermes Europe Railtel B.V. and Donaldson, Lufkin
                            & Jenrette Securities Corporation, UBS Securities LLC,
                            and Lehman Brothers, Inc.
          4.6**          -- Form of Rights Agreement between Global TeleSystems
                            Group, Inc. and The Bank of New York, as Rights Agent
          4.7+           -- Indenture dated as of February 10, 1998 between Global
                            TeleSystems Group, Inc. and The Bank of New York
                            (including the form of 9 7/8% Senior Notes due 2005 as an
                            exhibit thereto)
          4.8++          -- Indenture dated as of July 8, 1998 between Global
                            TeleSystems Group, Inc. and The Bank of New York relating
                            to the Company's 5 3/4% Convertible Senior Debentures due
                            2010
          4.9***         -- Registration Rights Agreement dated as of December 8,
                            1998 by and among the Registrant, Apax Funds Nominees
                            Limited and Warburg, Pincus Ventures, L.P.
          4.10*****      -- Registration Rights Agreement dated as of April 23, 1999
                            by and among Global TeleSystems Group, Inc., and Merrill
                            Lynch, Pierce, Fenner & Smith Incorporated, Donaldson
                            Lufkin & Jenrette Securities Corporation, Bear, Stearns &
                            Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers
                            Inc.
          5.1#           -- Opinion of Shearman & Sterling respecting the Securities
                            registered hereby.
         10.1**          -- Senior Note Purchase Agreement, dated as of January 19,
                            1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
         10.1(a)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
         10.1(b)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
         10.1(c)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 23, 1996
         10.1(d)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated September 16, 1996
         10.1(e)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 11, 1997
         10.1(f)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 29, 1997
         10.1(g)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated September 29, 1997
</TABLE>


                                      II-5
<PAGE>   113

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.2**          -- Registration Rights Letter Agreement, dated as of January
                            19, 1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
         10.3**          -- Warrant Agreement, dated as of January 19, 1996, among
                            Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.4**          -- Joint Venture Letter Agreement, dated January 19, 1996,
                            among Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.5            -- Intentionally Omitted
         10.6**          -- Registration Rights Letter Agreement, dated June 6, 1996,
                            among Global TeleSystems Group, Inc., The Open Society
                            Institute, Winston Partners II LDC and Winston Partners
                            II LLC
         10.7**          -- Warrant Agreement, dated as of June 6, 1996, between
                            Global TeleSystems Group, Inc., The Open Society
                            Institute, Winston Partners II LDC and Winston Partners
                            II LLC
         10.8**          -- Senior Note Purchase Agreement, dated as of February 2,
                            1996, between Global TeleSystems Group, Inc. and Emerging
                            Markets Growth Fund, Inc.
         10.8(a)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996 (see Exhibit No. 10.1(b))
         10.8(b)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996
         10.8(c)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 25,
                            1996
         10.8(d)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            10, 1996
         10.8(e)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            16, 1996
         10.8(f)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated December
                            30, 1996
         10.8(g)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated May 13,
                            1997
         10.8(h)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 20,
                            1997
         10.8(i)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 11,
                            1997
         10.8(j)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 21,
                            1997
</TABLE>

                                      II-6
<PAGE>   114

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.8(k)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated August 14,
                            1997
         10.8(l)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            29, 1997
         10.9**          -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Emerging Markets Growth Fund, Inc.
         10.10**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Emerging Markets
                            Growth Fund, Inc.
         10.11           -- Intentionally Omitted
         10.12**         -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Capital International Emerging Markets Funds
         10.13**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Capital International
                            Emerging Markets Funds
         10.14+          -- Restated and Amended Global TeleSystems Group, Inc.
                            Non-Employee Directors' Stock Option Plan
         10.15+          -- Restated and Amended GTS-Hermes, Inc. 1994 Stock Option
                            Plan
         10.16**         -- Restricted Stock Grant letter, dated as of January 1,
                            1995
         10.17**         -- Employment Agreement dated as of January 1995 between
                            SFMT, Inc. and Jan Loeber
         10.18**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Louis Toth
         10.19**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Gerald W. Thames
         10.20**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Raymond J. Marks
         10.21**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Henry Radzikowski
         10.22**         -- SFMT, Inc. Equity Compensation Plan
         10.23**         -- Form of Non-Statutory Stock Option Agreement
         10.24+          -- Third Amended and Restated 1992 Stock Option Plan of
                            Global TeleSystems Group Inc. dated as of September 25,
                            1997
         10.25**         -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                            Option Grant
         10.26**         -- Agreement on the Creation and Functions of the Joint
                            Venture of EDN Sovintel, dated June 18, 1990
         10.27**         -- Stock Purchase Agreement among Global TeleSystems Group,
                            Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
                            Limited, and MTU-Inform, dated September 6, 1995
         10.28**         -- Certificate of Registration of Revised and Amended
                            Foundation Document in the State Registration of
                            Commercial Organizations, dated May 30, 1996
         10.29**         -- Agreement on the Creation and Functions of the Joint
                            Venture Sovam Teleport, dated May 26, 1992
</TABLE>

                                      II-7
<PAGE>   115

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.30**         -- Amended and Restated Joint Venture Agreement between GTS
                            Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
                            Erik Jennes, dated July 6, 1995
         10.31**         -- Amended and Restated Shareholders' Agreement between HIT
                            Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
                            Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
                            Hermes Europe Railtel B.V., dated July, 1997
         10.31(a)**      -- Shareholders' Agreement among the Hermes Europe Railtel,
                            B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
                            Swed Carrier (incorporated by reference to Exhibit 10.1
                            to the Hermes Europe Railtel B.V.'s Registration
                            Statement on Form S-4 (File No. 333-37719) filed on
                            December 11, 1997) (supersedes the Amended and Restated
                            Shareholders' Agreement incorporated by reference as
                            Exhibit 10.31 to this Registration Statement)
         10.32**         -- Company Agreement between The Societe National de
                            Financement, GTS S.A.M. and The Principality of Monaco,
                            dated September 27, 1995
         10.33**         -- Joint Venture Agreement between SFMT-Hungaro Inc. and
                            Montana Holding Vagyonkezelo Kft., dated December 23,
                            1993
         10.34**         -- Joint Venture and Shareholders' Agreement among Gerard
                            Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
                            and Microsystem Telecom Rt., dated August 5, 1994
         10.35**         -- Agreement on the Establishment of Limited Liability
                            Company between SFMT-Czech, Inc. and B&H s.r.o., dated
                            July 12, 1994
         10.36**         -- Formation of the Equity Joint Venture between GTS and
                            SSTIC, dated April 12, 1995
         10.37**         -- Contract to Establish the Sino-foreign Cooperative Joint
                            Venture Beijing Tianmu Satellite Communications
                            Technology Co., Ltd, amended, by and between China
                            International Travel Service Telecom Co., Ltd. and
                            American China Investment Corporation, dated March 27,
                            1996
         10.38**         -- Joint Venture Contract between GTS TransPacific Ventures
                            Limited and Shanghai Intelligence Engineering, Inc.,
                            dated March 28, 1996
         10.39**         -- Agreement between Global TeleSystems Group, Inc. and
                            Cesia S.A., dated June 21, 1997
         10.40**         -- Consulting Agreement between SFMT, Inc. and Alan B.
                            Slifka, dated March 1, 1994
         10.41**         -- Consulting Agreement between Global TeleSystems Group,
                            Inc. and Bernard J. McFadden, dated August 15, 1996
         10.42**         -- Consulting Agreement between CESIA S.A. and Hermes Europe
                            Railtel B.V., dated June 20, 1997
         10.43++         -- Master Agreement, dated June   , 1998 between Ebone
                            Holding Association, Ebone A/S, Hermes Europe Railtel
                            Holdings B.V. and Hermes Europe Railtel (Ireland) Limited
         10.44+++        -- Plusnet Acquisition Agreement between Esprit Telecom
                            Group plc and Plusnet Gesellschaft fur Netzwerk Services
                            GmbH
         10.45****       -- Press Announcement of Esprit Telecom Group plc, dated
                            December 8, 1998, announcing the signing of a definitive
                            offer agreement with Global TeleSystems Group, Inc.
         10.46++++       -- Form of Undertaking of shareholders of NetSource ASA made
                            in connection with the acquisition of NetSource ASA by
                            Global TeleSystems Group, Inc.
</TABLE>

                                      II-8
<PAGE>   116

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.47++++       -- Form of Amendment Agreement to the Undertaking of
                            shareholders of NetSource ASA made in connection with the
                            acquisition of NetSource ASA by Global TeleSystems Group,
                            Inc.
         10.48++++       -- Form of Waiver Agreement in made connection with the
                            acquisition of NetSource ASA by Global TeleSystems Group,
                            Inc.
         10.49++++       -- Form of Waiver Agreement with certain shareholders of
                            NetSource ASA made in connection with the acquisition of
                            NetSource ASA by Global TeleSystems Group, Inc.
         10.50+++++      -- Indenture dated as of December 18, 1997 between Esprit
                            Telecom Group plc, as Issuer, and The Bank of New York,
                            as Trustee, Registrar and Paying Agent, relating to the
                            Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
                            2007 and 11 1/2% DM Senior Notes due 2007
         10.51+++        -- Indenture dated as of June 24, 1998 between Esprit
                            Telecom Group plc, as Issuer, and The Bank of New York,
                            as Trustee, Registrar and Paying Agent, relating to the
                            Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
                            2008 and 11% DM Senior Notes due 2008
         10.52***        -- Supplemental Indenture, dated December 23, 1998 of
                            $230,000,000 11 1/2% Senior Notes due 2007, supplementing
                            the indenture dated as of December 18, 1997, between
                            Esprit Telecom Group plc, as issuer, and The Bank of New
                            York, as Trustee, Registrar and Paying Agent
         10.53***        -- Supplemental Indenture, dated December 23, 1998 of DM
                            125,000,000 11 1/2% Senior Notes due 2007, supplementing
                            the indenture dated as of December 18, 1997, between
                            Esprit Telecom Group plc, as issuer, and The Bank of New
                            York, as Trustee, Registrar and Paying Agent
         10.54***        -- Supplemental Indenture, dated December 23, 1998 of DM
                            150,000,000 11% Senior Notes due 2008, supplementing the
                            indenture dated as of June 24, 1998, between Esprit
                            Telecom Group plc, as issuer and The Bank of New York, as
                            Trustee, Registrar and Paying Agent
         10.55***        -- Supplemental Indenture, dated December 23, 1998 of
                            $150,000,000 10 7/8% Senior Notes due 2008, supplementing
                            the indenture dated as of June 24, 1998, between Esprit
                            Telecom Group plc, as issuer, and The Bank of New York,
                            as Trustee, Registrar and Paying Agent
         10.56*****      -- Purchase Agreement dated as of April 19, 1999 by and
                            among Global TeleSystems Group, Inc., and Apax Funds
                            Nominees Limited and Warburg, Pincus Ventures, L.P. and
                            Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
                            Smith Incorporated, Donaldson, Lufkin & Jenrette
                            Securities Corporation, Bear, Stearns & Co. Inc.,
                            Dresdner Kleinwort Benson North American LLC, BT Alex.
                            Brown Incorporated, Lehman Brothers Inc., Prudential
                            Securities Incorporated, ING Baring Furman Selz LLC,
                            BancBoston Robertson Stephens Inc., CIBC Oppenheimer
                            Corp., ABN AMRO Incorporated, Arnhold and S.
                            Bleichroeder, Inc. and Credit Suisse First Boston
                            Corporation.
         10.57*****      -- Purchase Agreement dated as of April 19, 1999 by and
                            among Global TeleSystems Group, Inc. and Merrill Lynch &
                            Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
                            Donaldson, Lufkin & Jenrette Securities Corporation,
                            Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated,
                            and Lehman Brothers Inc.
</TABLE>

                                      II-9
<PAGE>   117


<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.58*****      -- Agreement for the transfer of Omnicom Shares dated as of
                            April 14, 1999 by and among Alain Nicalazzi, Florent
                            Martenne-Duplan, Philippe Ait Yahia and various other
                            Omnicom shareholders and Esprit Telecom Holdings, Limited
                            and Global TeleSystems Group, Inc.


         12.1#           -- Statement Re: Computation of Deficiency of Earnings
                            Available to Cover Fixed Charges
         21.1*           -- List of Subsidiaries of the Registrant


         23.1#           -- Consent of Ernst & Young LLP, Independent Auditors


         23.2#           -- Consent of PricewaterhouseCoopers, Independent
                            Accountants


         23.3#           -- Consent of Shearman & Sterling (included in its opinion
                            delivered under Exhibit No. 5.1)


         24.1##          -- Powers of Attorney (included on signature page to this
                            registration statement)
         27.1******      -- Financial Data Schedule extracted from our March 31, 1999
                            unaudited financial statements
</TABLE>


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

     # Filed herewith.

    ## Previously filed.

     * Incorporated by reference to the corresponding exhibit to our Annual
       Report on Form 10-K for the year ended December 31, 1998, filed on March
       23, 1999.
    ** Incorporated by reference to the corresponding exhibit to our
       Registration Statement on Form S-1 (File No. 333-36555), filed on
       September 26, 1997.
   *** Incorporated by reference to the corresponding exhibit to our
       Registration Statement on Form S-4 (File No. 333-68511), filed on
       December 8, 1998.
  **** Incorporated by reference to the corresponding exhibit to the Esprit
       Telecom Group plc Annual Report on Form 20-F for the year ended September
       30, 1998, filed on December 24, 1998.
 ***** Incorporated by reference to the corresponding exhibit to our Current
       Report on Form 8-K, dated April 14, 1999 and filed on April 28, 1999

****** Incorporated by reference to the corresponding exhibit to our Quarterly
       Report on Form 10-Q for the three month period ended March 31, 1999,
       filed on May 17, 1999


     + Incorporated by reference to the corresponding exhibit to our Annual
       Report on Form 10-K for the year ended December 31, 1997, filed on March
       31, 1998.

    ++ Incorporated by reference to the corresponding exhibit to our
       Registration Statement on Form S-1 (File No. 333-52733), filed on May
       14, 1998.

   +++ Incorporated by reference to the corresponding exhibit to the Esprit
       Telecom Group plc Registration Statement on Form F-4 (File No. 333-9292),
       filed on August 13, 1998.

  ++++ Incorporated by reference to the corresponding exhibit to the Global
       TeleSystems Group, Inc. Form 8-K, filed on November 30, 1998.

 +++++ Incorporated by reference to the corresponding exhibit to the Esprit
       Telecom Group plc Registration Statement on Form F-1 (File No. 333-8012),
       filed on December 10, 1997.

ITEM 17. UNDERTAKINGS

     The undersigned registrant hereby undertakes:

          (1) To file, during any period in which offers or sales are being
     made, a post-effective amendment to this registration statement:

             (i) To include any prospectus required by Section 10(a)(3) of the
        Securities Act of 1933.

             (ii) To reflect in the prospectus any facts or events arising after
        the effective date of the registration statement (or the most recent
        post-effective amendment thereof) which, individually

                                      II-10
<PAGE>   118

        or in the aggregate, represent a fundamental change in the information
        set forth in the registration statement.

             (iii) To include any material information with respect to the plan
        of distribution not previously disclosed in the registration statement
        or any material change to such information in the registration
        statement.

Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.

          (2) That, for the purpose of determining any liability under the
     Securities Act of 1933, each such post-effective amendment shall be deemed
     to be a new registration statement relating to the securities offered
     therein, and the offering of such securities at that time shall be deemed
     to be the initial bona fide offering thereof.

          (3) To remove from registration by means of a post-effective amendment
     any of the securities being registered which remain unsold at the
     termination of the offering.

          (4) That, for purposes of determining any liability under the
     Securities Act of 1933, each filing of the registrant's annual report
     pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
     of 1934 (and, where applicable, each filing of an employee benefit plan's
     annual report pursuant to Section 15(d) of the Securities Exchange Act of
     1934) that is incorporated by reference in the registration statement shall
     be deemed to be a new registration statement relating to the securities
     offered therein, and the offering of such securities at that time shall be
     deemed to be the initial bona fide offering thereof.

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under "Item
14 -- Indemnification of Directors and Officers" hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

                                      II-11
<PAGE>   119

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of McLean, Commonwealth of Virginia, on this third day
of June, 1999.


                                            GLOBAL TELESYSTEMS GROUP, INC.

                                            By:    /s/ H. BRIAN THOMPSON
                                              ----------------------------------
                                                Name: H. Brian Thompson
                                                Title: Chairman and
                                                       Chief Executive Officer

     We, the undersigned officers and directors of Global Telesystems Group,
Inc. hereby severally constitute and appoint, William H. Seippel, Alan Krenek
and Grier C. Raclin, and each of them, with full power of substitution, our true
and lawful attorney with full power to him singly to sign for us and in our
names in the capacities indicated below the Registration Statement on Form S-3
filed herewith and any and all pre-effective and post-effective amendments to
said Registration Statement, and, in connection with any registration of
additional securities pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, to sign any abbreviated registration statement and any and all
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, in each case, with the Securities and
Exchange Commission, and generally to do all such things in our names and on our
behalf in our capacities as officers and directors to enable Global TeleSystems
Group, Inc. to comply with the provisions of the Securities Act of 1933, as
amended, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to said Registration Statement and any and all amendments thereto.


     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the third day of June, 1999.



<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE
                      ---------                                      -----
<C>                                                    <S>                                 <C>

                          *                            Chairman and Chief Executive
- -----------------------------------------------------    Officer (principal executive
                  H. Brian Thompson                      officer)

                                                       President and Director
- -----------------------------------------------------
                   Robert J. Amman

                          *                            Executive Vice President --
- -----------------------------------------------------    Finance and Chief Financial
                 William H. Seippel                      Officer (principal financial and
                                                         accounting officer)

                          *                            Executive Vice Chairman of the
- -----------------------------------------------------    Board of Directors
                  Gerald W. Thames

                          *                            Executive Vice Chairman of the
- -----------------------------------------------------    Board of Directors
                   Alan B. Slifka
</TABLE>


                                      II-12
<PAGE>   120


<TABLE>
<CAPTION>
                      SIGNATURE                                      TITLE
                      ---------                                      -----
<C>                                                    <S>                                 <C>

                          *                            Director
- -----------------------------------------------------
                      David Dey

                          *                            Director
- -----------------------------------------------------
                     Roger Hale

                          *                            Director
- -----------------------------------------------------
                  Bernard McFadden

                          *                            Director
- -----------------------------------------------------
                 Stewart J. Paperin

                          *                            Director
- -----------------------------------------------------
                    W. James Peet

                          *                            Director
- -----------------------------------------------------
                    Jean Salmona

                          *                            Director
- -----------------------------------------------------
                     Joel Schatz

                          *                            Director
- -----------------------------------------------------
                    Frank V. Sica

                                                       Director
- -----------------------------------------------------
                    Adam Solomon

              By: /s/ H. BRIAN THOMPSON
  -------------------------------------------------
                  H. Brian Thompson
                  Attorney-in-Fact
                  for the Directors
</TABLE>


                                      II-13
<PAGE>   121

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          2.1***         -- Offer Agreement dated as of December 8, 1998 between the
                            Registrant and Esprit Telecom Telecom Group plc
          2.2***         -- Irrevocable Undertaking by Walter Anderson dated as of
                            December 8, 1998
          2.3***         -- Irrevocable Undertaking by Apax Funds Nominees Limited
                            dated as of December 8, 1998
          2.3(a)***      -- Amendment to the Irrevocable Undertaking by Apax Funds
                            Nominees Limited dated as of December 8, 1998, dated
                            December 12, 1998
          2.4***         -- Irrevocable Undertaking by Gold & Appel Transfer S.A.
                            dated as of December 8, 1998
          2.5***         -- Irrevocable Undertaking by Warburg, Pincus Ventures, L.P.
                            dated as of December 8, 1998
          2.6***         -- Irrevocable Undertaking by Sir Robin Biggam dated as of
                            December 8, 1998
          2.7***         -- Irrevocable Undertaking by John McMonigall dated as of
                            December 8, 1998
          2.8***         -- Irrevocable Undertaking by Roy Merritt dated as of
                            December 8, 1998
          2.9***         -- Irrevocable Undertaking by David Oertle dated as of
                            December 8, 1998
          2.10***        -- Irrevocable Undertaking by Michael Potter dated as of
                            December 8, 1998
          2.11***        -- Irrevocable Undertaking by Dominic Shorthouse dated as of
                            December 8, 1998
          3.1**          -- Certificate of Incorporation of SFMT, Inc.
          3.2**          -- Certificate of Correction to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on October 8, 1993
          3.3**          -- Certificate of Ownership and Merger Merging San
                            Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
                            with the Delaware Secretary of State on November 3, 1993
          3.4**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on January 12, 1995
          3.5**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on February 22, 1995
          3.6**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on October 16, 1996
          3.7**          -- By-laws of SFMT, Inc.
          3.8**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on December 1, 1997
          3.9**          -- Form of Amended and Restated By-laws of Global
                            TeleSystems Group, Inc. (supersedes By-laws of SFMT, Inc.
                            filed as Exhibit 3.7)
          3.10+          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on January 29, 1998
          3.11+          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on February 9, 1998.
</TABLE>
<PAGE>   122


<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          3.12+          -- Certificate of Designation of the Series A Preferred
                            Stock of Global Telesystems, Group Inc.
          3.13#          -- Certificate of Designation of the 7 1/4% Cumulative
                            Convertible Preferred Stock of Global TeleSystems Group,
                            Inc.
          4.1**          -- Form of Specimen Stock Certificate for Common Stock of
                            the Registrant
          4.2**          -- Indenture dated as of July 14, 1997 between Global
                            Telesystems Group, Inc. and The Bank of New York
                            (including the form of Senior Subordinated Convertible
                            Bond due 2000 as an exhibit thereto)
          4.3**          -- Registration Rights Agreement, dated as of July 14, 1997,
                            between Global TeleSystems Group, Inc. and UBS Securities
                            LLC.
          4.4**          -- Indenture dated as of August 19, 1997 between Hermes
                            Europe Railtel B.V. and The Bank of New York (including
                            the form of 11 1/2% Senior Note due 2007 as an exhibit
                            thereto)
          4.5**          -- Registration Rights Agreement dated as of August 19, 1997
                            between Hermes Europe Railtel B.V. and Donaldson, Lufkin
                            & Jenrette Securities Corporation, UBS Securities LLC,
                            and Lehman Brothers, Inc.
          4.6**          -- Form of Rights Agreement between Global TeleSystems
                            Group, Inc. and The Bank of New York, as Rights Agent
          4.7+           -- Indenture dated as of February 10, 1998 between Global
                            TeleSystems Group, Inc. and The Bank of New York
                            (including the form of 9 7/8% Senior Notes due 2005 as an
                            exhibit thereto)
          4.8++          -- Indenture dated as of July 8, 1998 between Global
                            TeleSystems Group, Inc. and The Bank of New York relating
                            to the Company's 5 3/4% Convertible Senior Debentures due
                            2010
          4.9***         -- Registration Rights Agreement dated as of December 8,
                            1998 by and among the Registrant, Apax Funds Nominees
                            Limited and Warburg, Pincus Ventures, L.P.
          4.10*****      -- Registration Rights Agreement dated as of April 23, 1999
                            by and among Global TeleSystems Group, Inc., and Merrill
                            Lynch, Pierce, Fenner & Smith Incorporated, Donaldson
                            Lufkin & Jenrette Securities Corporation, Bear, Stearns &
                            Co. Inc., BT Alex. Brown Incorporated and Lehman Brothers
                            Inc.
          5.1#           -- Opinion of Shearman & Sterling respecting the Securities
                            registered hereby.
         10.1**          -- Senior Note Purchase Agreement, dated as of January 19,
                            1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
         10.1(a)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
         10.1(b)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
         10.1(c)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 23, 1996
         10.1(d)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated September 16, 1996
</TABLE>

<PAGE>   123

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.1(e)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 11, 1997
         10.1(f)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 29, 1997
         10.1(g)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated September 29, 1997
         10.2**          -- Registration Rights Letter Agreement, dated as of January
                            19, 1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
         10.3**          -- Warrant Agreement, dated as of January 19, 1996, among
                            Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.4**          -- Joint Venture Letter Agreement, dated January 19, 1996,
                            among Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.5            -- Intentionally Omitted
         10.6**          -- Registration Rights Letter Agreement, dated June 6, 1996,
                            among Global Telesystems Group, Inc., The Open Society
                            Institute, Winston Partners II LDC and Winston Partners
                            II LLC
         10.7**          -- Warrant Agreement, dated as of June 6, 1996, between
                            Global TeleSystems Group, Inc., The Open Society
                            Institute, Winston Partners II LDC and Winston Partners
                            II LLC
         10.8**          -- Senior Note Purchase Agreement, dated as of February 2,
                            1996, between Global TeleSystems Group, Inc. and Emerging
                            Markets Growth Fund, Inc.
         10.8(a)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996 (see Exhibit No. 10.1(b))
         10.8(b)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996
         10.8(c)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 25,
                            1996
         10.8(d)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            10, 1996
         10.8(e)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            16, 1996
         10.8(f)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated December
                            30, 1996
         10.8(g)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated May 13,
                            1997
</TABLE>
<PAGE>   124

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.8(h)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 20,
                            1997
         10.8(i)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 11,
                            1997
         10.8(j)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 21,
                            1997
         10.8(k)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated August 14,
                            1997
         10.8(l)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            29, 1997
         10.9**          -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Emerging Markets Growth Fund, Inc.
         10.10**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Emerging Markets
                            Growth Fund, Inc.
         10.11           -- Intentionally Omitted
         10.12**         -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Capital International Emerging Markets Funds
         10.13**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Capital International
                            Emerging Markets Funds
         10.14+          -- Restated and Amended Global TeleSystems Group, Inc.
                            Non-Employee Directors' Stock Option Plan
         10.15+          -- Restated and Amended GTS-Hermes, Inc. 1994 Stock Option
                            Plan
         10.16**         -- Restricted Stock Grant letter, dated as of January 1,
                            1995
         10.17**         -- Employment Agreement dated as of January 1995 between
                            SFMT, Inc. and Jan Loeber
         10.18**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Louis Toth
         10.19**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Gerald W. Thames
         10.20**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Raymond J. Marks
         10.21**         -- Employment Agreement dated as of April 1996 between GTS
                            Group, Inc. and Henry Radzikowski
         10.22**         -- SFMT, Inc. Equity Compensation Plan
         10.23**         -- Form of Non-Statutory Stock Option Agreement
         10.24+          -- Third Amended and Restated 1992 Stock Option Plan of
                            Global TeleSystems Group Inc. dated as of September 25,
                            1997
         10.25**         -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                            Option Grant
</TABLE>
<PAGE>   125

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.26**         -- Agreement on the Creation and Functions of the Joint
                            Venture of EDN Sovintel, dated June 18, 1990
         10.27**         -- Stock Purchase Agreement among Global TeleSystems Group,
                            Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
                            Limited, and MTU-Inform, dated September 6, 1995
         10.28**         -- Certificate of Registration of Revised and Amended
                            Foundation Document in the State Registration of
                            Commercial Organizations, dated May 30, 1996
         10.29**         -- Agreement on the Creation and Functions of the Joint
                            Venture Sovam Teleport, dated May 26, 1992
         10.30**         -- Amended and Restated Joint Venture Agreement between GTS
                            Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
                            Erik Jennes, dated July 6, 1995
         10.31**         -- Amended and Restated Shareholders' Agreement between HIT
                            Rail B.V., GTS-Hermes, Inc., Nationale Maatschappij Der
                            Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
                            Hermes Europe Railtel B.V., dated July, 1997
         10.31(a)**      -- Shareholders' Agreement among the Hermes Europe Railtel,
                            B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
                            Swed Carrier (incorporated by reference to Exhibit 10.1
                            to the Hermes Europe Railtel B.V.'s Registration
                            Statement on Form S-4 (File No. 333-37719) filed on
                            December 11, 1997) (supersedes the Amended and Restated
                            Shareholders' Agreement incorporated by reference as
                            Exhibit 10.31 to this Registration Statement)
         10.32**         -- Company Agreement between The Societe National de
                            Financement, GTS S.A.M. and The Principality of Monaco,
                            dated September 27, 1995
         10.33**         -- Joint Venture Agreement between SFMT-Hungaro Inc. and
                            Montana Holding Vagyonkezelo Kft., dated December 23,
                            1993
         10.34**         -- Joint Venture and Shareholders' Agreement among Gerard
                            Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
                            and Microsystem Telecom Rt., dated August 5, 1994
         10.35**         -- Agreement on the Establishment of Limited Liability
                            Company between SFMT-Czech, Inc. and B&H s.r.o., dated
                            July 12, 1994
         10.36**         -- Formation of the Equity Joint Venture between GTS and
                            SSTIC, dated April 12, 1995
         10.37**         -- Contract to Establish the Sino-foreign Cooperative Joint
                            Venture Beijing Tianmu Satellite Communications
                            Technology Co., Ltd, amended, by and between China
                            International Travel Service Telecom Co., Ltd. and
                            American China Investment Corporation, dated March 27,
                            1996
         10.38**         -- Joint Venture Contract between GTS TransPacific Ventures
                            Limited and Shanghai Intelligence Engineering, Inc.,
                            dated March 28, 1996
         10.39**         -- Agreement between Global TeleSystems Group, Inc. and
                            Cesia S.A., dated June 21, 1997
         10.40**         -- Consulting Agreement between SFMT, Inc. and Alan B.
                            Slifka, dated March 1, 1994
         10.41**         -- Consulting Agreement between Global TeleSystems Group,
                            Inc. and Bernard J. McFadden, dated August 15, 1996
         10.42**         -- Consulting Agreement between CESIA S.A. and Hermes Europe
                            Railtel B.V., dated June 20, 1997
</TABLE>
<PAGE>   126

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.43++         -- Master Agreement, dated June   , 1998 between Ebone
                            Holding Association, Ebone A/S, Hermes Europe Railtel
                            Holdings B.V. and Hermes Europe Railtel (Ireland) Limited
         10.44+++        -- Plusnet Acquisition Agreement between Esprit Telecom
                            Group plc and Plusnet Gesellschaft fur Netzwerk Services
                            GmbH
         10.45****       -- Press Announcement of Esprit Telecom Group plc, dated
                            December 8, 1998, announcing the signing of a definitive
                            offer agreement with Global TeleSystems Group, Inc.
         10.46++++       -- Form of Undertaking of shareholders of NetSource ASA made
                            in connection with the acquisition of NetSource ASA by
                            Global TeleSystems Group, Inc.
         10.47++++       -- Form of Amendment Agreement to the Undertaking of
                            shareholders of NetSource ASA made in connection with the
                            acquisition of NetSource ASA by Global TeleSystems Group,
                            Inc.
         10.48++++       -- Form of Waiver Agreement in made connection with the
                            acquisition of NetSource ASA by Global TeleSystems Group,
                            Inc.
         10.49++++       -- Form of Waiver Agreement with certain shareholders of
                            NetSource ASA made in connection with the acquisition of
                            NetSource ASA by Global TeleSystems Group, Inc.
         10.50+++++      -- Indenture dated as of December 18, 1997 between Esprit
                            Telecom Group plc, as Issuer, and The Bank of New York,
                            as Trustee, Registrar and Paying Agent, relating to the
                            Esprit Telecom Group plc 11 1/2% Dollar Senior Notes due
                            2007 and 11 1/2% DM Senior Notes due 2007
         10.51+++        -- Indenture dated as of June 24, 1998 between Esprit
                            Telecom Group plc, as Issuer, and The Bank of New York,
                            as Trustee, Registrar and Paying Agent, relating to the
                            Esprit Telecom Group plc 10 7/8% Dollar Senior Notes due
                            2008 and 11% DM Senior Notes due 2008
         10.52***        -- Supplemental Indenture, dated December 23, 1998 of
                            $230,000,000 11 1/2% Senior Notes due 2007, supplementing
                            the indenture dated as of December 18, 1997, between
                            Esprit Telecom Group plc, as issuer, and The Bank of New
                            York, as Trustee, Registrar and Paying Agent
         10.53***        -- Supplemental Indenture, dated December 23, 1998 of DM
                            125,000,000 11 1/2% Senior Notes due 2007, supplementing
                            the indenture dated as of December 18, 1997, between
                            Esprit Telecom Group plc, as issuer, and The Bank of New
                            York, as Trustee, Registrar and Paying Agent
         10.54***        -- Supplemental Indenture, dated December 23, 1998 of DM
                            150,000,000 11% Senior Notes due 2008, supplementing the
                            indenture dated as of June 24, 1998, between Esprit
                            Telecom Group plc, as issuer and The Bank of New York, as
                            Trustee, Registrar and Paying Agent
         10.55***        -- Supplemental Indenture, dated December 23, 1998 of
                            $150,000,000 10 7/8% Senior Notes due 2008, supplementing
                            the indenture dated as of June 24, 1998, between Esprit
                            Telecom Group plc, as issuer, and The Bank of New York,
                            as Trustee, Registrar and Paying Agent
</TABLE>
<PAGE>   127


<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.56*****      -- Purchase Agreement dated as of April 19, 1999 by and
                            among Global TeleSystems Group, Inc., and Apax Funds
                            Nominees Limited and Warburg, Pincus Ventures, L.P. and
                            Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
                            Smith Incorporated, Donaldson, Lufkin & Jenrette
                            Securities Corporation, Bear, Stearns & Co. Inc.,
                            Dresdner Kleinwort Benson North American LLC, BT Alex.
                            Brown Incorporated, Lehman Brothers Inc., Prudential
                            Securities Incorporated, ING Baring Furman Selz LLC,
                            BancBoston Robertson Stephens Inc., CIBC Oppenheimer
                            Corp., ABN AMRO Incorporated, Arnhold and S.
                            Bleichroeder, Inc. and Credit Suisse First Boston
                            Corporation.
         10.57*****      -- Purchase Agreement dated as of April 19, 1999 by and
                            among Global TeleSystems Group, Inc. and Merrill Lynch &
                            Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
                            Donaldson, Lufkin & Jenrette Securities Corporation,
                            Bear, Stearns & Co., Inc., BT Alex. Brown Incorporated,
                            and Lehman Brothers Inc.
         10.58*****      -- Agreement for the transfer of Omnicom Shares dated as of
                            April 14, 1999 by and among Alain Nicalazzi, Florent
                            Martenne-Duplan, Philippe Ait Yahia and various other
                            Omnicom shareholders and Esprit Telecom Holdings, Limited
                            and Global TeleSystems Group, Inc.


         12.1#           -- Statement Re: Computation of Deficiency of Earnings
                            Available to Cover Fixed Charges
         21.1*           -- List of Subsidiaries of the Registrant


         23.1#           -- Consent of Ernst & Young LLP, Independent Auditors


         23.2#           -- Consent of PricewaterhouseCoopers, Independent
                            Accountants


         23.3#           -- Consent of Shearman & Sterling (included in its opinion
                            delivered under Exhibit No. 5.1)


         24.1##          -- Powers of Attorney (included on signature page to this
                            registration statement)
         27.1******      -- Financial Data Schedule extracted from our March 31, 1999
                            unaudited financial statements
</TABLE>


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

      # Filed herewith.


     ## Previously filed.


      * Incorporated by reference to the corresponding exhibit to our Annual
        Report on Form 10-K for the year ended December 31, 1998, filed on March
        23, 1999.

     ** Incorporated by reference to the corresponding exhibit to our
        Registration Statement on Form S-1 (File No. 333-36555), filed on
        September 26, 1997.

   ***  Incorporated by reference to the corresponding exhibit to our
        Registration Statement on Form S-4 (File No. 333-68511), filed on
        December 8, 1998.

  ****  Incorporated by reference to the corresponding exhibit to the Esprit
        Telecom Group plc Annual Report on Form 20-F for the year ended
        September 30, 1998, filed on December 24, 1998.

 *****  Incorporated by reference to the corresponding exhibit to our Current
        Report on Form 8-K, filed on April 28, 1999


******  Incorporated by reference to the corresponding exhibit to our Quarterly
        Report on Form 10-Q for the three month period ended March 31, 1999,
        filed on May 17, 1999


      + Incorporated by reference to the corresponding exhibit to our Annual
        Report on Form 10-K for the year ended December 31, 1997, filed on March
        31, 1998.

     ++ Incorporated by reference to the corresponding exhibit to our
        Registration Statement on Form S-1 (File No. 333-52733), filed on May
        14, 1998.
<PAGE>   128

   +++  Incorporated by reference to the corresponding exhibit to the Esprit
        Telecom Group plc Registration Statement on Form F-4 (File No.
        333-9292), filed on August 13, 1998.

  ++++  Incorporated by reference to the corresponding exhibit to the Global
        TeleSystems Group, Inc. Form 8-K, filed on November 30, 1998.

 +++++  Incorporated by reference to the corresponding exhibit to the Esprit
        Telecom Group plc Registration Statement on Form F-1 (File No.
        333-8012), filed on December 10, 1997.

<PAGE>   1
                                                                    EXHIBIT 3.13

                    CERTIFICATE OF DESIGNATION OF THE POWERS,
                       PREFERENCES AND RELATIVE, OPTIONAL
                           AND OTHER SPECIAL RIGHTS OF
                                7 1/4% CUMULATIVE
                         CONVERTIBLE PREFERRED STOCK AND
              QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF


                         Pursuant to Section 151 of the
                General Corporation Law of the State of Delaware



         Global TeleSystems Group, Inc. (the "Company"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify that (i) pursuant to authority conferred upon the board of
directors of the Company (the "Board of Directors") by its Certificate of
Incorporation, and pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, said Board of Directors is authorized
to issue Preferred Stock of the Company in one or more series and has adopted
the resolution set forth below on April 22, 1999 (the "Resolution"):

         RESOLVED that, pursuant to the authority vested in the Board of
     Directors by its Certificate of Incorporation, the Board of Directors does
     hereby create, authorize and provide for the issuance of 7 1/4% Cumulative
     Convertible Preferred Stock, par value $0.0001 per share, with a
     liquidation preference of $5,000 per share, consisting of up to 100,000
     shares having the designation, preferences, relative, participating,
     optional and other special rights and the qualifications, limitations and
     restrictions thereof that are set forth in the Certificate of Incorporation
     and in this Resolution as follows:

         1. Designation. There is hereby created out of the authorized and
unissued shares of Preferred Stock of the Company a series ofT Preferred Stock
designated as the "7 1/4% Cumulative Convertible Preferred Stock" (the
"Convertible Preferred Stock"). The authorized number of shares constituting the
Convertible Preferred Stock shall be 100,000, and such shares shall be
represented by stock certificates substantially in the form set forth in Exhibit
A hereto. The liquidation preference of the Convertible Preferred Stock shall be
$5,000 per share (the "Liquidation Preference"). The date the Convertible
Preferred Stock is first issued is referred to as the "Issue Date".


<PAGE>   2
                                      -2-


         2. Rank. The Convertible Preferred Stock will, rank (i) junior in right
of payment to all existing and future debt obligations of the Company upon
liquidation, dissolution or winding up of the Company, including the Company's
9 7/8% Senior Notes due 2005, the Company's 8 3/4% Convertible Senior
Subordinated Debentures due 2000 and the Company's 5 3/4% Senior Subordinated
Debentures due 2010, (ii) junior in right of payment to each class or series of
Capital Stock of the Company, the terms of which expressly provide that such
class or series of Capital Stock will rank senior to the Convertible Preferred
Stock as to dividends and upon liquidation, dissolution or winding up of the
Company ("Senior Capital Stock"); (iii) pari passu in right of payment with each
class of Capital Stock or series of Preferred Stock, established hereafter by
the Company's Board of Directors, the terms of which expressly provide that such
class or series will rank on a parity with the Convertible Preferred Stock as to
dividend rights and upon liquidation, dissolution or winding up of the Company
("Parity Capital Stock") and (iv) senior in right of payment as to dividend
rights and upon liquidation, dissolution or winding up of the Company to the
Common Stock and any Capital Stock of the Company that expressly provides that
it will rank junior to the Convertible Preferred Stock ("Junior Capital Stock").
The Company may not authorize, create (by way of reclassification or otherwise)
or issue any Senior Capital Stock or any obligation or security convertible or
exchangeable into, or evidencing a right to purchase, shares of any class or
series of Senior Capital Stock without the affirmative vote or consent of the
holders of at least 66-2/3% of the outstanding shares of Convertible Preferred
Stock.

         3. Dividends. The Holders of shares of the Convertible Preferred Stock
will be entitled to receive, when, as and if dividends are declared by the Board
of Directors out of funds of the Company legally available therefor, cumulative
preferential dividends from the Issue Date of the Convertible Preferred Stock
accruing at the rate of $362.50 per share of Convertible Preferred Stock per
annum, or $90.625 per share of Convertible Preferred Stock per quarter, payable
quarterly in arrears on March 15, June 15, September 15 and December 15 of each
year or, if any such date is not a Business Day, on the next succeeding business
day (each, a "Dividend Payment Date"), to the Holders of record as of the next
preceding March 1, June 1, September 1 and December 1 (each, a "Record Date").
Accrued but unpaid dividends, if any, may be paid on such dates as determined by
the Board of Directors. Dividends payable on the Convertible Preferred Stock
will be computed on the basis of a 360-day year of twelve 30-day months and will
be deemed to ac-


<PAGE>   3
                                      -3-


crue on a daily basis. Dividends on the Convertible Preferred Stock will accrue
from the Issue Date. Dividends on the Convertible Preferred Stock may be paid,
at the Company's option, in cash, Common Stock, or a combination thereof;
provided, however, that the Company shall be obligated to make its dividend
payments in cash if the Common Stock paid as a dividend would not, at the time
such dividend payment is made, be freely transferable under the Securities Act.
The Convertible Preferred Stock will not be redeemable unless all dividends
accrued through such redemption date shall have been paid in full.
Notwithstanding anything to the contrary herein contained, the Company shall not
be required to declare or pay a dividend if another person (including, without
limitation, any of its subsidiaries) pays an amount to the Holders equal to the
amount of such dividend on behalf of the Company and, in such event, the
dividend will be deemed paid for all purposes.

         Dividends on the Convertible Preferred Stock will accrue whether or not
the Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the quarter to which they relate. Accumulated unpaid
dividends will accrue and cumulate dividends at a rate of 7 1/4% per annum. The
Company will take all reasonable actions required or permitted under Delaware
law to permit the payment of dividends on the Convertible Preferred Stock.

         No dividend whatsoever shall be declared or paid upon, or any sum set
apart for the payment of dividends upon, any outstanding share of the
Convertible Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid upon,
or declared and a sufficient sum set apart for the payment of such dividend
upon, all outstanding shares of Convertible Preferred Stock. Unless full
cumulative dividends on all outstanding shares of Convertible Preferred Stock
due for all past dividend periods shall have been declared and paid, or declared
and a sufficient sum for the payment thereof set apart, then: (i) no dividend
(other than, in the case of Junior Capital Stock, a dividend payable solely in
shares of Junior Capital Stock or options, warrants or rights to purchase Junior
Capital Stock) shall be declared or paid upon, or any sum set apart for the
payment of dividends upon, any shares of Parity Capital Stock or Junior Capital
Stock; (ii) no other distribution shall be declared or made upon, or any sum set
apart for the payment of any distribution upon, any shares of Junior Capital
Stock;


<PAGE>   4
                                      -4-


(iii) no shares of Parity Capital Stock or Junior Capital Stock or any warrants,
rights, calls or options exercisable for or convertible into any Parity Capital
Stock or Junior Capital Stock shall be purchased, redeemed or otherwise acquired
or retired for value (excluding an exchange for shares of other Parity Capital
Stock or Junior Capital Stock or a purchase, redemption or other acquisition
from the proceeds of a substantially concurrent sale of Parity Capital Stock or
Junior Capital Stock) by the Company or any of its subsidiaries; and (iv) no
monies shall be paid into or set apart or made available for a sinking or other
like fund for the purchase, redemption or other acquisition or retirement for
value of any shares of Parity Capital or Junior Capital Stock or any warrants,
rights, calls or options exercisable for or convertible into any Parity Capital
Stock or Junior Capital Stock by the Company or any of its subsidiaries. Holders
of the Convertible Preferred Stock shall not be entitled to any dividends,
whether payable in cash, property or stock, in excess of the full cumulative
dividends as herein described.

         No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Capital Stock for any period unless full
cumulative dividends shall have been or contemporaneously are declared and paid
(or are deemed declared and paid) in full or declared and, if payable in cash, a
sum in cash sufficient for such payment is set apart for such payment on the
Convertible Preferred Stock. If full dividends are not so paid, the Convertible
Preferred Stock shall share dividends pro rata with the Parity Capital Stock.
Dividends on account of arrears and dividends in connection with any optional
redemption may be declared and paid at any time, without reference to any
regular Dividend Payment Date, to holders of record on such date, not more than
45 days prior to the payment thereof, as may be fixed by the Board of Directors
of the Company.

         4. Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company after payment in full of
the outstanding debt obligations of the Company and the Liquidation Preference
(and any accrued and unpaid dividends) on any Senior Capital Stock, each Holder
of shares of the Convertible Preferred Stock shall be entitled to payment out of
the assets of the Company available for distribution of the Liquidation
Preference per share of the Convertible Preferred Stock held by such Holder,
plus an amount equal to the accrued and unpaid dividends on the Convertible
Preferred Stock and Additional Dividends (as defined in the Registration Rights
Agreement) (if any) to the date


<PAGE>   5
                                      -5-


fixed for liquidation, dissolution, or winding up before any distribution is
made on any Junior Capital Stock, including, without limitation, Common Stock of
the Company. After payment in full of the Liquidation Preference and an amount
equal to the accrued and unpaid dividends and Additional Dividends (if any), to
which Holders of Convertible Preferred Stock are entitled, such Holders will not
be entitled to any further participation in any distribution of assets of the
Company. However, neither the voluntary sale, conveyance, exchange or transfer
(for cash, shares of stock, securities or other consideration) of all or
substantially all of the property or assets of the Company nor the consolidation
or merger of the Company with or into one or more corporations will be deemed to
be a voluntary or involuntary liquidation, dissolution or winding up of the
Company, unless such sale, conveyance, exchange, transfer, consolidation or
merger shall be in connection with a liquidation, dissolution or winding up of
the affairs of the Company.

         5. Redemption. The Convertible Preferred Stock may not be redeemed at
the option of the Company prior to March 15, 2002. The Convertible Preferred
Stock may be redeemed, in whole or in part, at the option of the Company after
March 15, 2002, at the redemption prices specified below (expressed as
percentages of the Liquidation Preference thereof), in each case, together with
an amount equal to accrued and unpaid dividends on the Convertible Preferred
Stock and Additional Dividends (if any), to the date of redemption, upon not
less than 15 nor more than 60 days' prior written notice, during the 12-month
period commencing on March 15 of each of the years set forth below:

<TABLE>
<CAPTION>
                                                                                Redemption
         Year                                                                      Rate
         ----                                                                   ----------
<S>                                                                             <C>
         2002............................................................          105.075%
         2003............................................................          104.350%
         2004............................................................          103.625%
         2005............................................................          102.900%
         2006............................................................          102.175%
         2007............................................................          101.450%
         2008............................................................          100.725%
         2009 and thereafter.............................................          100.000%
</TABLE>

         On and after any date fixed for redemption (the "Redemption Date"),
provided that the Company has made available at the office of the Transfer Agent
a sufficient amount of cash to effect the redemption, dividends will cease to
accrue on the Convertible Preferred Stock called for redemption (except that,


<PAGE>   6
                                      -6-


in the case of a Redemption Date after a dividend payment Record Date and prior
to the related Dividend Payment Date, holders of Convertible Preferred Stock on
the dividend payment Record Date will be entitled on such Dividend Payment Date
to receive the dividend payable on such shares), such shares shall no longer be
deemed to be outstanding and all rights of the holders of such shares as holders
of Convertible Preferred Stock shall cease except the right to receive the cash
deliverable upon such redemption, without interest from the Redemption Date.

         In the event of a redemption of only a portion of the then outstanding
shares of Convertible Preferred Stock, the Company shall effect such redemption
on a pro rata basis, except that the Company may redeem all of the shares held
by Holders of fewer than 100 shares (or all of the shares held by Holders who
would hold less than 100 shares as a result of such redemption), as may be
determined by the Company.

         With respect to a redemption pursuant hereto, the Company will send a
written notice of redemption by first class mail to each holder of record of
shares of Convertible Preferred Stock, not fewer than 15 days nor more than 60
days prior to the Redemption Date at its registered address (the "Redemption
Notice"); provided, however, that no failure to give such notice nor any
deficiency therein shall affect the validity of the procedure for the redemption
of any shares of Convertible Preferred Stock to be redeemed except as to the
holder or holders to whom the Company has failed to give said notice or except
as to the holder or holders whose notice was defective. The Redemption Notice
shall state:

         (a) the redemption price;

         (b) whether all or less than all the outstanding shares of the
     Convertible Preferred Stock are to be redeemed and the total number of
     shares of the Convertible Preferred Stock being redeemed;

         (c) the Redemption Date;

         (d) that the holder is to surrender to the Company, in the manner, at
     the place or places and at the price designated, his certificate or
     certificates representing the shares of Convertible Preferred Stock to be
     redeemed; and


<PAGE>   7
                                      -7-


         (e) that dividends on the shares of the Convertible Preferred Stock to
     be redeemed shall cease to accumulate on such Redemption Date unless the
     Company defaults in the payment of the redemption price.

         Each holder of Convertible Preferred Stock shall surrender the
certificate or certificates representing such shares of Convertible Preferred
Stock to the Company, duly endorsed (or otherwise in proper form for transfer,
as determined by the Company), in the manner and at the place designated in the
Redemption Notice, and on the Redemption Date the full redemption price for such
shares shall be payable in cash to the person whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.

         6. Voting Rights. Holders of record of shares of the Convertible
Preferred Stock will have no voting rights, except as required by law and as
provided in this Section 6 and in Sections 2, 9 and 13 hereof. Upon the
accumulation of accrued and unpaid dividends on the outstanding Convertible
Preferred Stock in an amount equal to six full quarterly dividends (whether or
not consecutive) (together with any event with a similar effect pursuant to the
terms of any other series of Preferred Stock upon which like rights have been
conferred, a "Voting Rights Triggering Event"), the number of members of the
Company's Board of Directors will be immediately and automatically increased by
two (unless previously increased pursuant to the terms of any other series of
Preferred Stock upon which like rights have been conferred), and the Holders of
a majority of the outstanding shares of Convertible Preferred Stock, voting
together as a class (pro rata, based on Liquidation Preference) with the holders
of any other series of Preferred Stock upon which like rights have been
conferred and are exercisable, will be entitled to elect two members to the
Board of Directors of the Company. Voting rights arising as a result of a Voting
Rights Triggering Event will continue until such time as all dividends in
arrears on the Convertible Preferred Stock are paid in full. Notwithstanding the
foregoing, however, such voting rights to elect directors will expire when the
number of shares of Convertible Preferred Stock outstanding is reduced to 10,000
or less.

         In the event such voting rights expire or are no longer exercisable
because dividends in arrears have been paid in full, the term of any directors
elected pursuant to the pro-


<PAGE>   8
                                      -8-


visions of this paragraph 6 above shall terminate forthwith and the number of
directors constituting the Board of Directors shall be immediately and
automatically decreased by two (until the occurrence of any subsequent Voting
Rights Triggering Event). At any time after voting power to elect directors
shall have become vested and be continuing in the holders of Convertible
Preferred Stock (together with the holders of any other series of Preferred
Stock upon which like rights have been conferred and are exercisable) pursuant
to this paragraph 6, or if vacancies shall exist in the offices of directors
elected by such holders, a proper officer of the Company may, and upon the
written request of the holders of record of at least 25% of the shares of
Convertible Preferred Stock then outstanding or the holders of 25% of the shares
of any other series of Preferred Stock then outstanding upon which like rights
have been conferred and are exercisable addressed to the secretary of the
Company, shall, call a special meeting of the Holders of Convertible Preferred
Stock and the holders of such other series of Preferred Stock for the purpose of
electing the directors which such holders are entitled to elect pursuant to the
terms hereof; provided, however, that no such special meeting shall be called if
the next annual meeting of stockholders of the Company is to be held within 60
days after the voting power to elect directors shall have become vested (or such
vacancies arise, as the case may be), in which case such meeting shall be deemed
to have been called for such next annual meeting. If such meeting shall not be
called, pursuant to the provision of the immediately preceding sentence, by a
proper officer of the Company within 20 days after personal service to the
secretary of the Company at its principal executive offices, then the Holders of
record of at least 25% of the outstanding shares of Convertible Preferred Stock
or the holders of 25% of the shares of any other series of Preferred Stock upon
which like rights have been conferred and are exercisable may designate in
writing one of their members to call such meeting at the expense of the Company,
and such meeting may be called by the person so designated upon the notice
required for the annual meetings of stockholders of the Company and shall be
held at the place for holding the annual meetings of stockholders. Any Holder of
Convertible Preferred Stock or such other series of Preferred Stock so
designated shall have, and the Company shall provide, access to the lists of
Holders of Convertible Preferred Stock and the holders of such other series of
Preferred Stock for any such meeting of the holders thereof to be called
pursuant to the provisions hereof. If no special meeting of the Holders of
Convertible Preferred Stock and the holders of such other series of Preferred
Stock is called as provided in this paragraph 6, then such meeting shall be
deemed to


<PAGE>   9
                                      -9-


have been called for the next meeting of stockholders of the Company.

         At any meeting held for the purposes of electing directors at which the
Holders of Convertible Preferred Stock (together with the holders of any other
series of Preferred Stock upon which like rights have been conferred and are
exercisable) shall have the right, voting together as a separate class, to elect
directors as aforesaid, the presence in person or by proxy of the Holders of at
least a majority in voting power of the outstanding shares of Convertible
Preferred Stock (and such other series of Preferred Stock) shall be required to
constitute a quorum thereof.

         Any vacancy occurring in the office of a director elected by the
Holders of Convertible Preferred Stock (and such other series of Preferred
Stock) may be filled by the remaining director elected by the Holders of
Convertible Preferred Stock (and such other series of Preferred Stock) unless
and until such vacancy shall be filled by the Holders of Convertible Preferred
Stock (and such other series of Preferred Stock).

         Except as set forth above and otherwise required by applicable law, the
creation, authorization or issuance of any shares of any Junior Capital Stock,
Parity Capital Stock or Senior Capital Stock, or the increase or decrease in the
amount of authorized Capital Stock of any class, including Preferred Stock,
shall not require the affirmative vote or consent of Holders of Convertible
Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges or voting rights of shares of Convertible Preferred
Stock.

         In any case in which the Holders of Convertible Preferred Stock shall
be entitled to vote pursuant hereto or pursuant to Delaware law, each Holder of
Convertible Preferred Stock entitled to vote with respect to such matters shall
be entitled to one vote for each share of Convertible Preferred Stock held.

         Except as required by law, the Holders of the Convertible Preferred
Stock will not be entitled to vote on any merger or consolidation involving the
Company or a sale of all or substantially all the assets of the Company.

         7. Change of Control

         (a) In the event of a Change of Control, each Holder shall have the
     right to require the Company to purchase


<PAGE>   10
                                      -10-


     all or a portion of such Holder's Convertible Preferred Stock (the "Change
     of Control Offer") as of the date that is 30 Business Days after the
     occurrence of such Change of Control (the "Change of Control Purchase
     Date") for a purchase price equal to 100% of the Liquidation Preference
     together with accrued and unpaid dividends to but not including the Change
     of Control Purchase Date (the "Change of Control Purchase Price"). No funds
     shall be paid by the Company pursuant to a Change of Control Offer prior to
     the Company's repurchase of any securities ranking senior to the
     Convertible Preferred Stock and requiring repurchase pursuant to the change
     of control provisions governing such senior securities.

                  Within 10 Business Days after the occurrence of a Change of
Control, the Company shall mail to all Holders of record of the Convertible
Preferred Stock a written notice of the Change of Control. The notice shall
include the form of Change of Control Purchase Notice (as defined) to be
completed by the Holder and shall state:

               (i) the date of such Change of Control and, briefly, the events
          causing such Change of Control;

               (ii) the date by which the Change of Control Purchase Notice
          pursuant to this Section 7 must be given;

               (iii) the Change of Control Purchase Date;

               (iv) the Change of Control Purchase Price;

               (v) briefly, the conversion rights of the Convertible Preferred
          Stock;

               (vi) the name and address of the Paying Agent and the Conversion
          Agent;

               (vii) the then current Conversion Rate;

               (viii) that Convertible Preferred Stock as to which a Change of
          Control Purchase Notice has been given may be converted into Common
          Stock only to the extent that the Change of Control Purchase Notice
          has been withdrawn in accordance with the terms of this Certificate of
          Designations;


<PAGE>   11
                                      -11-


              (ix) the procedures that the Holder must follow to exercise
         rights under this Section 7;

              (x) the procedures for withdrawing a Change of Control Purchase
         Notice, including a form of notice of withdrawal; and

              (xi) that the Holder must satisfy the requirements set forth in
         the Convertible Preferred Stock in order to convert the Convertible
         Preferred Stock.

         (b) A Holder may exercise its rights specified in subsection (a) of
     this Section 7 upon delivery of a written notice of the exercise of such
     rights (a "Change of Control Purchase Notice") to the Paying Agent at any
     time prior to the close of business on the Business Day next preceding the
     Change of Control Purchase Date, stating:

              (i) the name of the Holder;

              (ii) the certificate numbers of the Convertible Preferred Stock
         that the Holder will deliver to be purchased;

              (iii) the number of shares of Convertible Preferred Stock that
         the Holder will deliver to be purchased; and

              (iv) that such Convertible Preferred Stock shall be purchased
         pursuant to the terms and conditions specified in this Certificate of
         Designations.

         The delivery of such Convertible Preferred Stock to the Paying Agent
(together with all necessary endorsements) at the office of the Paying Agent
shall be a condition to the receipt by the Holder of the Change of Control
Purchase Price therefor; provided, however, that such Change of Control Purchase
Price shall be so paid pursuant to this Section 7 only if the Convertible
Preferred Stock so delivered to the Paying Agent shall conform in all respects
to the description thereof set forth in the related Change of Control Purchase
Notice.

         Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent the Change of Control Purchase Notice shall have the right
to withdraw such Change of Control Purchase Notice at any time prior to the
close of business on the Business Day next preceding the Change of Control
Purchase Date by delivery of a written notice of withdrawal to


<PAGE>   12
                                      -12-


the Paying Agent in accordance with subsection (c) of this Section 7.

         The Paying Agent shall promptly notify the Company of the receipt by it
of any Change of Control Purchase Notice or written withdrawal thereof.

         (c) Upon receipt by the Paying Agent of the Change of Control Purchase
     Notice specified in subsection (b) of this Section 7, the Holder of the
     Convertible Preferred Stock in respect of which such Change of Control
     Purchase Notice was given shall (unless such Change of Control Purchase
     Notice is withdrawn as specified below) thereafter be entitled to receive
     solely the Change of Control Purchase Price with respect to such
     Convertible Preferred Stock. Such Change of Control Purchase Price shall be
     paid to such Holder promptly following the later of (i) the Change of
     Control Purchase Date with respect to such Convertible Preferred Stock
     (provided the conditions in subsection (b) of this Section 7 have been
     satisfied) and (ii) the time of delivery of such Convertible Preferred
     Stock to the Paying Agent by the Holder thereof in the manner required by
     subsection (b) of this Section 7. Convertible Preferred Stock in respect of
     which a Change of Control Purchase Notice has been given by the Holder
     thereof may not be converted into shares of Common Stock on or after the
     date of the delivery of such Change of Control Purchase Notice unless such
     Change of Control Purchase Notice has first been validly withdrawn.

         A Change of Control Purchase Notice may be withdrawn by means of a
written notice of withdrawal delivered by the Holder to the office of the Paying
Agent at any time prior to the close of business on the Business Day immediately
preceding the Change of Control Purchase Date, specifying:

             (i) the name of the Holder;

             (ii) the certificate numbers of the Convertible Preferred Stock in
         respect of which such notice of withdrawal is being submitted; and

             (iii) the number of shares of Convertible Preferred Stock with
         respect to which such notice of withdrawal is being submitted; and

             (iv) the number of shares, if any, of such Convertible Preferred
         Stock that remains subject to the


<PAGE>   13
                                      -13-


         original Change of Control Purchase Notice and that has been or will be
         delivered for purchase by the Company.

         (d) At or before 11:00 a.m., New York City time, on the second Business
     Day immediately following a Change of Control Purchase Date, the Company
     shall deposit with the Paying Agent an amount of money sufficient to pay
     the aggregate Change of Control Purchase Price of all of the shares of
     Convertible Preferred Stock that are to be purchased as of such Change of
     Control Purchase Date plus accrued and unpaid dividends thereon up to but
     not including the Change of Control Purchase Date. The manner in which the
     deposit required by this subsection (d) is made by the Company shall be at
     the option of the Company, provided that such deposit shall be made in a
     manner such that the Paying Agent shall have immediately available funds on
     the second Business Day immediately following the Change of Control
     Purchase Date.

         If a Holder does not exercise the right to require the Company to
purchase such Holder's Convertible Preferred Stock, each share of such
Convertible Preferred Stock shall thereafter be convertible into the right to
receive the consideration receivable as a result of the Change of Control by a
holder of the number of shares of Common Stock into which such Convertible
Preferred Stock was convertible immediately prior to the Change of Control.

         A Change of Control shall be deemed to have occurred if any of the
following occurs:

         (e) any Person or group, other than the Permitted Holders, is or
     becomes owner, directly or indirectly, of shares of capital stock of the
     Company representing 50% or more of the total voting power of all shares of
     capital stock of the Company or has the power directly or indirectly, to
     elect a majority of the members of the Board of Directors of the Company;
     (b) the Company consolidates with, or merges with or into, another Person
     or the Company sells, assigns, conveys, transfers, leases or otherwise
     disposes of all or substantially all of the assets of the Company, or any
     Person consolidates with, or merges with or into, the Company, in any such
     event other than pursuant to a transaction in which the Person or Persons
     that "beneficially owned," directly or indirectly, shares of capital stock
     of the Company representing a majority of the total voting power of all
     classes of capital stock of


<PAGE>   14
                                      -14-


     the Company immediately prior to such transaction, "beneficially own,"
     directly or indirectly, shares of capital stock of the Company representing
     a majority of the total voting power of all classes of capital stock of the
     surviving or transferee Person; (c) during any consecutive two year period,
     individuals who at the beginning of such period constituted the Board of
     Directors of the Company (together with any new directors whose election by
     the Board of Directors of the Company or whose nomination for election by
     the stockholders of the Company was approved by a vote of a majority of the
     directors then still in office who were either directors at the beginning
     of such period or whose election or nomination for election was previously
     so approved) cease for any reason (other than by action of the Permitted
     Holders) to constitute a majority of the Board of Directors of the Company
     then in office; or (d) there shall occur the liquidation of dissolution of
     the Company. For purposes of this definition, (i) "group" has the meaning
     under Section 13(d) and 14(d) of the Exchange Act or any successor
     provision to either of the foregoing, including any group acting for the
     purpose of acquiring, holding or disposing of securities within the meaning
     of Rule 13-d5(b)(1) under the Exchange Act and (ii) a "beneficial owner"
     shall be determined in accordance with Rule 13d-3 under the Exchange Act
     promulgated by the Commission under the Exchange Act, except that the
     number of shares of capital stock of the Company entitling the holders
     thereof to vote generally in the election of directors shall be deemed to
     include, in addition to all outstanding shares of capital stock of the
     Company entitling the holders thereof to vote generally in the election of
     directors and Unissued Shares deemed to be held by the Person with respect
     to which the Change of Control determination is being made, all Unissued
     Shares deemed to be held by all other Persons.

         "Unissued Shares" means shares of capital stock of the company not
outstanding that are subject to options, warrants, rights to purchase, or
conversion privileges exercisable within 60 days of the date of determination of
a Change of Control and that, upon issuance, will entitle the holders thereof to
vote generally in the election of directors.

         For purposes of the definition of "Change of Control," "Permitted
Holders" means (a) Alan B. Slifka and any entity controlled by him, (b) one or
more of George Soros, Soros Fund Management LLC, Purnendu Chatterjee or
Chatterjee Management Company or Affiliates of any of the foregoing, and any


<PAGE>   15
                                      -15-


person or entity for which any such person or entity acts as investment advisor
or investment manager and (c) charitable organizations controlled by or
affiliated with any of the Persons names in the foregoing clauses (a) and (b).

         Notwithstanding the foregoing, a Change of Control will be deemed not
to have occurred (i) if the last sale price of the Common Stock for any five
Trading Days during the ten Trading days immediately preceding the Change of
Control is at least equal to 105% of the Conversion Price in effect immediately
preceding the Change of Control or (ii) if at least 90% of the consideration
(excluding cash payments for fractional shares or cash payments for appraisal
rights) in the transaction or transactions constituting the Change of Control
consists of shares of Common Stock or securities convertible into shares of
Common Stock that are, or upon issuance will be, traded on a national securities
exchange.

         8. Conversion Rates. The Convertible Preferred Stock will be
convertible at the option of the Holder, into shares of Common Stock at any
time, unless previously redeemed or repurchased, at a conversion rate of 72.46
shares of Common Stock per share of the Convertible Preferred Stock) (as
adjusted pursuant to the provisions hereof, the "Conversion Rate") (or
equivalent to a conversion price of $69.00 per share of Common Stock, the
"Conversion Price") (subject to the adjustments described below). The right to
convert a share of the Convertible Preferred Stock called for redemption or
delivered for repurchase will terminate at the close of business on the
Redemption Date for such Convertible Preferred Stock or at the time of the
repurchase, as the case may be. Convertible Preferred Stock for which a Holder
has delivered a Change of Control Purchase Notice exercising the option of such
Holder to require the Company to purchase such Convertible Preferred Stock may
be converted only if such notice is withdrawn by a written notice of withdrawal
delivered by the Holder to the Paying Agent prior to the close of business on
the Business Day prior to the Change of Control Purchase Date in accordance with
Section 7.

         The right of conversion attaching to any share of Convertible Preferred
Stock may be exercised by the Holder thereof by delivering the share to be
converted to the office of the Transfer Agent, or any agency or office of the
Company maintained for that purpose, accompanied by a duly signed and completed
notice of conversion in form reasonably satisfactory to the Transfer Agent of
the Company, such as that which is set


<PAGE>   16
                                      -16-


forth in Exhibit B hereto. The conversion date will be the date on which the
share and the duly signed and completed notice of conversion are so delivered.
As promptly as practicable on or after the conversion date, the Company will
issue and deliver to the Transfer Agent a certificate or certificates for the
number of full shares of Common Stock issuable upon conversion, with any
fractional shares rounded up to full shares or, at the Company's option, payment
in cash in lieu of any fraction of a share, based on the Closing Price of the
Common Stock on the Trading Day preceding the conversion date. Such certificate
or certificates will be delivered by the Transfer Agent to the appropriate
Holder on a book-entry basis or by mailing certificates evidencing the
additional shares to the Holders at their respective addresses set forth in the
register of Holders maintained by the Transfer Agent. All shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock will be fully paid
and nonassessable and will rank pari passu with the other shares of Common Stock
outstanding from time to time. Any shares of Convertible Preferred Stock
surrendered for conversion during the period from the close of business on any
Record Date to the opening of business on the next succeeding Dividend Payment
Date must be accompanied by payment of an amount equal to the dividends payable
on such Dividend Payment Date on the shares of Convertible Preferred Stock being
surrendered for conversion. No other payment or adjustment for dividends, or for
any dividends in respect of shares of Common Stock, will be made upon
conversion. Except as otherwise provided herein, dividends accrued shall not be
paid on Convertible Preferred Stock converted; provided, however, dividends
accrued through March 15, 2002 shall be paid on any Depositary Shares called
from redemption and converted before March 15, 2002. If any Holder surrenders
shares of Convertible Preferred Stock for conversion between a Record Date and
the related Dividend Payment Date, then notwithstanding such conversion, the
dividend payable on such Dividend Payment Date will be paid to the Holder on
such Record Date. Holders of Common Stock issued upon conversion will not be
entitled to receive any dividends payable to holders of Common Stock as of any
record time before the close of business on the conversion date.

         The Conversion Rate shall be adjusted from time to time by the Company
as follows:

         (a) In case the Company shall (i) pay a dividend in shares of Common
     Stock to all holders of Common Stock, (ii) make a distribution in shares of
     Common Stock to all holders of Common Stock, (iii) subdivide its
     outstanding


<PAGE>   17
                                      -17-


     Common Stock into a greater number of shares, or (iv) combine its
     outstanding Common Stock into a smaller number of shares, the Conversion
     Rate in effect immediately prior thereto shall be adjusted so that the
     Holder of any Security thereafter surrendered for conversion shall be
     entitled to receive that number of shares of Common Stock which it would
     have owned had such Security been converted immediately prior to the
     happening of such event. An adjustment made pursuant to this subsection (a)
     shall become effective immediately after the record date in the case of a
     dividend in shares or distribution and shall become effective immediately
     after the effective date in the case of subdivision or combination.

         (b) In case the Company shall issue rights or warrants to all or
     substantially all holders of its Common Stock entitling them (for a period
     commencing no earlier than the record date described below and expiring not
     more than 60 days after such record date) to subscribe for or purchase
     shares of Common Stock (or securities convertible into Common Stock) at a
     price per share less than the current Market Price per share of Common
     Stock at the record date for the determination of shareholders entitled to
     receive such rights or warrants, the Conversion Rate in effect immediately
     prior thereto shall be adjusted so that the same shall equal the rate
     determined by multiplying the Conversion Rate in effect immediately prior
     to such record date by a fraction, of which the denominator shall be the
     number of shares of Common Stock outstanding on such record date, plus the
     number of shares which the aggregate offering price of the total number of
     shares of Common Stock so offered (or the aggregate conversion price of the
     convertible securities so offered) would purchase at such current Market
     Price, and of which the numerator shall be the number of shares of Common
     Stock outstanding on such record date plus the number of additional shares
     of Common Stock offered (or into which the convertible securities so
     offered are convertible). Such adjustment shall be made successively
     whenever any such rights or warrants are issued, and shall become effective
     immediately after such record date. If at the end of the period during
     which such rights or warrants are exercisable not all rights or warrants
     shall have been exercised, the adjusted Conversion Rate shall be
     immediately readjusted to what it would have been based upon the number of
     additional shares of Common Stock actually issued (or the number of shares
     of Common Stock issuable upon conversion of convertible securities actually
     issued).


<PAGE>   18
                                      -18-


         (c) In case the Company shall distribute to all or substantially all
     holders of its Common Stock any shares of Capital Stock of the Company
     (other than Common Stock), evidences of indebtedness or other non-cash
     assets (including securities of any company other than the Company), or
     shall distribute to all or substantially all holders of its Common Stock
     rights or warrants to subscribe for or purchase any of its securities
     (excluding those referred to in subsection (b) above), then in each such
     case the Conversion Rate shall be adjusted so that the same shall equal the
     rate determined by multiplying the Conversion Rate in effect immediately
     prior to the date of such distribution by a fraction, of which the
     denominator shall be the current Market Price per share of the Common Stock
     on the record date mentioned below less the fair market value on such
     record date (as determined by the Board of Directors, whose determination
     shall be conclusive evidence of such fair market value) of the portion of
     the capital stock, evidences of indebtedness or other non-cash assets so
     distributed or of such rights or warrants applicable to one share of Common
     Stock (determined on the basis of the number of shares of Common Stock
     outstanding on the record date), and of which the numerator shall be the
     current Market Price per share of the Common Stock on such record date.
     Such adjustment shall become effective immediately after the record date
     for the determination of shareholders entitled to receive such
     distribution. Notwithstanding the foregoing, in the event that the Company
     shall distribute rights or warrants (other than those referred to in
     subsection (b) above) ("Rights") pro rata to holders of Common Stock, the
     Company may, in lieu of making any adjustment pursuant to this Section 8,
     make proper provision so that each Holder of a share of Convertible
     Preferred Stock who converts such shares of Convertible Preferred Stock (or
     any portion thereof) after the record date for such distribution and prior
     to the expiration or redemption of the Rights shall be entitled to receive
     upon such conversion, in addition to the shares of Common Stock issuable
     upon such conversion (the "Conversion Shares"), a number of Rights to be
     determined as follows: (i) if such conversion occurs on or prior to the
     date for the distribution to the holders of Rights of separate certificates
     evidencing such Rights (the "Distribution Date"), the same number of Rights
     to which a holder of a number of shares of Common Stock equal to the number
     of Conversion Shares is entitled at the time of such conversion in
     accordance with the terms and provisions of and applicable to the Rights
     and (ii) if such conversion occurs after the
<PAGE>   19
                                      -19-


Distribution Date, the same number of Rights to which a holder of the number of
shares of Common Stock into which the principal amount of the shares of
Convertible Preferred Stock so converted was convertible immediately prior to
the Distribution Date would have been entitled on the Distribution Date in
accordance with the terms and provisions of and applicable to the Rights.

         (d) In case the Company shall, by dividend or otherwise, at any time
distribute (a "Triggering Distribution") to all or substantially all holders of
its Common Stock cash in an aggregate amount that, together with the aggregate
amount of all cash distributions to all or substantially all holders of its
Common Stock made within the 12 months preceding the date of payment of the
Triggering Distribution and in respect of which no Conversion Rate adjustment
pursuant to this Section 8 has been made, exceeds 12.5% of the product of the
current Market Price per share of Common Stock on the Business Day (the
"Determination Date") immediately preceding the day on which such Triggering
Distribution is declared by the Company multiplied by the number of shares of
Common Stock outstanding on such date (excluding shares held in the Treasury of
the Company), the Conversion Rate shall be increased so that the same shall
equal the rate determined by multiplying such Conversion Rate in effect
immediately prior to the Determination Date by a fraction, of which the
denominator shall be the current Market Price per share of the Common Stock on
the Determination Date less the amount of cash (plus the fair market value of
such other consideration) so distributed within such 12 months (including,
without limitation, the Triggering Distribution) applicable to one share of
Common Stock (determined on the basis of the number of shares of Common Stock
outstanding on the Determination Date) and the numerator shall be such current
Market Price per share of the Common Stock on the Determination Date, such
reduction to become effective immediately prior to the opening of business on
the day following the date on which the Triggering Distribution is paid.

         (e) In any case in which this Section 8 shall require that an
adjustment be made following a record date or a Determination Date, as the case
may be, established for purposes of this Section 8, the Company may elect to
defer (but only until five Business Days following the filing by the Company
with the Transfer Agent of the certificate described in subsection (i) of this
Section 8) issuing to the Holder of any Security converted after such


<PAGE>   20
                                      -20-


record date or Determination Date the shares of Common Stock and other Capital
Stock of the Company issuable upon such conversion over and above the shares of
Common Stock and other Capital Stock of the Company issuable upon such
conversion only on the basis of the Conversion Rate prior to adjustment; and, in
lieu of the shares the issuance of which is so deferred, the Company shall issue
or cause its transfer agents to issue due bills or other appropriate evidence
prepared by the Company of the right to receive such shares. If any distribution
in respect of which an adjustment to the Conversion Rate is required to be made
as of the record date, effective date or Determination Date therefor is not
thereafter made or paid by the Company for any reason, the Conversion Rate shall
be readjusted to the Conversion Rate which would then be in effect if such
record date had not been fixed or such effective date or Determination Date had
not occurred.

         (f) (i) No adjustment in the Conversion Price or the corresponding
Conversion Rate shall be required unless such adjustment would require an
increase or decrease of at least 1% in such rate; provided, however, that any
adjustments which by reason of this paragraph are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this paragraph shall be made by the Company and shall be made
to the nearest cent or to the nearest one-hundredth of a share, as the case may
be. No adjustment need be made for a change in the par value or no par value of
the Common Stock.

         (ii) No adjustment need be made for a transaction referred to in this
Section 8 if all holders of all of the Company's securities are entitled to
participate in the transaction on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of Common Stock participate in the transaction. The Company
shall give notice to the Transfer Agent of any such determination.

         (iii) No adjustment need to be made for rights to purchase Common Stock
or issuances of Common Stock pursuant to a Company plan for reinvestment of
dividends of interest. No adjustment need be made for a change in the par value
or a change to no par value of the Common Stock. To the extent that the
Convertible Preferred Stock becomes convertible into the right to receive cash,
no adjustment

<PAGE>   21
                                      -21-


need be made thereafter as to the cash. Interest will not accrue on the cash.

         (g) The Company shall be entitled to make such reductions in the
Conversion Rate, in additional to those required by Section 8, as it in its
discretion shall determine to be advisable in order that any stock dividends,
subdivisions of shares, distributions of rights to purchase stock or securities
or distributions of securities convertible into or exchangeable for stock
hereafter made by the Company to its shareholders shall not be taxable.

         (h) The Company may from time to time reduce the Conversion Rate by an
amount for any period of time if the period is at least 20 days or such longer
period as required by law and if the reduction is irrevocable during the period;
provided, however, that in no event may the Conversion Rate be reduced such that
the Conversion Price is less than the par value of a share of Common Stock.

         (i) Whenever the Conversion Rate is adjusted, the Company shall
promptly file with the Transfer Agent an Officers' Certificate briefly stating
the facts requiring the adjustment and the manner of computing it.

         (j) The Company shall provide to the Holders reasonable notice of any
event that would result in an adjustment to the Conversion Rate so as to permit
the Holders to effect a conversion of Convertible Preferred Stock into shares of
Common Stock prior to the occurrence of such event.

         9. Certain Covenants.

         (a) Payments for Consent

         The Company nor any of its subsidiaries shall, directly or indirectly,
pay or cause to be paid any consideration, whether by way of dividend or other
distribution, fee or otherwise, to any Holder of shares of the Convertible
Preferred Stock for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Certificate of Designations or the
Convertible Preferred Stock unless such consideration is offered to be paid and
is paid to all Holders of the Convertible Preferred Stock that consent, waive or
agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.

<PAGE>   22
                                      -22-


         (b) Reports

         Whether or not required by the rules and regulations of the Commission,
so long as any shares of the Convertible Preferred Stock are outstanding, the
Company shall furnish to the Holders of the Convertible Preferred Stock (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
were required to file such Forms, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all information that would be required to be
contained in a current report on Form 8-K if the Company were required to file
such reports. In the event the Company has filed any such report with the
Commission, it shall not be obligated to separately furnish the report to any
Holder unless and until such Holder requests a copy of the report. In addition,
whether or not required by the rules and regulations of the Commission, the
Company shall file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request.

         10. Reissuance of Convertible Preferred Stock. Shares of Convertible
Preferred Stock redeemed for or converted into Common Stock or that have been
reacquired in any manner shall not be reissued as shares of Convertible
Preferred Stock and shall (upon compliance with any applicable provisions of the
laws of Delaware) have the status of authorized and unissued shares of Preferred
Stock undesignated as to series and may be redesignated and reissued as part of
any series of Preferred Stock; provided, however, that so long as any shares of
Convertible Preferred Stock are outstanding, any issuance of such shares must be
in compliance with the terms hereof.

         11. Business Day. If any payment, redemption or exchange shall be
required by the terms hereof to be made on a day that is not a Business Day,
such payment, redemption or exchange shall be made on the immediately succeeding
Business Day.

         12. Additional Rights of Holders. In addition to the rights provided to
Holders under this Certificate of Designation, Holders shall have the rights set
forth in the Registration Rights Agreement.

<PAGE>   23
                                      -23-


         13. Amendment, Supplement and Waiver. The Company may amend this
Certificate of Designation with the affirmative vote or consent of the holders
of a majority of the shares of Convertible Preferred Stock then outstanding,
(including votes or consents obtained in connection with a tender offer or
exchange offer for the Convertible Preferred Stock) and, except as otherwise
provided by applicable law, any past default or failure to comply with any
provision of this Certificate of Designation may also be waived with the consent
of such holders. Notwithstanding the foregoing, however, without the consent of
each Holder affected, an amendment or waiver may not (with respect to any shares
of the Convertible Preferred Stock held by a non-consenting Holder): (i) alter
the voting rights with respect to the Convertible Preferred Stock or reduce the
number of shares of the Convertible Preferred Stock whose Holders must consent
to an amendment, supplement or waiver, (ii) reduce the Liquidation Preference of
any share of the Convertible Preferred Stock or adversely alter the provisions
with respect to the redemption of the Convertible Preferred Stock, (iii) reduce
the rate of or change the time for payment of dividends on any share of the
Convertible Preferred Stock, (iv) waive a default in the payment of dividends or
Additional Dividends (if any) on the Convertible Preferred Stock, (v) make any
share of the Convertible Preferred Stock payable in money other than United
States dollars, (vi) make any change in the provisions of the Certificate of
Designation relating to waivers of the rights of Holders of the Convertible
Preferred Stock to receive the Liquidation Preference, dividends or Additional
Dividends (if any) on the Convertible Preferred Stock, or (vii) make any change
in the foregoing amendment and waiver provisions.

         Notwithstanding the foregoing, without the consent of any Holder of the
Convertible Preferred Stock, the Company may (to the extent permitted by, and
subject to the requirements of, Delaware law) amend or supplement this
Certificate of Designation to cure any ambiguity, defect or inconsistency, to
provide for uncertificated shares of the Convertible Preferred Stock in addition
to or in place of certificated shares of the Convertible Preferred Stock, to
make any change that would provide any additional rights or benefits to the
Holders of the Convertible Preferred Stock or to make any change that the Board
of Directors determines, in good faith, is not materially adverse to Holders of
the Convertible Preferred Stock.

         14. Transfer and Exchange. When Convertible Preferred Stock is
presented to the Transfer Agent with a request to register the transfer of such
Convertible Preferred Stock or

<PAGE>   24
                                      -24-


to exchange such Convertible Preferred Stock for an equal number of shares of
Convertible Preferred Stock of other authorized denominations, the Transfer
Agent shall register the transfer or make the exchange as requested if its
reasonable requirements for such transaction are met and such transfer or
exchange is in compliance with applicable laws or regulations.

         15. Certain Definitions. As used in this Certificate of Designation,
the following terms shall have the following meanings (and (1) terms defined in
the singular have comparable meanings when used in the plural and vice versa,
(2) "including" means including without limitation, (3) "or" is not exclusive
and (4) an accounting term not otherwise defined has the meaning assigned to it
in accordance with United States generally accepted accounting principles as in
effect on the Issue Date and all accounting calculations will be determined in
accordance with such principles), unless the content otherwise requires:

         "Additional Dividends" means, with respect to any share of Convertible
Preferred Stock, the additional amounts payable pursuant to Section 14 hereof.

         "Board of Directors" mean the Board of Directors of the Company or any
committee thereof duty authorized to act on behalf of the Board.

         "Business Day" means each day which is not a legal holiday.

         "Capital Stock" of any person means any and all shares, interests,
rights to purchase, warrants, options, participation or other equivalents of or
interests in (however designated) equity of such person, including any Preferred
Stock, but excluding any debt securities convertible into or exchangeable for
such equity.

         "Closing Price" means on any day the reported last sale price on such
day, or in case no sale takes place on such day, the average of the reported
closing bid and ask prices on the principal national securities exchange (which
shall include the Nasdaq National Market) on which such stock is listed or
admitted to trading (and if the Common Stock is listed or admitted to trading on
more than one U.S. national or non-U.S. securities exchange, the Company shall
determine, in its reasonable discretion, the principal securities exchange on
which such Common Stock is listed or admitted to trading), or if not listed or
admitted to trading on any securities exchange, the

<PAGE>   25
                                      -25-


average of the closing bid and ask prices as furnished by any independent
registered broker-dealer firm, selected by the Company for that purpose, in each
case adjusted for any stock split during the relevant period.

         "Commission" means the Securities and Exchange Commission.

         "Default" means any event which is, or after notice or passage of time
or both would be, a Voting Rights Triggering Event.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Holders" means the registered holders from time to time of the
Convertible Preferred Stock.

         "Market Price", as of any date, means the average of the daily Closing
Price for the five consecutive trading days ending on such date.

         "Officers' Certificate" means a certificate signed by two officers of
the Company.

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

         "Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.

         "Registration Rights Agreement" means the Registration Rights Agreement
among the Company and Merrill Lynch, Pierce, Fenner and Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc.,
BT Alex. Brown Incorporated and Lehman Brothers Inc. with respect to the
Convertible Preferred Stock.

         "Securities Act" means the Securities Act of 1933, as amended.


<PAGE>   26
                                      -26-


         "Shelf Registration Statement" means a shelf registration statement
filed with the Commission to cover resales of Transfer Restricted Securities by
holders thereof, as required by the Registration Rights Agreement.

         "Trading Day" means, in respect of any securities exchange or
securities market, each Monday, Tuesday, Wednesday, Thursday and Friday, other
than any day on which securities are not traded on the applicable securities
exchange or in the applicable securities market.

         "Transfer Agent" means the transfer agent for the Convertible Preferred
Stock appointed by the Company, which initially shall be The Bank of New York.

         "Transfer Restricted Securities" means each share of Convertible
Preferred Stock (or the shares of Common Stock into which such share of
Convertible Preferred Stock is convertible) until (i) the date on which such
security has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement or (ii) the date on which
such security is distributed to the public pursuant to Rule 144 under the
Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act
(or any successor rule thereof) or would be saleable pursuant to Rule 144(k)
under the Securities Act had it not been held by, or had it never been held by,
an affiliate of the Company.


<PAGE>   27
                                      -27-




         IN WITNESS WHEREOF, said Global TeleSystems Group, Inc., has caused
this Certificate of Designation to be signed by Grier C. Raclin, its Senior Vice
President -- External Affairs, General Counsel and Corporate Secretary, this
23rd day of April, 1999.

                                     GLOBAL TELESYSTEMS GROUP, INC.


                                     By:   /s/ GRIER C. RACLIN
                                        ----------------------------------------
                                        Name:  Grier C. Raclin
                                        Title: Senior Vice President -- External
                                               Affairs, General Counsel and
                                               Corporate Secretary



<PAGE>   28


                                                                       EXHIBIT A



                       FORM OF CONVERTIBLE PREFERRED STOCK


                                FACE OF SECURITY


         THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF
RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE
903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) TO AN INSTITUTION
THAT IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(a)(1), (2), (3)
OR (7) UNDER THE SECURITIES ACT IN A TRANSACTION EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF
AVAILABLE), OR (5) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, AND IN EACH CASE, IN ACCORDANCE WITH All APPLICABLE SECURITIES
LAWS OF THE STATES OF THE UNITED STATES.

         IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE
REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH
REGISTRAR AND TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER
COMPLIES WITH THE FOREGOING RESTRICTIONS.



                                      A-1


<PAGE>   29



Certificate Number                               Number of Shares of Convertible
                                                                 Preferred Stock


                                                           CUSIP NO.: 37936U 401


               7 1/4% Cumulative Convertible Preferred Stock (par
                  value $0.0001) (Liquidation Preference $5,000
                    per share of Convertible Preferred Stock)

                                       of

                         Global TeleSystems Group, Inc.


         Global TeleSystems Group, Inc., a Delaware corporation (the "Company"),
hereby certifies that (the "Holder") is the registered owner of fully paid and
non-assessable preferred securities of the Company designated the 7 1/4%
Cumulative Convertible Preferred Stock (par value $0.0001) (liquidation
preference $5,000 per share of Cumulative Convertible Preferred Stock) (the
"Convertible Preferred Stock"). The shares of Convertible Preferred Stock are
transferable on the books and records of the Registrar, in person or by a duly
authorized attorney, upon surrender of this certificate duly endorsed and in
proper form for transfer. The designation, rights, privileges, restrictions,
preferences and other terms and provisions of the Convertible Preferred Stock
represented hereby are issued and shall in all respects be subject to the
provisions of the Certificate of Designations dated April , 1999, as the same
may be amended from time to time (the "Certificate of Designations").
Capitalized terms used herein but not defined shall have the meaning given them
in the Certificate of Designations. The Company will provide a copy of the
Certificate of Designations to a Holder without charge upon written request to
the Company at its principal place of business.

         Reference is hereby made to select provisions of the Convertible
Preferred Stock set forth on the reverse hereof, and to the Certificate of
Designations, which select provisions and the Certificate of Designations shall
for all purposes have the same effect as if set forth at this place.

         Upon receipt of this certificate, the Holder is bound by the
Certificate of Designations and is entitled to the benefits thereunder.

         Unless the Transfer Agent's Certificate of Authentication hereon has
been properly executed, these shares of


                                      A-2
<PAGE>   30

Convertible Preferred Stock shall not be entitled to any benefit under the
Certificate of Designations or be valid or obligatory for any purpose.

         IN WITNESS WHEREOF, the Company has executed this certificate this 23rd
day of April, 1999.

                                    GLOBAL TELESYSTEMS GROUP, INC.


                                    By:
                                       ------------------------------
                                       Name:
                                       Title:



                                    By:
                                       ------------------------------
                                       Name:
                                       Title:



                                      A-3
<PAGE>   31




                 TRANSFER AGENT'S CERTIFICATE OF AUTHENTICATION

         This is one of the Convertible Preferred Stock referred to in the
within mentioned Certificate of Designations.

Dated:  April 23, 1999

                                        The Bank of New York, N.A.
                                        as Transfer Agent,


                                        By:
                                            -------------------------
                                            Authorized Signatory




                                      A-4
<PAGE>   32




                               REVERSE OF SECURITY


         Dividends on each share of Convertible Preferred Stock shall be payable
at a rate per annum set forth in the face hereof or as provided in the
Certificate of Designations.

         The shares of Convertible Preferred Stock shall be redeemable as
provided in the Certificate of Designations. The shares of Convertible Preferred
Stock shall be convertible into the Company's Common Stock in the manner and
according to the terms set forth in the Certificate of Designations.

         As required under Delaware law, the Company shall furnish to any Holder
upon request and without charge, a full summary statement of the designations,
voting rights preferences, limitations and special rights of the shares of each
class or series authorized to be issued by the Company so far as they have been
fixed and determined and the authority of the Board of Directors to fix and
determine the designations, voting rights, preferences, limitations and special
rights of the class and series of shares of the Company.





                                      A-5
<PAGE>   33




                                   ASSIGNMENT

                  FOR VALUE RECEIVED, the undersigned assigns and transfers the
shares of Convertible Preferred Stock evidenced hereby to:


- --------------------------------------------------------------------------------
        (Insert assignee's social security or tax identification number)



- --------------------------------------------------------------------------------
                    (Insert address and zip code of assignee)


and irrevocably appoints:______________________________________________________
agent to transfer the shares of Convertible Preferred Stock evidenced hereby on
the books of the Transfer Agent and Registrar. The agent may substitute another
to act for him or her.

Date:
     --------------------

Signature:
          ------------------------------
          (Sign exactly as your name
           appears on the other side of
           this Convertible Preferred
           Stock Certificate)

Signature Guarantee:(1)
                         -----------------------------------------------------

- --------
(1)      (Signature must be guaranteed by an "eligible guarantor institution"
         that is, a bank, stockbroker, savings and Loan association or credit
         union meeting the requirements of the Registrar, which requirements
         include membership or participation in the Securities Transfer Agents
         Medallion Program ("STAMP") or such other "signature guarantee program"
         as may be determined by the Registrar in addition to, or in
         substitution for, STAMP, all in accordance with the Securities Exchange
         Act of 1934, as amended.)



                                      A-6
<PAGE>   34

                                                                       EXHIBIT B



                              NOTICE OF CONVERSION



(To be Executed by the Registered Holder
in order to Convert the Convertible, Preferred Stock)


         The undersigned hereby irrevocably elects to convert (the "Conversion")
shares of 7 1/4% Cumulative Convertible Preferred Stock (the "Convertible
Preferred Stock"), represented by stock certificate No(s). _______ (the
"Convertible Preferred Stock Certificates") into shares of common stock ("Common
Stock") of Global TeleSystems Group, Inc. (the "Company") according to the
conditions of the Certificate of Designations of the Powers, Preferences and
Relative, Optional and Other Special Rights of the Convertible Preferred Stock
and Qualifications, Limitations and Restrictions Thereof (the "Certificate of
Designations"), as of the date written below. If shares are to be issued in the
name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates. No fee will be charged to the holder for any conversion, except
for transfer taxes, if any. A copy of each Convertible Preferred Stock
Certificate is attached hereto (or evidence of loss, theft or destruction
thereof).

         The undersigned represents and warrants that all offers and sales by
the undersigned of the shares of Common Stock issuable to the undersigned upon
conversion of the Convertible Preferred Stock shall be made pursuant to
registration of the Common Stock under the Securities Act of 1933 (the "Act"),
or pursuant to any exemption from registration under the Act.

         Any holder, upon the exercise of its Conversion Rates in accordance
with the terms of the Certificate of Designations and the Convertible Preferred
Stock, agrees to be bound by the terms of the Registration Rights Agreement.

         Capitalized terms used but not defined herein shall have the meanings
ascribed thereto in or pursuant to the Certificate of Designations.

Date of Conversion:
                    -----------------------------------------------

Applicable Conversion Rate:
                            ---------------------------------------



                                      B-1
<PAGE>   35

Number of shares of Convertible
Preferred Stock to be Converted:
                                 -----------------------------------------

Number of shares of Common Stock
to be Issued: (2)
                 ---------------------------------------------------------

Signature:
          ----------------------------------------------------------------

Name:
      --------------------------------------------------------------------

Address:(3)
           ---------------------------------------------------------------

Fax No.:
         -----------------------------------------------------------------







- --------
(2)      The Company is not required to issue shares of Common Stock until the
         original Convertible Preferred Stock Certificate(s) (or evidence of
         loss, theft or destruction thereof) to be converted are received by the
         Company or its Transfer Agent. The Company shall issue and deliver
         shares of Common Stock to an overnight courier not later than three
         business days following receipt of the original Convertible Preferred
         Stock Certificate(s) to be converted.

(3)      Address where shares of Common Stock and any other payments or
         certificates shall be sent by the Company.




                                      B-2


<PAGE>   1

                                                                     EXHIBIT 5.1

                        [SHEARMAN & STERLING LETTERHEAD]

                                  June 3, 1999

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

Ladies and Gentlemen:

     We have acted as U.S. counsel to Global TeleSystems Group, Inc., a Delaware
corporation ("GTS"), in connection with the Registration Statement on Form S-3
(no. 333-78097) (the "Registration Statement") under the Securities Act of 1933,
as amended, relating to the offering from time to time by certain holders of
10,000,000 Depositary Shares each representing 1/100 of a share of 7 1/4%
Cumulative Convertible Preferred Stock (liquidation preference $50 per share) of
GTS (the "Depositary Shares"), 100,000 shares of 7 1/4% Cumulative Convertible
Preferred Stock, par value $.0001 per share, (liquidation preference $5,000 per
share) of GTS (the "Convertible Preferred Stock"), 7,246,000 shares of common
stock, par value $.10 per share ("Common Stock") of GTS issuable on conversion
of the Convertible Preferred Stock and 1,500,000 shares of Common Stock that may
be issued from time to time as dividends on the Convertible Preferred Stock. The
Depositary Shares, the Common Stock issuable on conversion of the Convertible
Preferred and the Convertible Preferred Stock are being registered in connection
with the obligation of GTS, pursuant to a certain registration rights agreement,
to register such securities held by certain holders thereof that may be sold
pursuant to the prospectus included in the Registration Statement (the
"Prospectus"). The Common Stock that may be issued from time to time as
dividends on the Convertible Preferred Stock is being registered in connection
with the obligation of GTS, pursuant to a certain depositary agreement, to
register such Common Stock. The Depositary Shares, the Common Stock and the
Convertible Preferred Stock are described in the Prospectus. This opinion is an
exhibit to the Registration Statement.

     In that capacity, we have reviewed the Registration Statement, the
Certificate of Incorporation, including the Certificate of Designations of the
Powers, Preferences and Relative Optional and Other Special Rights of 7 1/4%
Cumulative Convertible Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (the "Certificate of Designations") and By-Laws of the
Company, the proceedings of the Board of Directors of the Company relating to
the aforementioned securities and originals, or copies certified or otherwise
identified to our satisfaction, of such other documents, corporate records,
certificates and other instruments as we have deemed necessary or appropriate
for purposes of this opinion. In such examination, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as copies.

     Based upon the foregoing, we are of the opinion that:

          (i)  the Convertible Preferred Stock (which are represented by
     Depositary Shares) has been duly authorized and is validly issued, fully
     paid and non-assessable;

          (ii)  the Common Stock issuable on conversion of the Convertible
     Preferred Stock has been duly authorized, and upon Conversion of the
     Convertible Preferred Stock in accordance with the terms of the Certificate
     of Designations, will be validly issued, fully paid and non-assessable; and

          (iii) the Common Stock that may be issued from time to time by the
     Company as dividends on the Convertible Preferred Stock, has been duly
     authorized and, upon due declaration by the Board of Directors of the
     Company of a dividend on the Convertible Preferred Stock payable in Common
<PAGE>   2

     Stock, and due payment of such dividend in accordance with the Certificate
     of Designations, will be validly issued, fully paid and non-assessable.

     Our opinions expressed above are limited to Delaware corporate law and we
do not express any opinion herein concerning any other law.

     We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "LEGAL
MATTERS" contained in the Prospectus.

                                            Very truly yours,

                                            /s/ SHEARMAN & STERLING

<PAGE>   1

                                                                    EXHIBIT 12.1

GLOBAL TELESYSTEMS GROUP, INC.

EARNINGS/DEFICIENCIES TO COVER FIXED CHARGES

FOR THE QUARTER ENDED MARCH 31, 1999



<TABLE>
<CAPTION>
                              THREE MONTHS
                                 ENDED
                               MARCH 31,                           YEAR ENDED
                              ------------   ------------------------------------------------------
                                  1999         1998        1997        1996       1995       1994
                              ------------   ---------   ---------   --------   --------   --------
<S>                           <C>            <C>         <C>         <C>        <C>        <C>
Net Loss before
  extraordinary loss........   ($162,208)    ($243,052)  ($134,761)  ($76,205)  ($44,196)  ($17,951)
Addback:  Income tax
  expense...................       3,764         7,752       2,485      1,360      2,565         --
                               ---------     ---------   ---------   --------   --------   --------
Pretax Loss.................    (158,444)     (235,300)   (132,276)   (74,845)   (41,631)   (17,951)
Adjustments:  Fixed
  charges...................      47,673       129,712      29,273    367,464     33,914        100
                               ---------     ---------   ---------   --------   --------   --------
Adjusted earnings from
  continuing operations.....    (110,771)     (105,588)   (103,003)   292,619     (7,717)   (17,851)
Interest expense
  indebtedness, including
  amortization of dis-
  count.....................      47,673       129,712      29,273    367,464     33,914        100
                               ---------     ---------   ---------   --------   --------   --------
     Total fixed charges....      47,673       129,712      29,273    367,464     33,914        100
Deficiency of earnings
  available to cover fixed
  charges...................   ($158,444)    ($235,300)  ($132,276)  ($74,845)  ($41,631)  ($17,951)
                               =========     =========   =========   ========   ========   ========
</TABLE>


<PAGE>   1

                                                                    EXHIBIT 23.1

               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


     We consent to the reference to our firm under the caption "Experts" in the
Pre-Effective Amendment No. 1 to the Registration Statement (Form S-3 No.
333-78097) and related Prospectus of Global TeleSystems Group, Inc. and to the
incorporation by reference therein of our report dated March 8, 1999, with
respect to the consolidated financial statements and schedules of Global
TeleSystems Group, Inc. included in its Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the Securities and Exchange Commission.



                                                  /s/ Ernst & Young LLP



Vienna, Virginia


June 2, 1999


<PAGE>   1


                                                                    EXHIBIT 23.2



                       CONSENT OF INDEPENDENT ACCOUNTANTS



     We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 (Pre-Effective Amendment No. 1) of our report dated March
3, 1999, relating to the financial statements and financial statements schedules
of Espirit Telecom Group plc, which appears in Global TeleSystems Group, Inc.
Annual Report on Form 10-K for the year ended December 31, 1998. We also consent
to the references to us under the headings "Experts" in such Registration
Statement.



                                               /s/ PricewaterhouseCoopers



London, England


June 3, 1999




© 2019 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission