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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------

                                   FORM 10-K

      [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

      [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                            COMMISSION FILE NUMBER:

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

                         GLOBAL TELESYSTEMS EUROPE B.V.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                 NETHERLANDS                                        NONE
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification Nos.)
</TABLE>

                              TERHULPSESTEENWEG 6A
                                 1560 HOEILAART
                                    BELGIUM
                    (Address of principal executive offices)

                                 (322) 658-5200
                        (Registrant's telephone number)

          Securities registered pursuant to Section 12(b) of the Act:
                                      NONE

          Securities registered Pursuant to Section 12(g) of the Act:
                                      NONE

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

     Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this Form 10-K, and will not be
contained, to the best of the registrants' knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]  Not Applicable.

     On February 15, 2001, there were outstanding 200,634 shares of Common Stock
of Global TeleSystems Europe B.V. There is no established market for the
registrant's voting stock. Accordingly, the registrant is unable to estimate the
value of shares held by non-affiliates. There were 318 shares of common stock
held by non-affiliates.

<TABLE>
<CAPTION>
      ITEM OF FORM 10-K            DOCUMENTS INCORPORATED BY REFERENCE
      -----------------            -----------------------------------
<S>                                <C>
     Part IV, Item 14(c)                        Exhibits
</TABLE>

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                         GLOBAL TELESYSTEMS EUROPE B.V.

                                   FORM 10-K
                          YEAR ENDED DECEMBER 31, 2000

                               TABLE OF CONTENTS

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                                                                        PAGE
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<S>       <C>                                                           <C>
                                   PART I
ITEM 1.   Business....................................................    2
ITEM 2.   Properties..................................................   30
ITEM 3.   Legal Proceedings...........................................   30
ITEM 4.   Submission of Matters to a Vote of Security Holders.........   31

                                  PART II

ITEM 5.   Market for the Company's Common Equity and Related
            Stockholder Matters.......................................   31
ITEM 6.   Selected Financial Data.....................................   32
ITEM 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................   33
ITEM 7A.  Quantitative and Qualitative Disclosure About Market Risk...   39
ITEM 8.   Financial Statements and Supplementary Information for the
            Company...................................................   41
ITEM 9.   Changes In and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................   60

                                  PART III

ITEM 10.  Directors and Executive Officers of the Company.............   60
ITEM 11.  Executive Compensation......................................   63
ITEM 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................   68
ITEM 13.  Certain Relationships and Related Transactions..............   68

                                  PART IV

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form
            8-K.......................................................   69
SIGNATURES............................................................   73
</TABLE>

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                                     PART I

ITEM 1. BUSINESS

RECENT DEVELOPMENTS

     Global TeleSystems Europe B.V. (the "Company", "GTS Europe B.V.", or
"Ebone") is a subsidiary of Global TeleSystems, Inc. ("GTS"). In November 2000,
GTS announced a substantial restructuring (the "Restructuring") of its
operations to focus on those areas of its business that its management believes
have stronger prospects for long-term success and profitability, and to divest,
liquidate or otherwise address those operations that its management believes are
non-strategic or which are unsustainable as currently constituted and are a
drain on GTS's limited financial and other resources. Following the
Restructuring, GTS anticipates that the Company's operations will provide
substantially all of GTS's revenues. GTS's decision to undertake the
Restructuring was prompted in large measure by the significant downturn in the
financial and stock markets, which commenced in March 2000. As a consequence of
that downturn, the availability of capital markets and other financing, which
was essential and was previously plentiful for below-investment grade emerging
and more-established alternative telecommunications providers, like the Company
and GTS, has substantially decreased or has become available only with onerous
terms and conditions. At the same time, the pace of competition in the Company's
and GTS's markets has intensified. The Company and GTS cannot predict when these
conditions will improve. Consequently, GTS determined that a substantial
restructuring was required to achieve self-sufficiency with regard to its
financial resources and to implement its business plan. Although the Company and
GTS believe they have made significant progress during the first and second
quarters of 2001 to complete the Restructuring and to enhance the liquidity
position of the Company and GTS, the future viability of the Company will depend
upon GTS's ability to complete those aspects of the Restructuring, which will
fund GTS's operations through the first quarter of 2002, on the Company's
ability to access funding under the Amended Bank Facility, defined below, and on
the ability of the Company to access additional capital to fund its operations
after the first quarter of 2002, as discussed in greater detail below.

     In connection with the Restructuring, GTS will focus on providing, through
the Company, data and internet-based broadband services to traditional carriers,
Internet service providers, application service providers, other Web-centric
entities and data intensive pan-European corporations. As part of the
Restructuring, GTS reorganized into four "stand alone" business units -- GTS
Broadband Services (which was rebranded "Ebone" in January 2001 and which is
comprised primarily of the Company's operations); GTS Business Services; GTS
Central Europe; and Golden Telecom, Inc. ("Golden Telecom") -- and announced
that it intended to sell the portion of its Business Services focused on serving
small-to-medium-sized enterprises ("SME's") and providing voice and voice-based
services. The Business Services units are primarily comprised of GTS's wholly
owned subsidiary, Global TeleSystems (Europe) Limited, formerly Esprit Telecom
Group plc ("Esprit" or "GTS (Europe) Ltd"). GTS also announced its intention to
sell its Central European operations, which provide voice and data services in
Hungary, Poland, the Czech Republic, Slovakia and Romania. GTS expects to retain
its transborder fiber optic network in that region.

     In addition, GTS indicated it could sell all or part of its 61.5% interest
in Golden Telecom, a subsidiary with operations in Russia and other countries in
the former Soviet Union, which was split-off from GTS in an initial public
offering in October 1999. On April 2, 2001, GTS announced that it had entered
into an agreement to sell up to its entire equity interest in Golden Telecom.
See "-- Agreement to Sell Certain of GTS's Shares in Golden Telecom." While GTS
has had certain discussions with third parties concerning the sale of the
Central European businesses, these discussions have not resulted at this time in
any definitive agreements to purchase any of these assets and there can be no
assurance that any such agreements will be reached. As discussed under
"-- Amended Bank Facility," GTS is required to transfer to subsidiaries of the
Company GTS's interest in the Central Europe division and in Golden Telecom
prior to effectiveness of the Amended Bank Facility, defined below.

     As a result of the Restructuring initiative, the Company recorded a $136.8
million charge within its statements of operations in the fourth quarter 2000.
Of the $136.8 million, $121.3 million represents non-cash

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items due to the write-off of impaired goodwill and intangibles of $83.5 million
with the remaining $37.8 million principally related to the write-off of
impaired fixed assets.

As discussed in greater detail below, many of the steps taken by GTS during the
first and second quarters of 2001 to complete the Restructuring are related to
and affect the Company.

  AMENDED BANK FACILITY

     On July 14, 2000, a wholly owned subsidiary of the Company, Global
TeleSystems Europe Holdings B.V. (the "Borrower") entered into a $550 million
multi-currency bank facility with Bank of America International Limited,
Deutsche Bank AG London and Dresdner AG London Branch (the "Bank Facility"). The
Bank Facility had a term of eight years -- the first four years as a revolving
facility and the remaining four years as a term facility with declining
availability and required amortization of outstanding loans. The outstanding
borrowings under the Bank Facility were E100 million and E200 million as of
December 31, 2000 and March 31, 2001, respectively.

     On account of the Restructuring, the Borrower and the lenders under the
Bank Facility commenced negotiations to amend the Bank Facility. In April 2001,
the Borrower and the lenders under the Bank Facility entered into an agreement
(the "Supplemental Agreement"), to amend and restate the Bank Facility (the
"Amended Bank Facility"), to permit the Restructuring and to reduce the maximum
amount available for borrowings to E300 million pending the negotiation of a new
longer term facility. The following is a summary of the Supplemental Agreement
and the Amended Bank Facility and is qualified in its entirety by reference to
the Supplemental Agreement and the Amended Bank Facility, which are incorporated
by reference as on exhibit to this report.

     The Supplemental Agreement and the Amended Bank Facility together, among
other things:

          (1) provide that the funds available under the Amended Bank Facility
     are limited to the lesser of (A) a range of funding, based on the
     Borrower's business plan, from E180 million to E300 million from April 2001
     through January 2002 (until the termination of the Amended Bank Facility),
     and (ii) an amount determined by a monthly calculated rolling three-month
     annualized cash flow multiple;

          (2) provide that the Amended Bank Facility is available on a revolving
     basis until March 31, 2002, with an optional additional twelve-month term
     subject to payment of a term-out fee to the lenders;

          (3) allow GTS and the Company to undertake the asset transfers
     associated with the Esprit Restructuring, defined below;

          (4) replace financial covenants under the Bank Facility with covenants
     requiring minimum consolidated revenues, minimum consolidated net operating
     cash flow and maximum cumulative consolidated capital expenditure;

          (5) require GTS to (a) use reasonable endeavors to transfer all of its
     shares in Golden Telecom to the Borrower as soon as possible and cause the
     Borrower to grant security in favor of the lenders over all such shares and
     over any promissory note or guarantee provided by Alfa Holdings, defined
     below, in connection with its or its affiliates' obligations under the
     Golden Purchase Agreement, defined below (each to the extent possible under
     the Golden Purchase Agreement or by obtaining Alfa Holdings' consent) and
     to lend a portion of the proceeds of the sale of the Golden Telecom shares
     to the Borrower (b) cause (i) the current parent of the Central European
     division to grant security over its shares in the Delaware holding
     companies of the Central European unit in favor of the lenders, (ii) the
     shares of the companies comprising the Central European division to be
     transferred to a new subsidiary of GTS and the shares of such new company
     to be transferred to the Borrower and (iii) the Borrower to grant security
     over the shares of such new company in favor of the Banks; and

          (6) require GTS to apply (a) E50 million of the sale proceeds of the
     shares in Golden Telecom in prepayment of loans outstanding under the
     Amended Bank Facility (to be payable in two equal installments by May 31,
     2001 if the Closing, defined below, occurs prior to that date, or payable
     in a single payment at the Closing if the Closing occurs on or after May
     31, 2001); and (b) the proceeds of
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<PAGE>   5

     any sale of the Central European division to prepayment of the Amended Bank
     Facility and the cancellation of commitments provided that (i) if such
     proceeds received on or before September 30, 2001 (x) exceed E25 million,
     the amount of such excess shall not be applied to the cancellation of
     commitments and (y) do not exceed E25 million, the commitments will be
     reduced by all such proceeds received up to E50 million;

          (7) require if GTS issues new shares, any proceeds of such issuance in
     excess of $50 million and the proceeds of any other raising of funds by the
     Company or any of its subsidiaries (other than the Borrower and its
     subsidiaries or the Central Europe division), to be applied to the
     prepayment and cancellation of the Amended Bank Facility, provided that the
     parties have agreed to work together in good faith to endeavor to identify,
     discuss, and implement changes to the Supplemental Agreement and Amended
     Bank Facility necessary or appropriate to obtain such investment;

          (8) require GTS and Borrower to hold their cash in an account in the
     name of the Borrower, which account is pledged to the lenders, with certain
     exceptions, including (a) $50 million in proceeds from the financing
     described in (7) above, (b) E35 million in respect of the Working Capital
     Facility, defined below, (c) approximately $35 million and E32 million in
     restricted cash held in support of third party obligations, (d) aggregate
     cash balances of GTS and the Borrower not to exceed E7.5 million, and (e)
     $10 million in an account in GTS's name subject to a pledge to the lenders;

          (9) restrict GTS and its subsidiaries from entering into joint
     ventures and partnerships and from making acquisitions, other than, among
     other things, certain acquisitions and other transactions for consideration
     consisting of the issuance of shares of GTS, provided that the total
     liabilities of GTS and its subsidiaries in respect of such transactions
     does not exceed $25 million; and

          (10) prohibit payments by the Borrower and its subsidiaries to other
     subsidiaries of GTS and to the Company, other than (a) payments to the
     Company to an account pledged in favor of the lenders, (b) disposals
     relating to the Asset Transfers, defined below, (c) certain transactions
     relating to Golden Telecom and the Central European division and (d)
     provided no default has occurred under the Amended Bank Facility, payment
     of E6,400,000 to GTS in respect of the cash outflows during April 2001 and,
     in respect of each month thereafter, the amount required to meet cash
     outflows of GTS during such month up to certain agreed amounts, including
     amounts payable by GTS on behalf of the Borrower and its subsidiaries.

     Effectiveness of the Supplemental Agreement and Amended Bank Facility is
subject to the transfer of certain directly owned GTS subsidiaries to the
Borrower described above, the delivery of legal opinions and other documentation
and the satisfaction of certain customary conditions precedent. GTS and the
Borrower are in the process of completing the legal documentation needed to
satisfy these conditions precedent, which is expected to be finalized shortly.

     The Company believes that, combined with internally generated cash, the
terms of the Supplemental Agreement and the Amended Bank Facility should provide
adequate funding to allow GTS and the Company to meet their business plans
through March 31, 2002. The Amended Bank Facility provides that the parties
intend to work with each other in good faith towards the objective of closing a
refinancing of the Amended Bank Facility in full as soon as reasonably
practical.

  AGREEMENT TO SELL CERTAIN OF GTS'S SHARES IN GOLDEN TELECOM

     On April 2, 2001, GTS entered into an agreement (the "Golden Purchase
Agreement") with Alfa Bank Holdings Limited ("Alfa Holdings"), Capital
International Global Emerging Markets Private Equity Fund, L.P. ("Capital
Global"), Cavendish Nominees Limited ("Cavendish"), and First NIS Regional Fund
SICAV ( "First NIS," together with Cavendish, "Barings," and collectively, with
Alfa Bank, Capital Global and Cavendish, the "Purchasers") to sell 12,195,122
shares of common stock, par value $0.01 per share (the "Golden Common Stock"),
of Golden Telecom owned by GTS. On April 10, 2001, Alfa Holdings assigned its
rights and obligations to Alfa Telecom Limited, an affiliate of Alfa Holdings
("Alfa Telecom"), in accordance with its right to make such assignment under the
Share Purchase Agreement prior to the closing of the
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transaction (the "Closing"). At March 31, 2001, GTS owned approximately 61.5%,
or 15,056,328 shares, of the outstanding Golden Common Stock. The following
summary describes certain of the material terms of the Golden Purchase Agreement
and is qualified in its entirety by reference to the Golden Purchase Agreement,
which is incorporated by reference as an exhibit to this report.

     Under the Golden Purchase Agreement, the purchase price for the shares of
Golden Common Stock is $10.25 per share in cash, or $125,000,000; of which Alfa
Telecom is to purchase 10,731,707 shares for $110,000,000; Capital Global has
agreed to purchase 487,805 shares for $5,000,000; Cavendish has agreed to
purchase 886,927 shares for $9,091,000; and First NIS has agreed to purchase
88,683 shares for $909,000. However, Alfa Telecom will satisfy its obligation to
pay the portion of the purchase price payable by it by delivery at the Closing
of 50% of such amount in cash and a promissory note (the "Note") in a principal
amount equal to 50% of such amount due May 31, 2001. The Note will be secured by
a security interest in the shares of Golden Common Stock purchased by Alfa
Telecom and a guaranty by Alfa Bank. The Closing is subject to the fulfilment or
written waiver of the conditions set forth in the Golden Purchase Agreement,
including the expiration (or termination) of any waiting period (or extension
thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and other customary closing conditions.

     At the Closing, GTS will enter into separate stock option agreements (the
"Stock Option Agreements") with each of Alfa Telecom, Capital Global and Barings
(the "Stock Option Parties"). The following paragraphs describe certain of the
material terms of the Stock Option Agreements. Pursuant to the Stock Option
Agreements, during the 60-day period after Closing, each of the Stock Option
Parties (or their designees) will have right to cause GTS to sell to each of
them up to the following number of shares allocated as follows: Alfa
Telecom -- 2,000,000 shares of Golden Common Stock, Capital Global -- 90,909
shares of Golden Common Stock, and Barings  --  181,818 shares of Golden Common
Stock. The purchase price for these shares shall be $11.00 per share in cash.
During this 60-day period GTS will agree not to sell such shares to any other
party.

     If the Stock Option Parties (or their designees) purchase at least $140
million shares of Golden Common Stock held by GTS either at the Closing or
during the 60-day period described above (the "Minimum Purchase Condition"),
then for the period from 60 days after the closing until twelve months
thereafter (the "Lock-up Period"), the Stock Option Parties (or their designee)
will have the right to cause GTS to sell to each of the Stock Option Parties (or
their designees) any of the shares of Golden Common Stock which the Company
continues to own, at a per share price equal to the greater of (a) $11.00 or (b)
120% of the moving average of the closing price of the Golden Common Stock on
the Nasdaq National Market during the 60-trading day period ended on the date
immediately before the Stock Option Parties (or their designees) deliver a
notice of intention to purchase such additional shares.

     If the Minimum Purchase Condition is fulfilled, during the Lock-up Period
GTS will not be permitted to sell the shares of Golden Common Stock owned by it
unless the following procedures are followed: GTS must notify the Stock Option
Parties of GTS's intent to sell such shares at least 30 days prior to
consummating the sale of such shares. The Stock Option Parties will then have
(i) fifteen days after receiving such notice to notify GTS of the Stock Option
Parties' decision to purchase a number of the shares which GTS proposes to sell
in the following allocations -- Alfa Telecom up to 88%, Capital Global up to 4%,
and Barings up to 8% (provided that each of the Stock Option Parties shall have
the option to purchase any shares which the other Stock Option Parties do not
purchase), and (ii) if the Stock Option Parties have not consummated their
purchase of such shares within sixty days after receiving GTS's notice, GTS will
be entitled to consummate the sale to the third party.

     If the Minimum Purchase Condition is not fulfilled, GTS will be free to
sell the shares of Golden Common Stock held by it. However, for the twelve-month
period after the Closing, Alfa Telecom (or its designee) will have the right to
cause GTS to sell to Alfa Telecom (or its designee) any of the shares of Golden
Common Stock which GTS continues to own and has not sold, at a per share price
equal to the greater of (a) $11.00 or (b) 120% of the moving average of the
closing price of the Golden Common Stock on the Nasdaq National Market during
the 60-trading day period ended on the date immediately before the Stock Option
Parties (or their designees) deliver a notice of intention to purchase such
shares.

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     During the period between six months and twelve months after the Closing,
Alfa Telecom will have the right pursuant to its Stock Option Agreement to cause
GTS to sell any shares of Golden Common Stock which GTS then owns in an
underwritten public offering provided that GTS shall not be required to complete
the offering unless the offering price is equal to at least $15.00 per share.

     As discussed under "-- Recent Developments -- Amended Bank Facility," GTS
may be required to transfer its shares of Golden Common Stock to the Borrower in
connection with the conditions precedent to effectiveness of the Amended Bank
Facility.

  RESTRUCTURING OF GTS'S GLOBAL TELESYSTEMS (EUROPE) LTD (ESPRIT) SUBSIDIARY

     As part of the Restructuring, GTS determined that it must address and
resolve the substantial outstanding debt obligations of Esprit, which that
subsidiary cannot independently service. Esprit has incurred and, without a
restructuring of such obligations, is expected to continue to incur net losses,
operating losses, negative cash flow from operating activities, and losses from
operations before interest, income taxes, depreciation and amortization, foreign
currency gains (losses), other income (expense) and non-recurring expenses
("EBITDA"). For the years ended December 31, 1998, December 31, 1999 and
December 31, 2000, Esprit sustained net losses of $106.5 million, $341.4 million
and $1,029.9 million, respectively, and negative EBITDA of $37.0 million, $160.6
million and $179.2 million, respectively. Esprit has incurred substantial debt
to finance its business. As of December 31, 2000, the amount of such
indebtedness consisted of long-term debt owed to GTS in the amount of $104.2
million and Esprit's $230,000,000 principal amount 11 1/2% Senior Notes due 2007
("Esprit US Notes due 2007"), $150,000,000 principal amount 10 7/8% Senior Notes
due 2008 ("Esprit US Notes due 2008" and, together with the US Notes due 2007,
the "Esprit US Notes"), DM 125,000,000 principal amount 11 1/2% Senior Notes due
2007 ("Esprit DM Notes due 2007") and DM 150,000,000 principal amount 11% Senior
Notes due 2008 ("Esprit DM Notes due 2008" and, together with the Esprit DM
Notes due 2007, the "Esprit DM Notes"; the Esprit US Notes and the Esprit DM
Notes, are hereinafter referred to as the "Esprit Notes"). Without a
restructuring of these debt obligations, GTS expects that Esprit's existing
operations will continue to sustain negative cash flows. In addition, GTS
contributed $87.5 million and $287.2 million to Esprit in the form of equity
during 1999 and 2000, respectively, and has contributed $12.2 million to Esprit
in the form of equity during the first quarter of 2001. Due to Esprit's
continuing expected negative cash flows and other demands for GTS's own cash
resources, GTS had indicated to Esprit that it would be unable to continue
providing funding to Esprit after March 31, 2001, other than on a senior secured
basis.

     In order to be able to continue to meet its trade obligations consistent
with past practices while it addressed its options with regard to its
outstanding indebtedness under the Esprit Notes and its long-term debt owed to
GTS, on December 15, 2000 Esprit announced that it had elected not to pay
scheduled cash interest payments totaling approximately $12.0 million due on
December 15, 2000 on the Esprit US Notes due 2008 and Esprit DM Notes due 2008.
Upon the expiration of the applicable grace period, this payment default matured
into an event of default under the related indentures for the Esprit US Notes
due 2008 and the Esprit DM Notes due 2008. If the indebtedness represented by
the Esprit US Notes due 2008 and Esprit DM Notes due 2008 were accelerated, this
could, in turn, trigger an event of default under the Esprit US Notes due 2007
and Esprit DM Notes due 2007. These events of default have no effect upon the
Company's debt obligations. GTS and Esprit, with the assistance of its financial
advisors, entered into negotiations with an unofficial committee (the
"Committee") comprised of certain holders of the Esprit Notes with a view toward
developing a consensual restructuring plan for Esprit that would maximize the
value of Esprit for all interested parties.

     Following negotiations with the Committee and its financial and legal
advisors, Esprit and GTS have developed a plan for a reorganization of GTS's
European voice services business (as described more fully below and referred to
as "GTS Business Services") which comprises a restructuring of the Esprit's
obligations under the Esprit Notes pursuant to a scheme of arrangement under
Part XIII of the UK Companies Act of 1985 (the "Scheme") and a restructuring of
certain other indebtedness and obligations of Esprit (the "Esprit
Restructuring"). Esprit and the other companies, which include certain
subsidiaries of the Company, comprising the GTS Business Services division,
following the Esprit Restructuring (the "Newco Group"),
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shall continue business operations as a stand-alone business. In connection with
such plan, GTS, Esprit and the Committee have entered into an agreement dated as
of March 27, 2001 (the "Lock-Up Agreement") pursuant to which the holders of
Esprit Notes represented on the Committee have agreed, subject to certain
conditions, to support and act in good faith to ensure the implementation of the
Scheme. In connection with implementation of the Esprit Restructuring, it is
contemplated that GTS, subject to the satisfaction of certain conditions
described below, will (1) enter into proposed senior secured credit facilities
with Esprit that are intended to provide Esprit and the other companies
comprising the GTS Business Services division with interim funding, as described
below and (2) sell certain assets to, and purchase certain assets from,
subsidiaries of GTS in consideration of the cancellation of intercompany
payables owed to and by such subsidiaries, as described below (the "Asset
Transfers"). This discussion is a summary of the Lock-Up Agreement and the
Summary of Terms, defined below, and is qualified in its entirety by reference
to those documents, which are incorporated by reference as an exhibit to this
report.

     In addition, the Committee has agreed to the outline of the Restructuring
contained in the Summary of Terms and Conditions attached to the Lock-Up
Agreement (the "Summary of Terms"). Under the Summary of Terms, upon the
effective date of the Esprit Restructuring (the "Effective Date"), holders of
the Esprit Notes, under the terms of the Scheme, will receive ordinary shares
("Newco Stock") of a newly-formed company ("Newco") in exchange for all of their
claims under the Esprit Notes. Newco will own 100% of the ordinary shares of
Esprit and, after giving effect to the contribution by GTS and/or its
subsidiaries of the shares of the other companies, including certain
subsidiaries of the Company, comprising the GTS Business Services division, 100%
of the equity of such other GTS Business Services companies.

     After giving effect to the Esprit Restructuring, holders of the Esprit
Notes will become the beneficial owners of an amount of Newco Stock equal to (a)
90% of the Newco Stock outstanding, less (b) the amount of Newco Stock issued to
key employees of GTS Business Services on the Effective Date pursuant to the
employee incentive plan. GTS and/or one of its subsidiaries will become the
holder of 10% of the Newco Stock as consideration for transferring ownership to
Newco of certain of GTS's non-Esprit Business Services subsidiaries, including
certain subsidiaries of the Company. In addition, GTS and/or such subsidiary
shall have contractual warrant rights, subject to certain conditions, to
purchase additional Newco Stock in an amount equal to 10% of the Newco Stock
outstanding on the exercise date of such warrant rights. As a result of the
Esprit Restructuring, GTS will cease to have any claim against Esprit in respect
of its $104.2 million subordinated long-term loan to Esprit.

     Under the Summary of Terms, GTS will advance interim funding to Esprit and
the other companies comprising the GTS Business Services division as of March
31, 2001 under a facility (the "Working Capital Facility") to be made available
for the working capital requirements of such GTS Business Services companies or
the members of the Newco Group, as the case may be, up to a maximum commitment
of E35 million. Funding under the Working Capital Facility will not be used to
pay amounts owed by the GTS Business Services companies or the members of the
Newco Group, as the case may be, to GTS or any entities in "Ebone"
(collectively, "Ebone"), the business unit of GTS (comprised primarily of the
Company) relating to the provision of broadband data transmission, for use of
such data transmission network. The Working Capital Facility shall be a senior
secured credit facility. The commitment under the Working Capital Facility shall
be available for the period April 1, 2001 through December 31, 2001. Amounts
borrowed under the Working Capital Facility will bear interest at 12 per cent
per annum and be secured by a fixed and floating charge on all assets of the
loan parties thereunder, including, without limitation, all of the shares in
their respective direct subsidiaries. In addition, each loan party under the
Working Capital Facility will guarantee the obligations of other loan parties,
under the Working Capital Facility. The maturity date of the Working Capital
Facility will be December 31, 2003.

     Under the Summary of Terms, GTS will also advance interim funding of up to
E20 million to Esprit and the other companies comprising the GTS Business
Services division as of March 31, 2001 or the members of the Newco Group, as
applicable, in addition to any amounts of indebtedness incurred under the
Working Capital Facility, under a facility (the "Ebone Facility" and, together
with the Working Capital Facility, the "GTS Facilities") to be made available to
pay the costs of transmission services or network capacity to be provided by
Ebone on its data transmission network during the period April 1, 2001 through
December 31,
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<PAGE>   9

2001. The Ebone Facility shall be a senior secured facility. To the extent that,
other than for reasons of an increase in the number of circuits and capacity
requested and utilized over that ordered prior to March 27, 2001, the cumulative
costs of such transmission services and network capacity provided during the
period April 1, 2001 through December 31, 2001 exceed E20 million, funds
available under the Ebone Facility shall increase dollar for dollar to cover
such increased costs.

     Amounts borrowed under the Ebone Facility will bear interest at 12 per cent
per annum and be secured by the same collateral as under the Working Capital
Facility. In addition, each loan party under the Ebone Facility will guarantee
the obligations of other loan parties under the Ebone Facility. From and after
the Effective Date, all amounts then or thereafter outstanding under the Ebone
Facility will be repaid through the issuance of shares of preferred stock of
Newco having a liquidation value based upon the principal amount of the Ebone
Facility and accreting and accumulating dividends on a non-cash basis of 12 per
cent per annum and all security interests in favor of GTS will be released.

     Under the Summary of Terms, certain subsidiaries of Esprit will transfer to
GTS and/or GTS's subsidiaries in the Ebone group, on or before the Effective
Date, certain assets and contract rights currently held by such subsidiaries
(the "Business Services Transfer Assets"). The Business Services Transfer Assets
to be transferred to such Ebone subsidiaries are set forth in Exhibit A to the
Summary of Terms and include the ETN Esprit backbone, the city networks in
Paris, Berlin and Madrid, all fiber leases, licenses from certain software
providers, data contracts, customer contracts, telecommunications equipment,
rights relating to certain points-of-presence in the Ebone network, leased
office premises, and the company that owns the lease relating to the offices
currently occupied by Esprit and GTS at 151 Shaftesbury Avenue, London, England.

     In addition, the Summary of Terms contemplates that GTS shall, or shall
cause its subsidiaries (other than Esprit and its subsidiaries) to, transfer to
Esprit and/or its subsidiaries, on or before the Effective Date, certain assets
and contract rights currently held by such GTS subsidiaries (the "GTS Transfer
Assets"). The GTS Transfer Assets to be transferred Esprit and/or its
subsidiaries are set forth in Exhibit B to the Summary of Terms and include
certain routers and other telecommunications equipment used or acquired for use
in connection with the provision of services by Esprit or other GTS Business
Services companies.

     On April 10, 2001, Esprit obtained consent from holders of the Esprit Notes
to modify certain provisions in the indentures (the "Esprit Indentures")
relating to each series of the Esprit Notes (the "Proposed Amendments") in order
to permit GTS to (1) enter into the GTS Facilities and (2) undertake the Asset
Transfers.

     The obligation of GTS to execute, deliver and provide funding under the GTS
Facilities is subject to, among other things, (i) the production of satisfactory
loan and security documentation, (ii) the due performance of Esprit's and Newco
Group's obligations under the Summary of Terms, including the transfer of the
Business Services Transfer Assets and (iii) with respect to financing to be
provided on and after June 1, 2001, GTS selling assets or subsidiaries
generating sufficient proceeds to allow GTS to provide such financing. All funds
advanced by GTS after April 1, 2001 shall be deemed to have been made on a
secured basis.

     The Esprit Restructuring to be accomplished pursuant to the Lock-Up
Agreement is planned to be effected through the Scheme. Pursuant to this
procedure, the agreement is conditioned upon at least 75% of the face value of
the Esprit Notes, and 50% of the number of holders of the Esprit Notes who
participate in the process (either in person or by proxy), voting in favor of
the Scheme and the High Court (the "Court") of England and Wales approving the
Scheme. Once agreed by these requisite majorities and approved by the Court, all
holders of the Esprit Notes will be bound by the terms of the Scheme, but the
Scheme will not affect the rights of other creditors of Esprit. The parties
expect to file the Scheme with the appropriate reviewing authorities during the
second quarter of 2001. As of April 11, 2001, holders representing approximately
70% of the aggregate principal amount of the Esprit Notes had signed the Lock-Up
Agreement.

     Notwithstanding the percentage of the aggregate principal amount of the
Esprit Notes represented by holders of the Esprit Notes that have signed the
Lock-Up Agreement, there can be no assurance that the Scheme will be approved by
the requisite votes of holders of the Esprit Notes or sanctioned by the Court or
that the consummation of the Esprit Restructuring will occur in the timeframe
contemplated by Lock-up

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<PAGE>   10

Agreement, or at all. If the Scheme is not approved and the Esprit Restructuring
is not consummated, such failure could have a material adverse effect on the
Restructuring and GTS. In addition, in the event GTS and Esprit are unsuccessful
in obtaining approval of the Scheme or completing the Esprit Restructuring,
Esprit may be required to cease operations, could seek protection under
applicable bankruptcy laws, initiate administration proceedings or be put into
receivership and be compelled to liquidate, and GTS may be required to defend
against the claims of Esprit creditors.

     If GTS is not successful in (1) increasing its available cash resources
through asset sales, including pursuant to the Golden Purchase Agreement, or
other means in the second quarter of 2001 and the balance of the year, and (2)
completing the Esprit Restructuring and the Company is not successful in
satisfying the conditions precedent to effectiveness of, and the financial
covenant and other conditions to borrowing under, the Amended Bank Facility, the
Company may be compelled to examine and pursue other alternatives, including
instituting cash conservation measures, which may include a substantial
curtailment of capital and other expenditures, a sale of assets, halting certain
operations of the Company, or seeking the protection of applicable bankruptcy or
insolvency laws for units of the Company or the Company as a whole. Any person
considering an investment in any of the Company's securities is urged to
consider these risks. All of the statements set forth in this report are
qualified by reference to these considerations, as well as the matters addressed
under "-- Certain Considerations Generally Applicable to Our Company."

BUSINESS OVERVIEW AND STRATEGY

     We are Europe's premier independent broadband network services provider.
Our goal is to maintain and enhance our position as a leading pan-European
provider of broadband, Internet, and data to communications carriers, Internet
service providers and other high-usage enterprise customers. In order to achieve
this goal, we will build on the strengths of:

     - our pan-European broadband fiber optic network, which extends
       approximately 21,000 kilometers, connects 56 cities in 20 countries, and
       is the largest such operational network in Europe;

     - our pan-European Tier 1 Internet Protocol ("IP") backbone, which carries
       approximately 5% of the total Internet traffic, 25% of all European
       Internet traffic and is the first European IP network to operate at 10
       gigabits per second; and

     - our large base of carrier, Internet service provider and other bandwidth-
       and Internet-intensive customers.

The key elements of our strategy for achieving this goal are as follows:

  FOCUS OUR ACTIVITIES ON OUR CORE EXPERTISE IN OPTICAL AND IP NETWORKING

     We intend to capitalize on the market downturn by focusing our aggressive
sales and marketing activities on the services offered on our leading broadband
optical and IP-based network and hosting center infrastructure. Our depth of
experience in operating one of the largest and most technologically advanced
network infrastructures in Europe is of great value to those companies that
offer application and other advanced services that require broadband
infrastructure. During 2001, we plan to expand our service portfolio through our
own and partner-initiated service platforms which add value in the IP-based
communications market with minimal additional capital expenditure.

     Our basic service portfolio is available in each country in Europe in which
we operate. We intend to continue to develop and market managed networking
services such as Managed Bandwidth and Managed Intranet Services to our service
provider, enterprise and media customers. We will market more advanced,
value-added services to our customers as their communications needs evolve from
basic Internet connectivity to full utilization IP-based communication services,
such as corporate intranets and virtual private networks.

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<PAGE>   11

  BUILD ON OUR LEADERSHIP POSITION IN THE CARRIERS' CARRIER MARKET TO PENETRATE
  A BROADER BANDWIDTH INTENSIVE CUSTOMER BASE

     Since we began offering service on our fiber optic network in November
1996, we have developed a significant customer base comprised of
telecommunications carriers, Internet service providers Internet-centric and
other bandwidth-intensive customers. We serve over 200 of the leading
telecommunication and data customers in Europe and North America. As a result of
being first in the market, we have gained significant experience in developing
service innovations and tailoring our service offerings to meet our customers'
rapidly evolving needs. We intend to build on our success in delivering
broadband service to carriers by increasingly focusing on emerging bandwidth-
and Internet-intensive companies. These types of customers include broadband
multimedia providers, content providers, such as motion picture studios and
broadcasters, and emerging data transmission providers, such as wireless
operators. By providing scalable, secure, high quality services to our
customers, we seek to establish ourselves as their strategic communications
partner.

  EXPLOIT THE REACH AND CAPACITY OF OUR FIBER OPTIC NETWORK

     We will continue to invest in our network to expand its geographic reach
and capacity in order to ensure that we can accommodate our customers' future
capacity requirements. As of December 31, 2000, our network extended
approximately 21,000 kilometers across Europe. This network is almost entirely
based on advanced dense wave division multiplexing technology with a minimum of
100 gigabits per second multiplexors installed on all routes. In the core of the
network connecting London, Amsterdam, Paris, Frankfurt and Brussels a second
system upgradeable to 96 wavelengths of 10 gigabits per second has been
implemented to satisfy demand beyond 100 gigabits per second. Second fiber pairs
supporting dense wave division multiplexing at 96 x 10 gigabits per second will
be brought into service on other routes configured at 100 gigabits per second as
required. Where dense wave division multiplexing has been installed for the
first time on new high density routes (Copenhagen-Oslo-Stockholm and
London-Manchester-Edinburgh-Dublin), 80 or 96 x 10 gigabits per second systems
are initially being installed.

     In particular, the following features also demonstrate the diversity,
strength and competitive advantages of our network:

     - City Enterprise Networks.  In order to offer true end-to-end transmission
       services to our carrier, business and other bandwidth-intensive
       customers, GTS has built, and intends to complete additional, intracity
       fiber networks, or City Enterprise Networks, in major European cities.
       GTS, through certain subsidiaries including subsidiaries of the Company,
       currently operates nine such networks in Amsterdam, Frankfurt, Milan,
       Paris, Budapest, Prague, Berlin, Geneva and Stockholm. In addition,
       during 2001, we expect to complete the deployment of City Enterprise
       Networks in five additional cities (Dusseldorf, London, Madrid, Vienna
       and Zurich). Each City Enterprise Network is designed to connect, within
       a city, its major Internet and telecommunications transmission centers,
       including points of presence on our network, telehouses, Internet
       exchange points and, where economically feasible, our existing customers'
       points of presence in that city. Such networks allow us to reach our
       customers without relying on third-party local access providers. We
       expect to improve service quality and realize higher margins as we manage
       more traffic end-to-end over our network.

     - Substantial transatlantic capacity.  We believe that a large portion of
       our market growth will come in the form of IP-based data services. We
       currently lease transatlantic capacity from third parties. Because a
       majority of IP traffic originates in the United States, we have invested
       in our own transatlantic capacity infrastructure through the acquisition
       of a dedicated fiber pair on the FLAG Atlantic-1 transatlantic fiber
       optic link. By owning this fiber pair, we will acquire capacity of 80
       gigabits per second upgradeable up to a maximum of 400 gigabits per
       second of fully protected capacity from the New York City area directly
       to our European network. We believe that owning a large volume of
       transatlantic capacity to and from the United States will enhance our
       competitive low cost position in Europe while extending our network to
       the U.S. at favorable prices. We expect the FLAG Atlantic-1 link to be
       operational by mid-2001.

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<PAGE>   12

     - Data and Web-hosting centers to support Web-based services.  We have
       deployed and intend to continue to develop data- and Web-hosting centers
       on our network near key public Internet exchange points to strengthen our
       portfolio of Web-based services. This provides us with the necessary
       facilities to undertake secure co-location, data- and Web-hosting
       services and facilitates our ability to offer a range of communication
       services. GTS, through certain subsidiaries including subsidiaries of the
       Company, has established data- and Web-hosting capability in, Bracknell
       (UK), London, Amsterdam, Frankfurt and Paris. We intend to offer data-
       and Web-hosting capability through existing facilities in up to five
       additional cities by the end of 2001. These centers are a natural
       extension of our strategy to meet the end-to-end needs of the Web- and
       media-centric content and application providers who are leading the rapid
       growth of the Internet- and multimedia-related segments of our target
       markets. In addition to carrying these customers' international traffic
       on our network, we will be able to host and distribute their
       applications, support their business activities and provide peering
       arrangements.

  CAPITALIZE ON THE "EBONE" BRAND NAME

     In the first quarter of 2001, we re-branded our Broadband Services unit
under the name "Ebone." The Company acquired Ebone in 1998. Originating in 1991,
Ebone is the largest European Internet backbone and provides access to more than
150 ISP's across Europe. Through the re-branding program the Company is seeking
to expand our market share, increase customer loyalty and capitalize on Ebone's
reputation for quality and expertise.

OUR EUROPEAN OPERATIONS

  OVERVIEW

     We are one of the leading European providers of managed bandwidth and
related communications services to carriers, Internet service providers and
other bandwidth-intensive customers. We have the largest centrally managed fiber
optic network in Europe and a Tier 1 Internet backbone network. We offer a
portfolio of bundled voice, data and Internet services to small-to-medium sized
enterprises and pan-European companies in 20 European countries.

     We seek to capitalize on the increasing demand in Europe for communication
services and products, in which businesses utilize data networks to perform key
business communications processes. We believe that a wide variety of businesses,
both large and small, will increasingly consume bandwidth to communicate,
improve operating efficiencies and transact commerce in secure, reliable and
cost-effective ways. We currently provide these customers with a range of voice
and data services, including, in selected European countries, dedicated Internet
access and virtual private network services. As we develop and expand our suite
of services to include, among others, Web-hosting, co-location, messaging and
remote access services and we complete the Restructuring, we expect to realize
substantially all of our revenue from businesses that purchase managed bandwidth
and backbone transmission services from us and that rely on bandwidth-intensive,
IP-based applications to communicate with customers, suppliers and employees.

     We began providing broadband carrier services in November 1996 and are
recognized as a pioneer in fiber optic network deployment and service
development. We have established long-term contracts with these customers. We
provide mission-critical value-added services to these customers and
increasingly seek to establish ourselves as their strategic partner. This
integration into our customers' operations often provides us with the
opportunity to introduce and implement additional services, which enable us to
further penetrate our customer base.

     Customers of our broadband services include:

     - European incumbent telecommunications operators

     - Alternative carriers

     - Voice resellers

     - International carriers

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<PAGE>   13

     - Internet service providers

     - Medium and large trans-European multinational enterprises

     We believe that the trend toward substantial increases in the volume of
data traffic is being driven by the rapid growth of the Internet and
bandwidth-intensive applications that require scalable, high-quality, cost-
effective network services. In addition, we believe that our customers will
increasingly demand Internet-or IP-based services, such as Internet access,
Web-hosting and data management services, in order to participate in the
expected growth of data communication and the Internet. In order to reinforce
our leadership position, we will continue to add new services on our network and
sell our services in additional markets throughout Europe.

  BROADBAND SERVICES

     We have developed a broad range of services that vary in technology
(synchronous digital hierarchy, dense wavelength division multiplexing, IP),
configuration (point-to-point, ring, virtual network services), quality
requirements, and geographical reach (domestic, pan-European, transatlantic
services). Service innovation and the ability to package and price services
flexibly allow us to effectively serve the needs of our customers.

     Our network services have the following competitive advantages:

     - Tailored solutions.  We have significant experience in tailoring highly
       customized contract terms and volume discounts that allow our customers
       to select varying capacity, access, guaranteed availability and contract
       terms.

     - High capacity cross-border network facilities.  Our dense wavelength
       division multiplexing network provides high capacity cross-border network
       facilities without requiring customers to invest in network
       infrastructure or to be constrained by a narrow range of capacity
       offerings.

     - Diverse routing.  Our fiber optic network's diverse, redundant routes are
       designed to allow us to provide strong performance commitments. On most
       routes, the fiber optic network has performed at over 99.9% availability.

     - Cost-reduction through advanced technology.  We have substantially
       reduced our unit cost by increasing the available capacity on a fiber
       pair and deploying advanced dense wavelength division multiplexing
       technology.

     - Uniform network architecture.  The uniform technology of our
       international managed transmission network allows us to provide a better
       quality and reliability of service as well as uniformity of features
       throughout our fiber optic network.

     Managed Bandwidth Services.  We primarily provide large capacity
cross-border European and transatlantic services over an integrated, managed
network. Our network, based on dense wavelength division multiplexing and
synchronous digital hierarchy technology, provides digital transmission
capability upon which a broad range of advanced applications may be run. Our
network offers availability, flexibility, reliability and bandwidth speeds not
widely available for transport of telecommunications traffic across national
borders in Western Europe. Our network is designed to provide customers with a
wide variety of bandwidth speeds, ranging from a data transmission rate of 2
megabits per second to a data transmission rate of 2.5 gigabits per second.
Access to our network allows our customers to rapidly enter the markets they are
targeting while benefiting from its low unit cost.

     We tailor our services to meet the diverse requirements of various customer
segments which require managed bandwidth services from two categories of
platforms:

     - Optical Services.  We offer 2.5 gigabits per second and 10 gigabits per
       second managed wavelength services, primarily to telecommunications,
       network and Internet service provider customers. As the

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       leader in managed optical services in Europe, we expect this service to
       continue to be central to our service offerings.

     - International Private Leased Circuits via Synchronous Digital Hierarchy
       platforms.  We offer point-to-point managed bandwidth services in speeds
       ranging from 2 megabits per second to 2.5 gigabits per second. These
       services can be tailored via protected and unprotected network paths to
       provide the proper cost and reliability factors demanded by various
       customer segments. These services are expected to continue to grow in
       demand from telecommunication, network and Internet service providers as
       well as Enterprise customers.

     IP-based Services.  The current and future growth of the Internet has a
significant impact on the network service provider business. In addition to
increasing the amount of data that is being transported across borders, the
Internet influences the transport technologies, the traffic patterns and the
segments that require carrier-like services.

     We offer to Internet service providers, value added network service
providers, multimedia application providers and Web-hosting companies a
carrier-grade Internet platform. We provide general purpose, congestion free
access to the worldwide Internet and low delay, high performance access to the
European domain of the worldwide Internet. In addition, we are using optical IP
technology to offer in Europe real-time IP performance that is needed by IP
operators and by voice, fax and video over IP providers.

     We offer Internet connectivity for both the wholesale and retail markets in
speeds from 2 megabits per second to 2.5 gigabits per second, and co-location
services on this network through our hosting centers. During 2001 we expect to
expand our portfolio of services through our own and partner-initiated service
platforms to add value in the IP market.

     We will actively market these new services to our existing customer base
and to other European companies that view the Internet as critical to their
expansion plans. Specifically, we plan to extend our data-and Web-hosting
services to enable customers in developing market segments such as media and
enterprise customers to distribute applications from our data- and Web-hosting
centers.

  SALES AND MARKETING

     Network Services

     The term of a typical customer agreement for our broadband services
currently ranges from six months to ten years. Our customer agrees to purchase,
and we agree to provide, transmission services. In general our customer agrees
to pay certain nonrecurring charges up-front and recurring charges on an annual
basis, payable in twelve monthly installments. If a customer terminates a
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 of service for
each of the twelve months remaining in the contract term. We typically guarantee
transmission services to a specified 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 in respect of the
relevant link. Our low cost basis is due to, among other things, our network's
use of advanced fiber optic cable and electronic equipment permitting high
capacity transmission over longer distances between regeneration/amplifier
facilities than legacy networks.

     Our enterprise customers typically choose contract terms not in excess of 3
years. These customers consume Internet and Managed Network Services from Ebone
to meet their network-related needs. The role of the network service provider is
typically crucial in the ability of these businesses to meet their own growth
and revenue plan, so our contracts offer strict Service Level Agreements against
a credit charge.

     Marketing activities consist of building the service portfolio for the
segments in which we operate and providing leads and other sales-related
activity to the sales force in each of our countries. The sales organization in
each country is focused exclusively on customers and customer-related activity,
with all other administrative and market activities run centrally. We and GTS
have sales offices in Austria, Belgium, the

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Czech Republic, Denmark, France, Germany, Hungary, Ireland, Italy, Luxembourg,
the Netherlands, Norway, Poland, Slovakia, Spain, Sweden, Switzerland and the
United Kingdom.

OUR NETWORK INFRASTRUCTURE

  OVERVIEW

     Our network infrastructure consists of our pan-European fiber optic
network, our City Enterprise Networks, in the dedicated fiber pair we have
purchased on the FLAG Atlantic-1 transatlantic fiber optic cable, our data-and
Web-hosting centers and our operations system and support functions. In Europe,
our network has 65 carrier points of presence in 47 cities, and 56 IP nodes in
40 cities. The fiber optic network spans approximately 21,000 kilometers and 17
countries. In addition, nine intra-city fiber networks are currently
operational.

  NETWORK DESIGN

     The design of our pan-European network is based on a layered architecture
which separates the physical layer, the optical layer, the transmission layer,
and the data (IP) layer of our network with standard interfaces and protocols in
order to optimize design and operation and provide flexibility for introducing
new technologies, new applications and new services.

     Physical Layer.  The physical layer of our pan-European fiber optic network
is based on a mesh of dark fiber routes interconnecting cities on our network
via at least two or three physically diverse paths for maximum resilience
against fiber or facilities failures.

     Optical Layer.  The optical layer of our pan-European fiber optic network
represents the core of our network and is based on dense wavelength division
multiplexing. This layer supports the provision of optical services directly to
customers at 2.5 gigabits per second and provides for the operation of multiple
synchronous digital hierarchy and/or IP systems to run concurrently on a single
fiber pair in a highly cost efficient manner. The optical layer of our network
is based largely on Ciena 40 x 2.5 gigabits per second and 96 x 10 gigabits per
second. wavelength systems with a capacity of 100 gigabits per second on a fiber
pair using dense wavelength division multiplexing technology. Dense wavelength
division multiplexing, or DWDM, is a technology that allows transmission of
multiple waves of light over a single fiber optic strand, thereby increasing
network capacity. By using current dense wavelength division multiplexing
technology, we are able to derive up to 96 wavelengths per fiber optic pair,
each wavelength with a capacity of 10 gigabits per second, for a total capacity
of 960 gigabits per second over a single fiber optic pair.

     Transmission Layer.  We are using synchronous digital hierarchy (SDH) time
division multiplexing equipment to consolidate, groom and add or drop low and
high order traffic coming from our various network components and to support the
provision of synchronous digital hierarchy leased line services to customers at
data transmission rates ranging from 2 megabits per second to 622 megabits per
second. The synchronous digital hierarchy layer of our pan-European fiber optic
network runs via dense wavelength division multiplexing channels in our network
with a multilayered architecture consisting of multiple synchronous digital
hierarchy rings optimized for different traffic characteristics.

     Services using synchronous digital hierarchy technology may include local
access capacity between our network point of presence and the customer's point
of presence, depending on customer requirements. Services using dense wavelength
division multiplexing technology are delivered on a standard basis at our point
of presence. On a special project basis and shortly through our City Enterprise
Network, dense wavelength division multiplexing services may be expanded to the
customer's point of presence.

     Internet Protocol Layer.  Backbone links interconnect core pan-European
fiber optic network nodes at data transmission rates of 2.5 gigabits per second,
providing high quality, seamless Internet protocol connections throughout
Europe. Core network routers are deployed in a redundant configuration to ensure
maximum reliability. Since we design and operate directly both the optical
network layer and the Internet protocol layer, a further optimization of the
resulting network architecture is achieved. The Internet application implemented
on top of the gigabit Internet protocol platform places us among the prominent

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Tier 1 Internet service providers in Europe, with direct connections to the
other major European Internet backbone providers. For a direct interconnection
with major U.S. Internet backbones, two network nodes are deployed in the United
States, with high speed connections to the European gigabit backbone. The high
performance core IP network is designed to support a flexible introduction of
IP-based value added services at the edge of our network.

     Network Management.  We control our pan-European fiber optic network
through our main network operations center, located in Brussels. The network
operations center can pinpoint potential service problems and can deal with
service rerouting, if required, much more effectively than in networks
controlled by multiple operators in different countries. Our advanced
operational support systems also allow us to manage the large number of network
components and local repair organizations required in an extensive international
network of this size, as well as for advanced customer care in managing customer
operational activities. Our backup paths and management components enable us to
recover from individual failures at the optical, synchronous digital hierarchy
and Internet protocol 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 own substantially all of our network equipment as well as some segments
of the fiber optic cable. A substantial part of the fiber is leased on a
long-term basis. Long-term leases for fiber are advantageous to us because they
reduce the burden of building large quantities of capacity before they can be
used. When we lease dark fiber, the infrastructure provider will generally be
responsible for maintaining the fiber optic cable. We have entered into
agreements with equipment vendors, infrastructure providers and other third
parties to supply and/or maintain the equipment for the network.

  Network Capacity

     Our pan-European fiber optic network includes Ciena 40 x 2.5 gigabits per
second dense wavelength division multiplexing systems on a substantial majority
of our routes. In addition, a second 96 x 10 gigabits per second capable system
is installed on routes interconnecting London, Amsterdam, Frankfurt, Dusseldorf,
Paris and Brussels, the cities which comprise the core of our network.

  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 pan-European fiber optic network. Our agreements for leases of
portions of our pan-European fiber optic network typically require the
infrastructure provider to provide a certain number of pairs of dark fiber and
in some cases facilities along the network route commencing on dates we provide.
The term of a lease agreement generally 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 the
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 (which we do not expect
to exceed more than 10 percent of our network), 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.

     We are also deploying our pan-European fiber optic 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 pan-European fiber optic network utilize long term rights-of-way
agreements with landowners.

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  City Enterprise Networks

     Through us and other subsidiaries, GTS currently operates nine City
Enterprise Networks in Amsterdam, Frankfurt, Milan, Paris, Budapest, Prague,
Berlin, Geneva and Stockholm. We expect to complete the deployment of intracity
fiber networks in the following five additional cities during 2001: Dusseldorf,
London, Madrid, Vienna and Zurich.

     Each City Enterprise Network will be designed to connect, within a city,
its major telecommunications transmission centers, including points of presence
on our pan-European fiber optic network, our data and Web-hosting centers, our
other points of presence in such city, telehouses, Internet exchange points and,
where economically feasible, our existing customers' points of presence in that
city.

     Relying on our own local infrastructure in key cities through our City
Enterprise Networks will allow us to reduce operating expenses (by avoiding or
reducing our payments to local access providers) and to enhance the robustness
of our network (through end-to-end network management and compatibility of the
City Enterprise Networks with our existing network). Such fully integrated
networks of intracity and intercity connectivity will, we believe, appeal to our
customers in need of managed bandwidth services. By offering co-location and
data and Web-hosting capabilities as a bundled service with our broadband
network capabilities, we intend to attract Web-centric and media-centric
companies to our network without procuring expensive services from local access
providers.

     Each City Enterprise Network will, subject to regulatory constraints and
market conditions, consist of up to 144 fiber pairs in underground ducts that we
will buy, lease or lay. We believe this high number of fiber pairs is justified
by the economies of the short distance environment of city centers and the
higher numbers of connection points to link customers to the network. Our
intracity network rings in Western Europe will eventually connect customers at
data transmission rates of up to 2.5 gigabits per second.

  The Transatlantic Expansion of our Fiber Optic Network

     We currently provide connectivity from Europe to the United States through
capacity leased from third parties. On October 13, 1999, we announced that we
had committed to purchase one dedicated fiber pair on FLAG Atlantic-1, the
world's first transatlantic dual cable system designed to carry voice, high
speed data and video traffic at data transmission rates of up to 2.4 terabits
per second. By owning this fiber pair, we will acquire capacity of 80 gigabits
per second upgradeable to a maximum capacity of 400 gigabits per second of fully
protected capacity (or 800 gigabits per second of unprotected capacity) from the
New York City area directly to our network in Europe. This supply of capacity
will allow us to accommodate the growing volume of transatlantic traffic at a
competitive low cost base. We expect to commence service on our fiber pair on
FLAG Atlantic-1 by mid-2001.

  Data- and Web-Hosting Centers

     Our strategy is to expand our Internet services portfolio by deploying data
and Web-hosting centers on our network near key public Internet exchange points.
This will establish the necessary facilities to undertake data and Web-hosting
services and facilitate the provision of IP-based services. These centers will
allow us to meet the end-to-end needs of the providers of Web and media-centric
content and applications who are leading the rapid growth of the Internet and
multimedia related segments of our target markets in Europe. Thus, in addition
to carrying these customers' international traffic on our network, we will be
able to host and distribute their applications, support their Internet-related
activities and provide peering arrangements.

     During 2000, GTS, through us and other subsidiaries, established data and
Web-hosting capability in Bracknell (UK), London, Frankfurt, Paris and
Amsterdam. We intend to deploy data and webhosting capacity through existing
facilities in up to five additional cities by the end of 2001. These facilities
will be specifically designed to offer high speed access to our network and
provide co-location, dedicated and shared data- and Web-hosting services.

     We will offer high performance distribution of bandwidth-intensive
multimedia applications and regional content through our extensive peering
arrangements. Our networked data- and Web-hosting centers are a key
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component of the infrastructure required to serve the future needs of our
customer segments. Additional benefits of the data and Web-hosting centers
include:

     - Providing Internet service providers with telehousing and managed
       services for their Internet protocol routers and servers;

     - Providing a NT or UNIX based server, allowing Internet service providers
       and Web-centric companies to take full advantage of our expertise in
       traffic and server management; and

     - Providing shared server management, offering an entry solution to
       emerging Internet service providers and Web-centric companies at a
       reasonable cost.

     Increasing Internet demand is driving Internet service providers to
co-locate their servers and IP routers closer to their customers, thereby
improving their network reach and performance. Data-and Web-hosting centers
directly connecting Web servers to an IP backbone remove the bottlenecks
associated with traditional hosting facilities. In addition, increasing demand
for Web content is driving Web-centric companies to locate servers at those
facilities to ensure superior Internet connectivity. Our data- and Web-hosting
centers will offer seamless and scalable Internet connectivity for emerging
Internet service providers and Web-centric companies, offering a direct
connection to our pan-European seamless network at bandwidths of initially 2.5
gigabits per second, with upgrades up to 10 gigabits per second. We believe that
offering data- and Web-hosting services will provide opportunities to cross-sell
services on our fiber optic network, thereby improving customer retention and
enabling us to address new target segments.

  Operations, Systems and Support

     Our operations, systems and support functions consist of two main areas:
customer care and billing and network operating services and systems. In
performing our operations functions, we work with particular companies and
sub-contractors that we believe are committed to maintaining our
industry-leading service offerings.

     We seek to provide premium customer care throughout our business. Our
customer care and billing system provides us with extensive customer
information, which is critical to customer retention and account growth.

COMPETITION

     The ongoing liberalization of the European telecommunications market has
coincided with technological innovation to create an increasingly competitive
market, characterized by still dominant incumbent telecommunications operators
which own and operate fully built networks and infrastructure, as well as new
market entrants.

     The markets for managed bandwidth services, local and long distance
telecommunications services, Internet connectivity and related services are
extremely competitive. We anticipate that competition will continue to intensify
as the use of the Internet grows. The tremendous growth and potential market
size of these markets, particularly the Internet services market, has attracted
many new start-ups as well as established businesses from different industries.
We compete primarily on the basis of the pan-European coverage of our network,
the range and quality of services offered, customer service and price.
Competitors have compelled us to lower our prices or modify our service
offerings to remain competitive. Since the first quarter of 2000, the market
capitalization of many start-up telecommunications companies has declined and
access to the capital markets, including venture capital, has been difficult,
except for the dominant incumbent, formerly state-owned operators and those new
entrants that investors believe have a viable plan to attain profitability. Many
of the start-ups may downsize, fail, be acquired or consolidate. The resulting
shakeout may result in fewer competitors, but remaining competitors, including
the incumbent operators, will be providers that may have greater financial and
other resources than the Company to withstand an economic downturn.

     For our broadband, data and Internet services customers, we compete with
various telecommunications companies, including MCI WorldCom, Inc., Viatel,
Inc., KPN Qwest B.V., COLT Telecom Group plc,
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<PAGE>   19

Level 3 Communications, Inc., Carrier1 International S.A., Deutsche Telekom AG,
France Telecom S.A., Global Crossing Ltd. and British Telecommunications plc.
Many of these entities have begun to construct or are operating high bandwidth
fiber optic networks across various European countries and in several European
metropolitan markets and in some cases, provide transatlantic connectivity, in
competition with our network and our existing and planned City Enterprise
Networks.

LICENSES AND REGULATORY ISSUES

OVERVIEW OF EU TELECOMMUNICATIONS LAW AND POLICY

     The EU has progressively liberalized its telecommunications markets over
the past decade. In 1990, the EU adopted two measures: the Open Network
Provision Framework Directive and the Services Directive. These two directives
set forth basic rules for access to public telephone networks and required the
liberalization of the provision of all telecommunications services within the EU
except for certain "reserved services," including voice telephony.

     In 1992, the EU adopted the Open Network Provision Leased Line Directive,
which requires the incumbent operators to lease lines to competitors and
end-users at cost-oriented prices, and to establish cost accounting systems for
these products by the end of 1993. Even though most EU member states have
established regulatory frameworks requiring incumbent 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 adopted 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. A
number of EU member states were granted a delay in implementing the Full
Competition Directive.

     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.

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

     In April 1997, the EU adopted a directive on a common framework for general
authorizations and individual licenses in the field of telecommunications
services, including networks. Licenses must be awarded through open,
non-discriminatory and transparent procedures and applications are 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 EU adopted a directive on the application of the Open
Network Provision to voice telephony and on universal service.

     In September 1998, the EU adopted amendments to its June 1997 directive on
interconnection mandating the introduction of number portability and carrier
preselection (or equal access) by incumbent telecommunications operators with
significant market power by January 1, 2000.

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<PAGE>   20

     In October 1999, the EU Commission opened an investigation into the
condition of the provisioning and pricing of leased lines. The aim of the
investigation is to establish whether current telephone company practices
infringe EU competition rules.

     We believe that the adoption of the Full Competition Directive and the
various related directives adopted by the EU have resulted in the removal of
most regulatory barriers to the establishment and operation of
telecommunications infrastructure in the countries of the EU where we currently
operate.

     However, some 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, some
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 maintained
various restrictions on full competition.

     Member states of the EU are 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 incumbent telecommunications operators. For most parties, these
commitments took effect on February 5, 1998 (including the EU member states). We
believe that this 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.

     As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services and deploy our network. 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 "-- Certain Considerations Generally Applicable to Our
Company -- Risks associated with regulatory matters."

NETWORK AND SERVICE LICENSES

     We require licenses, authorizations or registrations in almost all
countries to operate our network and provide our service. Licenses,
authorizations or registrations have been obtained in Austria, Belgium, Czech
Republic, Finland, France, Germany, Italy, Luxembourg, The Netherlands, Spain,
Sweden, Switzerland, the United Kingdom and the United States. No license or
authorization is required to operate our network in Denmark. We intend to file
applications in other countries in anticipation of service launch in accordance
with our network roll-out plan.

     A summary discussion of the regulatory framework in certain countries where
we have developed and are developing our network is set forth below. This
discussion is intended to provide a general outline, rather than a comprehensive
discussion, of the more relevant regulations and current regulatory posture of
the various jurisdictions.

     As a result of our acquisition of a number of existing telecommunications
operators, we hold licenses through several of our subsidiary companies. We are
in the process of reviewing our current licenses with a view to achieving the
maximum benefit from these licenses, and reorganization of some of our
operations may result. The following description presents a consolidated view of
our licensing position and does not reflect the position of any single company
within our group.

     Austria.  The Austrian telecommunications market was fully liberalized in
January 1998. We have been granted concessions to build and operate our network,
including City Enterprise Networks, and provide our services throughout Austria.

     Belgium.  We have been granted licenses to build and operate our network
and provide managed bandwidth and related services in a zone which includes
approximately 92 population centers in Belgium.

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<PAGE>   21

Extension of our network, including deploying City Enterprise Networks, requires
previous notification to the Belgian regulatory authority in order to amend the
geographical scope of our licenses.

     Czech Republic.  We were granted a license for the provision of our
international services on October 6, 1999. The license is valid for 10 years.

     Denmark.  The Danish telecommunications market was fully liberalized in
July 1997. Under Danish law, we do not require a telecommunications license to
build and operate our network in Denmark.

     Finland.  The Finnish telecommunications market was fully liberalized in
June 1997. We are registered to build and operate our international network.

     France.  The French telecommunications market was fully liberalized in
January 1998. We have licenses to build and operate our network, including City
Enterprises Networks, and provide managed bandwidth and related services in
France. The licenses are valid for a 15 year period from the date of issue. See
Item 3 -- "Legal Proceedings."

     Germany.  The German telecommunications market was fully liberalized in
August 1996. We have licenses to build and operate our network, including City
Enterprise Networks, and provide managed bandwidth and related services in
Germany.

     Ireland.  The Irish telecommunications market was fully liberalized in
December 1998. We have been granted a license to build and operate our network
and provide our services in Ireland. The license is valid for 15 years from the
date of issue.

     Italy.  Although in the past Italy has been dilatory in implementing EC
liberalization measures, full liberalization occurred in January 1998. We have
been granted licenses to build and operate our network, including City
Enterprise Networks, and provide our services throughout Italy. The licenses are
valid for 15 years from the date of issue.

     Luxembourg.  The telecommunications market of Luxembourg was fully
liberalized in July 1998. We have licenses to build and operate our network and
provide managed bandwidth in Luxembourg. The licenses are valid for 30 years
from the date of issue.

     The Netherlands.  The Dutch telecommunications market was fully liberalized
in July 1997. A new Telecommunications Act came into force in December 1998. The
new act confirmed the full liberalization of the Dutch telecommunications
market. We have registered to build and operate our network, including City
Enterprise Networks, and provide our services throughout the Netherlands.

     Norway.  Although Norway is not a member state of the EU, the Norwegian
telecommunications market is considered to be open to competition. We have
registered to build and operate our network and provide our services in Norway.

     Spain.  The Spanish telecommunications market was fully liberalized in
December 1998. We have licenses to build and operate our network, including City
Enterprise Networks, and provide managed bandwidth and related services in
Spain. The licenses are valid for 20 years from the date of issue and can be
renewed for a maximum of 50 years.

     Sweden.  The Swedish telecommunications market was full liberalized in
1993. A new Telecommunications Act was adopted in 1997 to reinforce the powers
of the national regulatory authority, to ensure conformity with EU Directives
and to supplement the pre-existing licensing regime with a general authorization
regime for certain services. Our registrations with the Swedish national
regulatory authorities allow us to build and operate our network, including City
Enterprise Networks, and provide our services throughout Sweden.

     Switzerland.  A new Swiss Telecommunications Law entered into force in
January 1998. Although Switzerland is not a member state of the EU, the law
largely mirrors the EU telecommunications liberalization directives. From that
date, the existing voice telephony monopoly was abolished and the

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<PAGE>   22

provision of competing services fully liberalized. We have a concession to build
and operate our network, including City Enterprise Networks, and provide managed
bandwidth and related services 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 the UK regulatory authority to create a competitive marketplace
from which detailed regulation could eventually be withdrawn. The United Kingdom
telecommunications market is liberalized beyond the requirements of the Full
Competition Directive, and most restrictions on competition have been removed in
practice as well as in law. We have been granted licenses to build and operate
our network, including City Enterprise Networks, and provide our services
throughout the United Kingdom.

     United States.  The Federal Communications Commission ("FCC") granted us a
license, as amended, pursuant to Section 214 of the Communications Act of 1934
authorizing us to provide limited global facilities-based and global resale
services, (subject to the terms and conditions imposed by the law and
authorization). The Section 214 authorization does not allow us to offer U.S.
services between the United States and Hungary, Poland, the Czech Republic,
Romania, Monaco, Russia, Ukraine, Kazakhstan, Uzbekistan, Azerbaijan, China and
India. We subsequently filed an application with the FCC for a Section 214
authorization to provide international facilities-based and resale service
between the United States and the latter countries. The FCC issued a public
notice stating that the portion of the application relating to service between
the United States and Russia was removed from stream line processing, and that
the remainder of the application was granted.

     Under the Act Relating to the Landing and Operation of Submarine Cables in
the United States of May 27, 1921, all submarine cable systems that connect to
the United States must obtain a landing license granted by the President of the
United States. Presidential authority for such licenses has been delegated to
the FCC. The owner of the FLAG Atlantic-1 cable, on which we have purchased
capacity, has obtained its license to land and operate a private fiber optic
submarine cable extending between the United States and the United Kingdom and
France.

     We intend to file additional applications or license extensions authorizing
us to provide our services and deploy and operate our network in anticipation of
service launch in accordance with our network roll-out plan. With the exception
of countries that are members of the EU and whose laws must comply with EU
Directives, many countries have not 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 our licenses, authorizations or
registrations may limit or otherwise affect our scope of operations. We cannot
assure you that (1) we will be able to obtain, maintain or renew licenses,
authorizations or registrations to provide the services we currently provide and
plan 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 us. 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 us.

  Internet Protocol Transport

     At present there is no general consensus on the regulatory position of
Internet protocol transport services in Europe and the United States. Currently,
Internet protocol transport 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 Internet protocol transport
services will not be regulated in the future in Europe or the United States. We
will continue to monitor regulatory developments that may affect Internet
protocol transport operations.

  Data- and Web-Hosting

     The laws relating to the regulation and liability of companies providing
data- and Web-hosting services in relation to the information carried or
disseminated through their services are in the process of development in Europe.
In England, for example, a recent court decision held an Internet service
provider liable for certain
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allegedly defamatory content carried through its network under factual
circumstance in which the Internet service provider had been notified by the
complainant about the message which the Internet service provider had failed to
delete when asked to do so by the complainant. Decisions, laws regulation and
content liability may significantly affect the services we intend to offer. We
will continue to monitor the developments that may affect these services

  Employees

     On December 31, 2000, we had approximately 880 employees.

CERTAIN CONSIDERATIONS GENERALLY APPLICABLE TO OUR COMPANY

  Consummation of the Restructuring is important to GTS's and the Company's
  future viability

     GTS intends to complete the Restructuring so that it can focus its
resources on its core competency of providing data and Internet services,
eliminate any exposure or possible adverse effects which might result from
defaulting on the Esprit Notes and raise additional funds from asset sales of
non-strategic assets to fund its working capital needs. GTS's failure to
accomplish some or all of these objectives could endanger the Company's future
viability.

     Based on the Company's current existing cash balances, projected internally
generated funds, and available borrowings under the Amended Bank Facility, the
Company believes that it will be able to address its funding requirements
through the first quarter of 2002. To address its longer-term funding needs, the
Company is in the process of seeking to refinance its indebtedness under the
Amended Bank Facility (through a long term facility or otherwise), and seeking
additional funding. If the Company cannot raise additional capital through these
steps or otherwise, however, the Company may be compelled to examine and pursue
other alternatives, including instituting cash conservation measures, which may
include a substantial curtailment of capital and other expenditures, a sale of
assets, halting certain operations of the Company, or seeking the protection of
applicable bankruptcy laws for units of the Company or the Company as a whole.

  As a result of questions concerning our liquidity, our customers and vendors
  may decide not to do business with us

     Due to concerns regarding our liquidity, customers and vendors may choose
to conduct business with us on terms that are less favorable than those
customarily extended by them, or not to conduct business with us entirely. Such
actions could have a material adverse effect on our business, financial
condition and prospects.

  Access to funds under the Amended Bank Facility will depend on our ability to
  meet conditions to borrowing

     Available funds under the Amended Bank Facility are limited to E300 million
pending the negotiation of a new long term facility. Funds under the Amended
Bank Facility constitute a substantial portion of the funding that we are
relying upon to fund our business plan, including capital expenditures, for the
next twelve months. Effectiveness of the Supplemental Agreement and the Amended
Bank Facility is subject to the satisfaction of certain conditions precedent,
which we expect to complete and which we are in the process of satisfying.
Furthermore, availability of funds under the Amended Bank Facility will depend
upon our ability to comply with the financial covenants and other conditions to
borrowing under the Amended Bank Facility. Although we believe we will be able
to satisfy such covenants and conditions, there can be no assurance that we will
be able to do so. Failure to comply with such covenants would also result in a
default under the Amended Bank Facility, which could have a material adverse
effect on our financial condition.

  We may be unable to meet our substantial debt obligations

     We have incurred substantial debt and may incur substantial additional debt
to implement our business plans. Our ability to make principal and interest
payments on our debt will depend upon, among other things, our future operating
performance. Our future operating performance depends on a variety of factors,
many of which are beyond our control. Because of this uncertainty, we cannot
assure you that we will generate

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sufficient cash flow to make payments on our debt. Insufficient future cash flow
could further impair our ability to raise additional financing. Our cash flow
could also be insufficient to make principal and interest payments on our debt.
If this occurs, we may be required to renegotiate the terms of, or to refinance,
our long-term debt. We cannot assure you that we would be able to refinance or
renegotiate the terms of our debt when required.

     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 be more vulnerable to general adverse economic and industry
       conditions;

     - May find it more difficult to make interest and principal payments on
       certain of our debt, which could be a default under the indentures
       relating to our other outstanding debt securities;

     - 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 could cause defaults under
our other debt.

  Covenants in our debt agreements restrict our operations

     The covenants in our currently outstanding debt and the currently
outstanding debt of our subsidiaries 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 place limitations as
to:

     - Incurrence of additional debt;

     - Payment of dividends or make certain other restricted payments;

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

     - Disposition of our assets;

     - Entrance into transactions with affiliates; or

     - The consolidating, merging or selling all or substantially all of our
       assets and the assets of our subsidiaries.

  Substantial additional capital is required to expand our network

     We will require significant amounts of capital to implement our business
plan. We anticipate that we will incur approximately $225 million in cash
capital expenditures in 2001 to expand the reach and capacity of our network,
construct additional intracity fiber networks and deploy additional data- and
Web-hosting centers in our target metropolitan markets. However, the actual
amount and timing of our future capital requirements may differ from our
estimates. Thus, financing may be needed to expand the reach and capacity of our
network, to construct additional intracity fiber networks, deploy additional
data- and Web-hosting centers and for general working capital purposes. We
cannot assure you that such additional financing will be available on terms
acceptable to us or at all. If we fail to obtain this financing, we might have
to delay or abandon our plans

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for expanding the reach and capacity of our network, constructing additional
intracity fiber networks, deploying additional data- and Web-hosting centers and
we may be compelled to sell certain of these assets. Delaying or abandoning
these plans or selling such assets could have a material adverse effect on our
business and financial condition.

  Competitors with greater resources may adversely affect our revenues

     The markets for managed bandwidth services, local and long distance
telecommunications services, Internet connectivity and related services are
extremely competitive. The ongoing liberalization of the European
telecommunications market has coincided with technological innovation to create
an increasingly competitive market, characterized by still-dominant incumbent
telecommunications operators as well as new market entrants. We anticipate that
competition will continue to intensify as the use of the Internet grows. The
tremendous growth and potential market size of these markets, particularly the
IP services market, has attracted many new start-ups as well as established
businesses from different industries. We compete primarily on the basis of the
pan-European coverage of our network, the range and quality of services offered,
customer service and price. Competitors have forced us, and may continue to
force us, to lower our prices or modify our service offerings to remain
competitive. In particular, during 2000, we experienced price erosion of
approximately 55% for our broadband services. While we expect price erosion to
slow somewhat in 2001, we cannot assure you that we will be able to effectively
market our expanded service offerings, keep prices at a profitable level or
attract and retain customers. While the downturn in the market may cause certain
competitors to downsize, merge or consolidate with other companies or cease to
operate, we anticipate continued pricing reductions by our competitors, and,
accordingly, expect the prices for our bandwidth and other data services to
continue to decrease for the foreseeable future. Many competitors have
established customer bases and extensive brand name recognition and have greater
financial, management and other resources. To the extent that customers perceive
that the Company's survival is in question, we may be unable to attract new
customers and to retain existing customers. These trends could have a material
adverse effect on our business, financial condition and results of operations.

  Competition for customers of our broadband and Internet services

     With respect to our broadband and Internet services, we compete with
various telecommunications companies, including MCI WorldCom, Inc., Viatel,
Inc., KPN Qwest B.V., COLT Telecom Group plc, Level 3 Communications, Inc.,
Carrier1 International S.A., Deutsche Telekom AG, France Telecom S.A., Global
Crossing Ltd. and British Telecommunications plc. Some of these entities are
already operating high bandwidth fiber optic networks across various European
countries and in several European metropolitan markets and in some cases,
provide transatlantic connectivity. These existing and future networks do or
will compete with our network, our Internet-related service offerings and our
intracity fiber networks. While the downturn in the market may cause certain
competitors to downsize, merge or consolidate with other companies or cease to
operate, we continue to expect to encounter strong and vigorous competition.

  We incurred a significant charge for bad debt in 2000 and adverse market
  conditions may continue

     During the fourth quarter of 2000, we recorded a bad debt reserve of
approximately 14.4 million for customer bad debts, see Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
created this reserve as a result of our experience of several defaults by
start-up or emerging telecommunications providers, which were our customers, and
the general tightening of the credit markets. Although we believe this reserve
is adequate, we expect adverse market and economic conditions to persist for the
foreseeable future. As a result, we may experience late collections and may be
compelled to create additional reserves for bad debt.

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  Our competitive position and ability to provide services may be compromised by
  our dependence on other telecommunications service providers

     We need to enter into interconnection agreements with large established
national carriers operating in our target markets. We also rely on local service
providers to provide local access services to enable our customers to link to
our fiber optic network. We may also need to enter into agreements which permit
us to place our equipment at the facilities of such third parties and/or lease
telecommunications transport capacity from such 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. In
addition, we have experienced delays in provisioning of local access services to
enable our customers to connect to our network. We continue to experience
provisioning delays that will delay our ability to provide services contracted
for by the customer and therefore defer our recognition of revenue to later
periods.

  We may experience a potential lack of customer demand

     Although we have been delivering services to a number of customers and have
experienced demand for services in the past, we cannot assure you that customer
demand for services over our network will continue to grow. Further, we cannot
assure you that there will be enough customer demand to realize the anticipated
cash flow, operating efficiencies and cost benefits of our network, even after
the Restructuring is completed.

  European use of the Internet, electronic commerce, data transmission services,
  multimedia and other bandwidth intensive applications may not increase as we
  expect

     Our business plan assumes that European use of the Internet, electronic
commerce, data transmission services, multimedia and other bandwidth-intensive
applications will increase substantially in the next few years, in a manner
similar to the increased use in the United States market in the past few years.
If the use of data transmission services, multimedia and bandwidth-intensive
applications in Europe does not increase as we anticipate, demand for many of
our value added services, including managed bandwidth services, Internet
protocol transit services and data- and Web-hosting services, will be lower than
we currently anticipate. Reduced demand for our services would have a negative
effect on our pricing power and our financial condition.

  Our actual costs and revenues may vary from what we expect them to be

     Our revenues and the costs of expanding the reach and capacity of our
network, constructing additional intracity fiber networks, deploying additional
data- and Web-hosting centers and operating our business depend upon a variety
of factors, including our ability to:

     - Efficiently manage the enhancement of our network and operations;

     - Access markets and attract a sufficient number of customers;

     - Negotiate favorable contracts with suppliers;

     - Obtain additional licenses, regulatory approvals, rights-of-way and
       infrastructure contracts;

     - Provide and develop services to which our customers will subscribe; and

     - Effectively manage our billing and information systems.

     Our revenues and costs are also dependent upon factors that are not within
our control, including:

     - Regulatory changes;

     - Changes in technology;

     - Increased competition;

     - Strikes;

                                        25
<PAGE>   27

     - Weather; and

     - Performance by third-parties, including our vendors, infrastructure
       providers and customers, in connection with the enhancement of our
       network.

     Due to the uncertainty of these factors, our actual costs and revenues may
vary from what we expect them to be and our future capital requirements might
increase. Accordingly, we cannot assure you that the amount of funds required to
enhance our network and construct additional City Enterprise Networks and
deploying additional data- and Web-hosting centers will not be greater than
anticipated.

  We may encounter delays in implementing key elements of our business strategy

     Our ability to achieve our strategic objectives will depend in large part
on the successful, timely and cost-effective realization of numerous elements of
our business plan, including:

     - Implementation of the Restructuring by GTS;

     - Our plan to develop and offer seamless connectivity between Europe and
       the United States;

     - Our plan to complete additional intracity fiber networks in up to five
       major European cities by the end of 2001;

     - Our plan to deploy, through existing facilities, additional data- and
       Web-hosting capacity in up to five major European cities by the end of
       2001;

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

     - The timely performance by third parties of their contractual obligations
       to engineer, design and construct the infrastructure underlying our
       additional intracity fiber networks, the extension of our network and the
       FLAG Atlantic-1 transatlantic cable; and

     - Activation of full capacity on the FLAG Atlantic-1 transatlantic cable
       which could be delayed or prevented if the FLAG fails to comply with
       interest coverage and other financial ratios in the credit facility it
       has entered into to finance construction of the cable.

     We cannot assure you that we will successfully execute these elements of
our business plan. In addition, any delays in realizing these elements of our
strategy would materially and adversely affect the timely or successful
realization of our business plan.

     We believe that our cost estimates and the build-out schedules for our
additional intracity fiber networks and data and Web-hosting centers are
reasonable with respect to these projects. However, the actual costs or time
required to complete the plans could substantially exceed current estimates. Any
significant delay or increase in the costs to develop such plans could have a
material adverse effect on our operations.

  We may face difficulties in integrating, managing and operating new
  technologies

     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. Integrating these new technologies could
increase the risk of system failure and result in further strains on our
resources. Additionally, any damage to our network management center or our
major switching centers could harm our ability to monitor and manage the network
operations and generate accurate call detail reports from which billing
information is derived.

  The technology of our 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 utilizes dense
wavelength division multiplexing and synchronous digital hierarchy technology,
another digital transmission
                                        26
<PAGE>   28

standard that facilitates the compatibility of dissimilar equipment from
different vendors. 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 for which we designed it. 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.

  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. Our network is vulnerable to damage or cessation of operations from:

     - Fire;

     - Earthquakes;

     - Severe storms;

     - Power loss;

     - Natural disasters;

     - Damage from human error and tampering;

     - Software defects;

     - Capacity limitations;

     - Breaches of security;

     - Physical break-ins;

     - Intentional acts of vandalism;

     - Telecommunications failures; and

     - Other factors that can cause interruptions in service or reduced capacity
       for our customers.

     We have designed our network to minimize the risk of such system failure
but we cannot assure that we will not experience failures or shutdowns relating
to individual points of presence or even catastrophic failure of the entire
network. Such significant or prolonged system failures or shutdowns could damage
our reputation and result in the loss of customers.

  Although we have implemented network security measures, our network may be
  susceptible to viruses, break-ins or disruptions

     We have implemented many network security measures, such as limiting
physical and network access to our routers. Nonetheless, our network's
infrastructure is potentially vulnerable to computer viruses, break-ins and
similar disruptive problems caused by our customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruptions, delays or cessation in service to our customers. Furthermore,
inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers. This could, in turn, deter potential customers and
adversely affect our existing customer relationships.

     Security problems represent an ongoing threat to public and private data
networks. Attacks upon the security of Internet sites and infrastructure
continue to be reported in the press. Addressing problems caused by computer
viruses, break-ins or other problems caused by third parties could have a
material adverse effect on us.
                                        27
<PAGE>   29

     The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins or
other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of such problems may result in
claims against us or could have a material adverse effect on our business or
reputation or on our ability to attract and retain customers for our services.
Moreover, until more consumer reliance is placed on security technologies
available, the security and privacy concerns of existing and potential customers
may inhibit the growth of the Internet service industry and our customer base
and revenues.

  Our business will suffer if we lose key personnel or fail to attract and
  retain other qualified personnel

     Our operations are managed by a small number of key executive officers. The
loss of any of these officers could have a negative effect on our business. The
loss of senior management or the failure to recruit additional qualified
personnel in the future could significantly impede our financial plans, network
development, marketing and other objectives. Although we have designed incentive
and compensation programs to retain key employees and have entered into
employment agreements with certain executive officers, we cannot assure you as
to the continued availability of qualified key executive officers.

     We believe that our growth and future success will depend in large part on
our continued ability to attract and retain highly skilled and qualified
management, marketing, technical and sales executives and other personnel who
are in high demand and often have multiple employment options. The competition
for qualified management, marketing, technical and sales executives and other
personnel in the telecommunications industry is intense. We will also need to
train our sales personnel to ensure that we successfully market our expanded
offering of e-business services to our business customers. We may lose key
employees or be forced to increase their compensation. We cannot assure you that
we will be able to hire, retain or successfully train necessary personnel.

  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 Ciena, Alcatel, Nortel, Ericsson, Siemens and Cisco Systems. 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.

  Our infrastructure may not keep pace with our rapid growth

     Our operating and financial control systems and infrastructure may not be
adequate to maintain and effectively manage future growth. If we fail to
continually upgrade our administrative, operating and financial control systems,
or if unexpected expansion difficulties arise as a result of our rapid growth,
our business, results of operations and financial condition could suffer a
material adverse effect. Inaccuracies in our forecasts of market demand could
result in insufficient or excessive telecommunications facilities and fixed
expenses that are not in line with our operations. As we proceed with our
development and expansion, there will be additional demands on our customer
support, sales and marketing and administrative resources and network
infrastructure.

  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 our 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 such 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 "-- Our Network Infrastructure -- Network Agreements."

                                        28
<PAGE>   30

  Risks associated with regulatory matters

  Delays in obtaining regulatory licenses and approvals could adversely affect
  our plans to offer services in our targeted markets

     Because we plan to provide an expanded array of telecommunications services
in Europe, we will become subject to significant additional regulation at the
EU, national and local levels. In particular, we must obtain and renew
agreements for the long-term lease of dark fiber, rights-of-way and other
permits to install fiber optic cable from railroads, utilities and governmental
authorities to expand the geographic reach of the network. We must also apply
for permits and other regulatory approvals from government and local authorities
to construct our additional intracity fiber networks. In addition, we are
dependent on FLAG Telecom applying for and obtaining the permits and other
regulatory approvals required to build and operate the FLAG Atlantic-1
transatlantic cable link. We cannot assure you that FLAG Telecom will be able to
obtain or maintain the necessary lease agreements, regulatory approvals, rights
and permits on a timely basis or that we will not be adversely affected by
regulatory developments, which could have a material adverse effect on these
planned businesses. Delays in receiving regulatory approvals, or the enactment
of adverse regulations or regulatory requirements, may delay or prevent us from
expanding the geographic reach of our network and our service offering.

  We may be liable for information disseminated through our network in EU member
  states

     The law relating to the regulation and liability of Internet service
providers in relation to information carried or disseminated is developing.

     In June 2000, the European Parliament and the Council adopted a Directive
on certain legal aspects of information society services, in particular
electronic commerce, in the Internal market ('Directive on electronic
commerce"). Member States are required to bring into force laws, regulations and
administrative provisions necessary to comply with this Directive before January
17, 2002.

     The Directive on electronic commerce applies to us and other service
providers established in the EU and aims to establish a consistent legal
framework for electronic commerce within the EU.

     The directive includes provisions which limit the liability (other than for
prohibitory injunctions) of "intermediaries" (such as Internet service providers
and carriers that transmit or host information provided by third party users of
the service) in respect of certain access, caching and hosting services provided
by them, subject to compliance with certain conditions. The limitations
potentially limit civil and criminal liability for all types of illegal
activities initiated by third parties on-line (for example, copyright piracy,
unfair competition practices, misleading advertising, copyright infringements,
defamation, trademark infringements). If an intermediary fails to qualify for
such limitations, the nature and scope of its liability will be established on
the basis of member states' existing legislation that may not provide us with
the same protections from liability.

     Notwithstanding the adoption of the Directive of electronic commerce, the
imposition upon Internet and Web-hosting service providers of potential
liability for material carried on or disseminated through their systems could
require us to implement measures to reduce our exposure to liability. Such
measures may require that we spend substantial resources or discontinue some of
our service offerings. Any of these actions could have a material adverse effect
on our business, operating results and financial condition.

  There may be restrictions on our ability to carry certain traffic through our
  network in EU member states

     In October 1999, the EU adopted a directive on data protection that
establishes minimum levels of protection for personal information and imposes
limits on the collection, processing, storage and dissemination of such data
without the subject's consent. The directive is being implemented in EU member
states in various stages. Certain functions that our carrier customers and we
perform (such as storage of routing and billing information) are subject to the
directive. The directive forbids the transfer of personal information collected
in the EU to countries that lack "adequate" privacy protection.

                                        29
<PAGE>   31

     The US approach to privacy was found by the European Commission to be
inadequate for the purposes of the Directive, putting at risk trans-Atlantic
data flows. However, in July 2000, the European Commission adopted a Decision
determining that an arrangement put in place by the US Department of Commerce,
known as the "safe harbor," provides adequate protection for personal data
transferred from the EU. Under the "safe harbor" arrangement, which became
effective in November 2000, US companies can voluntarily adhere to a set of data
protection principles recognized by the Commission as providing adequate
protection, and thus, meet the requirements of the Directive regarding transfer
of data from the EU to the US. The Company is currently examining the "safe
harbor" arrangements which may be available to it.

  Fluctuations in foreign currencies may have an adverse impact on our financial
  results and may make it more costly for us to pay our U.S. dollar-denominated
  debt

     Although we have reported our results in U.S. dollars, a substantial
portion of our sales and some of our costs, assets and liabilities are
denominated in Euros, pounds sterling and other currencies. Changes in foreign
currency exchange rates can reduce the value of our assets and revenues and
increase our liabilities and costs. The weakening of the Euro against the U.S.
dollar during 2000 has had the effect of decreasing reported revenues
denominated in such currency when translated into U.S. dollars.

     We have substantial debt denominated in U.S. dollars. However, most of our
revenues are denominated in the Euro and other 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. We cannot
assure you that changes in currency exchange rates will not have a material
adverse effect on our business, financial condition and results of operations.

ITEM 2. PROPERTIES

     We own substantially all of the telecommunications equipment required for
our business; however, we lease a substantial part of our fiber optic cable on a
long-term basis. The installed fiber optic cable is laid under the various
rights-of-way held by us. Other fixed assets are located at various leased
locations in geographic areas served by us.

     Our principal administrative offices and our Network Operations Center are
located in two adjacent buildings in Hoeilaart, Belgium, just outside Brussels.
The leases on both buildings expire on June 30, 2005 and December 31, 2008
respectively. We have entered into leases for two additional buildings in the
same complex as our principal offices. These buildings were occupied as of
January 2000. The leases run through January 2009 but may be terminated after
six years with six months notice plus six months rental penalty.

     In addition to the offices in Belgium, we have a leased office space in
Dublin, Ireland, which expires on October 2, 2022, in London, United Kingdom,
which expires in August 2002, in Frankfurt, Germany, which expires in March 2004
and Madrid, Spain, which expires in January 2004. We lease various offices on a
short-term basis for regional sales and service personnel.

ITEM 3. LEGAL PROCEEDINGS

     We are subject to various claims and proceedings in the ordinary course of
our business. In addition, we are party to the following claims and proceedings:

     On March 26, 1999, we opposed the annual license fee for 1998 imposed by
the French regulator as, among other things, contrary to Article 11 of EC
Directive 97/13 which requires license fees to cover only the administrative
cost of managing the license. On September 23, 1999, the French regulator
informed us that they rejected our position. On November 24, 1999, we filed a
complaint before the French administrative tribunal opposing the license fee. On
February 25, 2000, we filed a similar complaint, on the same terms,

                                        30
<PAGE>   32

before the French administrative tribunal opposing the license fee for 1999.
Under French law, we would not be required to pay these license fee and the
French regulator does not have the right to terminate our license until such
time as a ruling by the French administrative tribunal is issued. If our claim
is rejected in a final non-appealable judgment, we will be required to pay our
license fee in France. We do not believe that the outcome of this litigation
will have a material adverse effect upon our financial condition.

     Based on information currently available, we believe that none of such
current claims or proceedings, individually or in the aggregate, will have a
material adverse effect on our financial condition or results of operations,
although there can be no assurance that this will remain the case.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     The shareholders acted to appoint Duncan Lewis, Stephen Baus and Maurice
Woolf to the Managing Board and Robert J. Amman and Grier C. Raclin to the
Supervisory Board of the Company. All previous members of both Boards resigned.

                                    PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common equity is privately held and not traded on any United States or
foreign exchange or market.

     As of February 15, 2001, our common equity was held by two holders of
record.

     We have not paid any dividend on our common stock and do not intend to pay
dividends in the foreseeable future. In addition, the indentures governing our
11 1/2% senior notes due 2007, 10 3/8% senior notes due 2006, 10 3/8% senior
notes due 2009, 10 1/2% senior notes due 2006 and 11% senior notes due 2009
contain restrictions on the making of restricted payments (in the form of the
declaration of certain dividends or distributions, the purchase, redemption or
other acquisition of any of our capital stock, the payments of principal on any
subordinated indebtedness, as defined in such indentures, prior to any scheduled
payment or maturity, unless (A) no default or event of default, as defined in
the indentures, shall have occurred and be continuing, (B) we are able
immediately after giving effect to such a restricted payment to satisfy an
incurrence of indebtedness test and (C) such restricted payments do not exceed
certain amounts. In addition, we and certain of our operating subsidiaries may
enter into future financings, the terms of which may include dividend
restrictions.

     On July 26, 2000, GTS exchanged 3,166,528 of its common shares for 3,283 of
the Company's common shares pursuant to an exchange agreement which GTS had
entered into on October 15, 1999, with the minority interest holders of the
Company, who were grantees of the Company's stock options. The July 26, 2000
exchange of GTS common shares was based on the fair market value of the Company
as of the date of the exchange, and the transaction resulted in excess purchase
price over the fair value of assets acquired of approximately $37.2 million,
which was recorded in July 2000.

     In September 2000, the remaining 318 options of the Company were exercised.
As a result of this transaction, as of September 2000, 99.8% of the outstanding
common shares of the Company are owned by GTS. GTS is obligated to exchange its
common stock for the remaining 318 shares of the Company's stock during 2001.

     During the year ended December 31, 2000, we issued stock which was not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to the exercise of options to purchase 318 shares of our common stock.

                                        31
<PAGE>   33

ITEM 6. SELECTED FINANCIAL DATA

     The following is a summary of selected historical financial data as of and
for the five years ended December 31, 2000. The historical financial data as of
December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and
1998 has been derived from our financial statements, whose financial statements
have been audited by Ernst & Young , independent auditors, as indicated in their
report included elsewhere herein. The selected financial data presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited Consolidated
Financial Statements and related notes thereto appearing elsewhere in this
document.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                 ---------------------------------------------------------
                                                    2000         1999        1998       1997        1996
                                                 ----------   ----------   --------   ---------   --------
                                                                      (IN THOUSANDS)
<S>                                              <C>          <C>          <C>        <C>         <C>
STATEMENT OF OPERATIONS DATA:
  Revenues.....................................  $  464,671   $  304,363   $ 85,251   $   5,373   $     48
  Operating costs and expenses:
  Access and network services..................     206,162       91,975     41,848       6,842      4,694
  Selling, general and administration..........     139,413       50,909     28,273      17,868      9,894
  Depreciation and amortization................     140,584       68,726     28,638       5,229      1,266
  Business dispositions and restructuring
    related charges............................     140,155           --         --          --         --
  (Loss) income from operations................    (161,643)      92,753    (13,508)    (24,566)   (15,806)
  Other income/(expense):
  Interest income..............................      37,250       28,704      9,997       6,596        508
  Interest expense.............................    (127,435)     (81,133)   (30,852)    (12,826)      (153)
  Foreign currency gains (losses)..............      29,644          (25)   (11,308)       (367)    (1,126)
  Other, net...................................       1,253         (468)      (921)         --         --
  Net (loss) income............................  $ (225,816)  $   29,004   $(48,935)  $ (31,163)  $(16,577)
  (Deficiencies) surplus of earnings available
    to cover fixed charges(1)..................  $ (244,137)  $   29,679   $(51,492)  $ (31,163)  $(16,577)
OTHER DATA:
  EBITDA(2)....................................  $  119,096   $  161,479   $ 16,230   $ (16,737)  $(14,540)
  Net cash provided by (used in) operating
    activities.................................     103,902      102,707     44,957      (4,417)   (11,540)
  Net cash used in investing activities........    (518,118)    (395,321)   (92,758)   (107,466)   (20,781)
  Net cash provided by (used in) financing
    activities.................................      15,289      721,593    (21,463)    317,500     28,924
BALANCE SHEET DATA (AT END OF PERIOD):
  Total current assets.........................  $  548,066   $  767,540   $240,151   $ 249,325   $  7,528
  Property and equipment, net..................   1,159,944      756,452    438,984     204,944     20,303
  Total assets.................................   2,006,766    1,810,010    744,110     504,668     29,466
  Total current liabilities....................     408,160      203,654    169,413      61,744     11,915
  Capital leases, including current portion....     279,083      182,981    227,513     139,185         --
  Other debt, including current portion........   1,110,312    1,057,975    265,353     265,383        562
  Total liabilities............................   1,939,389    1,551,662    688,403     445,008     12,414
  Shareholders' equity(3)......................      67,377      258,388     27,948      59,660     17,052
</TABLE>

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

(1) Because of our historic losses, we have experienced a deficiency of earnings
    available to cover fixed charges in every year except 1999. The (deficiency)
    surplus of earnings available to cover fixed charges has been computed by
    taking our "adjusted (loss) surplus from operations" minus "fixed charges."
    Adjusted (loss) surplus from operations consists of (loss) surplus from
    continuing operations before income taxes plus fixed charges and minus
    capitalized interest. Fixed charges consist of interest on all indebtedness
    and amortization of discount on all indebtedness.

(2) EBITDA is earnings (loss) from operations before interest, taxes,
    depreciation and amortization, non-cash stock compensation, foreign currency
    gains (losses), other income (expense) and non-recurring expenses. EBITDA is
    a measure of a company's performance commonly used in the telecommunications
    industry, but should not be construed as an alternative to net income (loss)
    determined in accordance with GAAP as an indicator of operating performance
    or as an alternative to cash from operating activities determined in
    accordance with GAAP as a measure of liquidity.

(3) Includes shareholders' loans and shareholders' equity of $34.9 million and
    $8.4 million for 1996, respectively.

                                        32
<PAGE>   34

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

     The following is a discussion of our financial condition and results of
operations as of December 31, 2000 and 1999 and for the three year period ended
December 31, 2000. The following discussion should be read in conjunction with
our Consolidated Financial Statements and the notes related thereto.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
those concerning (i) availability of funding under the Amended Bank Facility,
(ii) projected traffic volume, (iii) future revenues and costs and (iv) changes
in our competitive environment, contain forward-looking statements concerning
our operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements.

     In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report. Among
the key factors that have a direct bearing on our results of operations are the
potential risk of delay in implementing our business plan; the political,
economic and legal aspects of the markets in which we operate; competition and
our need for additional substantial financing. These and other factors are
discussed herein under "Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Report.

     The factors described in this Report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made
by us or on behalf of us, and investors, therefore, should not place undue
reliance on any such forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and we
undertake no obligation to update any forward-looking statement or statements to
reflect events or circumstances after the date on which such statement is made
or to reflect the occurrence of unanticipated events. New factors may emerge
from time to time, and it is not possible for management to predict all of such
factors. Further, we cannot assess the impact of each such factor on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.

NOVEMBER 2000 RESTRUCTURING

     In November 2000, GTS announced a substantial restructuring (the
"Restructuring") of its operations to focus on those areas of its business,
which management believes have stronger prospects for long-term success and
profitability, and to divest, liquidate or otherwise address those operations,
which are non-strategic or which are unsustainable as currently constituted and
a drain on GTS's limited financial and other resources. Following the
Restructuring, GTS anticipates that the Company's operations will provide
substantially all of GTS's revenues. GTS's decision to undertake the
Restructuring was prompted in large measure by the significant downturn in the
financial and stock markets, which commenced in March 2000. As a consequence of
that downturn, the availability of capital markets and other financing, which
was essential and was previously plentiful for below-investment grade emerging
and more-established alternative telecommunications providers, like the Company
and GTS, has substantially decreased or has become available only with onerous
terms and conditions. At the same time, the pace of competition in the Company's
and GTS's markets has intensified. The Company and GTS cannot predict when these
conditions will improve. Consequently, GTS determined that a substantial
restructuring was required to achieve self-sufficiency with regard to its
financial resources and to implement its business plan. Although the Company and
GTS believe they have made significant progress during the first and second
quarters of 2001 to complete the Restructuring

                                        33
<PAGE>   35

and to enhance the liquidity position of the Company and GTS, the future
viability of the Company will depend upon GTS's ability to complete those
aspects of the Restructuring, which will fund GTS's operations through the first
quarter of 2002, on the Company's ability to access funding under the Amended
Bank Facility, defined below, and on the ability of the Company to access
additional capital to fund its operations after the first quarter of 2002, as
discussed in greater detail under Item 1 -- "Business -- Recent Developments."

     As a result of this Restructuring , the Company plans to divest certain
entities that provide voice and voice-based services ("Business Services"). It
is contemplated that these Business Services entities will be divested as part
of the Esprit Restructuring, as defined in Item 1 -- "Business -- Recent
Developments -- Restructuring of GTS's Global TeleSystems (Europe) Ltd (Espirit)
Subsidiary."

     In connection with the Restructuring, the Company has recorded a charge of
$136.8 million in the fourth quarter 2000. Of the $136.8 million charge for our
business disposition initiatives, $121.3 million represents non-cash items
related to the write-off of impaired goodwill and intangibles of $83.5 million
with the remaining $37.8 million principally related to the write-off of
impaired fixed assets. The remaining $15.5 million of the $136.8 million
represents cash items for transaction related costs, contract terminations for
excess local access transmission capacity and facilities and severance for
personnel. In determining the write down amounts for the goodwill and
intangibles, the Company utilized discounted cash flow analysis. Further, in
determining the write-down amount for its fixed assets, the Company utilized
discounted cash flows analysis and considered fair values that could be achieved
in the market for the sale of its assets; however, due to the significant
downturn in the financial markets for telecommunication providers the re-sale
market for used telecommunication equipment has also become less favorable to
the Company.

     On July 14, 2000, Global TeleSystems Europe Holdings, B.V., a wholly-owned
subsidiary of the Company, entered into a $550 million loan agreement with Bank
of America International Limited, Deutsche Bank AG London and Dresdner AG London
Branch. As a result of the Restructuring, the parties determined that changes to
the agreement should be made and agreed to negotiate an amended long-term credit
facility. In April 2001, the parties entered into an interim amended facility
while a definitive longer-term credit facility is negotiated. The amended
facility provides a E300 million revolving credit facility through March 2002,
at which time the facility converts into a one-year term loan. See Item
1 -- "Business -- Recent Developments -- Amended Bank Facility" for a
description of certain terms and conditions of the Amended Bank Facility,
including the provisions thereunder which require that the shares of Golden
Telecom owned by GTS and GTS's interests in its Central Europe division be
transferred to the borrower under the Amended Bank Facility. Effectiveness of
the Amended Bank Facility is subject to such transfers and to the satisfaction
of other conditions precedent which the borrower is in the process of
completing.

OTHER ORGANIZATIONAL CHANGES

     Throughout 2000, GTS has been realigning its legal organizational structure
in order to achieve the most beneficial company wide tax structure. Due to this
realignment, the 2000 financial results contained herein now include
subsidiaries that were previously included elsewhere within the GTS
organizational structure during 1999. In connection with the Restructuring, as
discussed in Item 1 -- "Business -- Recent Developments -- Restructuring of
GTS's Global TeleSystems (Europe) (Esprit) Subsidiary," the Company plans to
divest certain of the subsidiaries that it had acquired from GTS affiliates
during 2000. Further, as required under the Company's bond covenants, GTS has
obtained appraisals from an independent appraisal firm to support the
acquisition of net assets by the Company, at their appraised fair market value,
from other GTS affiliates.

     On June 24, 1998, we acquired a 75% interest in Ebone A/S ("Ebone"). Ebone
operates a Tier-1 Internet backbone network that connects European Internet
service providers to the Internet. We purchased the remaining 25% interest in
Ebone on May 25, 1999. The results of Ebone have been included in the
accompanying consolidated financial statements from the date of acquisition.

                                        34
<PAGE>   36

BUSINESS STRATEGY

     We are Europe's premier independent broadband network services provider.
Our goal is to maintain and enhance our position as a leading pan-European
provider of broadband, Internet, and data to communications carriers, Internet
service providers and other high-usage enterprise customers. In order to achieve
this goal, we will build on the strengths of:

     - our pan-European broadband fiber optic network, which extends
       approximately 21,000 kilometers, connects 56 cities in 20 countries, and
       is the largest such operational network in Europe;

     - our pan-European Tier 1 Internet Protocol backbone, which carries
       approximately 5% of the total Internet traffic, 25% of all European
       Internet traffic and is the first European IP network to operate at 10
       gigabits per second; and

     - our large base of carrier, Internet service provider and other bandwidth-
       and Internet-intensive customers,.

     The key elements of our strategy for achieving this goal are as follows:

     - Focus our activities on our core expertise in optical and IP networking;

     - Build on our leadership position in the carriers' carrier market to
       penetrate a broader bandwidth intensive customer base;

     - Exploit the reach and capacity of our fiber optic network; and

     - Capitalize on the "Ebone" brand name, which we adopted in January 2001

RESULTS OF OPERATIONS

  Year Ended December 31, 2000 vs. December 31, 1999

     Revenue.  Our consolidated revenue for the year ended December 31, 2000 was
$464.7 million as compared to $304.4 million for the comparable period in 1999.
The growth in revenue is attributable to the increase in the Company's customer
base, the expansion of the Company's network and inclusion of the financial
results of the acquired GTS affiliated companies during fiscal year 2000. The
Company expects that its revenue will decline as a result of the restructuring
measures initiated in 2000, since, the Business Services businesses, that the
Company plans to divest, recorded $106.7 million of revenues in 2000.

     Access and Network Services.  Access and network costs consist of costs
associated with providing telecommunication services on the Company's network
and the costs of leased capacity. During 2000, these costs increased to $206.2
million, or 44.4% of revenue as compared to $92.0 million, or 30.2% of revenue
for 1999. The increase in access and network services costs as a percentage of
revenue in 2000 was due to increased direct network operating and maintenance
costs, increases in local access costs as required for customer connectivity, as
well as the inclusion of the financial results associated with the acquired GTS
affiliated companies during fiscal year 2000. The Company expects that these
access and network services costs will slowly decline as a result of the
restructuring measures initiated in 2000 since, the Business Services
businesses, that the Company plans to divest, incurred access and network
services costs of $104.4 million in 2000.

     Selling, General and Administrative.  Selling, general and administrative
expenses for 2000 increased to $139.4 million, or 30.0% of revenue as compared
to $50.9 million, or 16.7% of revenue for 1999. The increase in selling, general
and administrative expenses in 2000 is attributable to the following: additional
expenses related to acquired entities; an increase in the Company's sales and
marketing efforts; additional building rent expense related to the increased
office space due to growth in the Company's infrastructure; increased
administrative costs required for the Company's increased customer base; the
development of the Company's new brand identity and increased charges to bad
debt expense as a result of the failure of several customers as well as
increased risk in the telecom sector. The Company expects that selling, general
and administrative expenses will decrease in future periods as a result of the
restructuring measures initiated in 2000 since, the Business Services
businesses, that the Company plans to divest, incurred selling, general and
administrative costs of $48.3 million in 2000.

                                        35
<PAGE>   37

     Depreciation and Amortization.  Depreciation and amortization expense
increased to $140.6 million or 30.2% of revenue for the year ended December 31,
2000 as compared to $68.7 million or 22.6% of revenue in 1999. The substantial
increase in depreciation and amortization costs is attributable to the
depreciation related to the expansion of the Company's network infrastructure
that has been undertaken over the past several years. Additionally, the Company
has experienced an increase in amortization expense associated with goodwill
that has resulted from its acquisition activities. The Company expects that
depreciation and amortization will decrease in future periods as a result of the
restructuring measures initiated in 2000 and the resulting write-down of
long-lived assets and goodwill.

     Business dispositions, merger and restructuring related charges.  In 2000,
the Company recorded $140.2 million in charges to earnings attributable to
business disposition and restructuring related costs. Of the $140.2 million,
$136.8 million and $3.4 million were recorded in the fourth and third quarter
respectively. The $136.8 million fourth quarter 2000 charge was attributable to
the GTS Board of Directors approval, in November 2000, of management's plan to
restructure GTS so that its primary focus is to provide broadband services to
traditional carriers, Internet service providers ("ISPs"), application service
providers ("ASPs"), other Web-centric entities and data intensive pan-European
corporations.

     Of the $136.8 million charge for our business disposition initiatives,
$121.3 million represents non-cash items related to the write-off of impaired
goodwill and intangibles of $83.5 million with the remaining $37.8 million
principally related to the write-off of impaired fixed assets. The remaining
$15.5 million of the $136.8 million represents cash items for transaction
related costs, contract terminations for excess local access transmission
capacity and facilities and severance for personnel.

     The $3.4 million charge was attributable to the GTS Board of Directors
approval in August 2000 of management's plan to exit from its residential and
pre-paid card businesses, and streamline its operations by, among other things,
consolidating its headquarters functions, reducing or redeploying headcount,
centralizing finance and billing operations and consolidating sales offices. The
charge is for severance related costs associated with termination of personnel
and cancellation of facility leases and anticipated office closure costs.

     Interest.  Interest expense increased to $127.4 million in 2000 as compared
to $81.1 million in 1999. This significant increase in interest expense is
attributable to the interest associated with the Company's issuance of new debt
obligations in late 1999, partially offset by an increase in capitalized
interest resulting from the construction of the Company's network. The Company
had outstanding debt obligations of $1.4 and $1.2 billion at December 31, 2000
and 1999, respectively.

     Interest income for 2000 increased to $37.3 million from $28.7 million in
1999. The increase is due to the interest earned from the Company's short-term
investments resulting from the investment of the proceeds from the new debt
obligations in late 1999.

     Foreign Currency Losses.  The Company recognized foreign currency gains of
$29.6 million in 2000 as compared to minimal losses in 1999. The increased gain
is primarily due to the impact of foreign currency fluctuations on the Company's
unhedged debt obligations.

  Year Ended December 31, 1999 vs. December 31, 1998

     Revenue.  Our consolidated revenue for the year ended December 31, 1999 was
$304.4 million as compared to $85.3 million for the comparable period in 1998.
The growth in revenue is attributable to the continued deployment of our network
and increased customer base.

     Telecommunication Services.  Our telecommunication services costs for the
year ended December 31, 1999 were $92.0 million, or 30.2% of revenue, compared
to $41.8 million, or 49.0% of revenue, for the comparable period in 1998. The
increase in telecommunication services for the year ended December 31, 1999
primarily due to increased costs related to operating and maintaining the
network as it continues to be deployed, as well as the increase in local access
costs resulting from increased volume of traffic.

     Selling, General and Administrative.  Selling, general and administrative
expenses for the year ended December 31, 1999 were $50.9 million, or 16.7% of
revenue, as compared to $28.3 million, or 33.2% of

                                        36
<PAGE>   38

revenue, for the comparable period in 1998. The increase in selling, general and
administrative expenses is reflective of the growth of our business operations
and support personnel.

     Depreciation and Amortization.  Depreciation and amortization expense for
the year ended December 31, 1999 was $68.7 million as compared to $28.6 million
in 1998. The increase in depreciation and amortization expense is attributable
to depreciation of additional network assets due to the continued build-out of
our network.

     Interest.  Interest expense for the year ended December 31, 1999 was $81.1
million as compared to $30.9 million for the comparable period in 1998. The
increase was primarily attributable the Company's issuance of new debt
obligations in 1999.

     Interest income, included in other income/(expense), for the year ended
December 31, 1999 was $28.7 million as compared to $10.0 million for the
comparable period in 1998. The increase in interest income was the result of
investing the excess cash generated from the issuance of the senior notes in
January and November 1999 in various highly liquid investments.

     Foreign Currency Losses.  Foreign currency losses were minimal for the year
ended December 31, 1999 as compared to $11.3 million for the comparable period
in 1998. The losses in 1998 were primarily the result of foreign exposure from
the issuance of the senior notes in U.S. dollars and other U.S. dollar cash and
payables balances, the weakening of the dollar versus European currencies in the
third and fourth quarter and losses on several forward exchange contracts.

LIQUIDITY AND CAPITAL RESOURCES

     The telecommunications industry is capital intensive. In order for the
Company to successfully compete, the Company will require substantial capital to
continue to develop its telecommunications networks, implement its business
strategy and meet the funding requirements of its operations, including losses
from operations, as well as to provide capital for its business development
initiatives. We anticipate that we will incur approximately $225 million in cash
capital expenditures in 2001 to implement our business plan.

     On April 5, 2001, the Company announced that a wholly owned subsidiary had
reached an agreement to amend its bank facility while a longer-term credit
facility is negotiated. The Amended Bank Facility provides up to E300 million in
available funds through March 2002, at which time the Amended Bank Facility
converts into a one-year term loan. Effectiveness of the Amended Bank Facility
is subject to the satisfaction of certain conditions precedent, which the
borrower is in the process of completing. As of March 31, 2001, the borrower had
drawn down E200 million of these funds. The borrower will have access to
available funding under the Amended Bank Facility limited to the lesser of (i) a
range of funding, based on the borrower's business plan, from E180 million to
E300 million from April 2001 through January 2002 (until the termination of the
Amended Bank Facility), and (ii) an amount determined by a monthly calculated
rolling three-month annualized cash flow multiple. See Item
1 -- "Business -- Recent Developments -- Amended Bank Facility" and Item
8 -- "Consolidated Financial Statements and Supplementary Information for the
Company" Footnote 2 thereto, "Management Plans and Subsequent Events".

     As part of the Esprit Restructuring discussed in detail in Item
1 -- "Business -- Recent Developments -- Restructuring of GTS's Global
TeleSystems (Europe) (Esprit) Subsidiary," the Company expects that it will
transfer its Business Services entities to the new company which will be formed
upon consummation of the Esprit Restructuring. The Company anticipates that the
divestiture of its Business Services business will have a favorable impact on
its results from operations and financial condition, since, the Business
Services businesses as currently constituted, were performing poorly from a
financial perspective and were a drain on the Company's financial and other
resources.

     Based on the Company's current existing cash balances, projected internally
generated funds and available borrowings under the Amended Bank Facility, the
Company believes that it will be able to address its funding requirements into
first quarter 2002. Further, as the Company's business strategy evolves, the
Company will continuously evaluate its optimal capital structure to ensure that
is meets the Company's overall corporate strategy.
                                        37
<PAGE>   39

     The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates. In particular, the accuracy
of the estimates is subject to changes and fluctuations in revenues, operating
costs and development expenses, which can be affected by the Company's ability
to (1) meet the financial covenants and other conditions to borrowing under the
Amended Bank Facility, (2) effectively and efficiently manage the expansion of
the Ebone network and operations and the build-out of its City Enterprise
Network infrastructure in the targeted metropolitan markets, (3) implement its
strategy to become a leading provider of data and IP to corporate businesses,
(4) limit, to the extent possible, price erosion for broadband services, (5)
access markets, attract sufficient numbers of customers and provide and develop
services for which customers will subscribe, and (6) negotiate favorable
contracts with suppliers, including large volume discounts on purchases of
capital equipment. In addition, the Company's liquidity may be affected by GTS's
ability to effectively and efficiently manage the sale of GTS's equity interest
in Golden Telecom and GTS's potential sale of its Central Europe business
because of the interaction of these transactions with the Amended Bank Facility,
as described in detail in Item 1 -- "Business -- Recent Developments -- Amended
Bank Facility" The Company's revenues and costs are also dependent upon factors
that are not within its control such as political, economic and regulatory
changes, changes in technology, increased competition and various factors such
as strikes, weather, and performance by third parties in connection with its
operations. Due to the uncertainty of these factors, actual revenues and costs
may vary from expected amounts, possibly to a material degree, and such
variations are likely to affect the Company's future capital requirements. In
addition, if the Company expands its operations at an accelerated rate, its
funding needs will increase, possibly to a significant degree, and the Company
will expend its capital resources sooner than currently expected. As a result of
the foregoing, or if the Company's capital resources otherwise prove to be
insufficient, the Company will need to raise additional capital to execute its
current business plan and to fund expected operating losses. The Company
continues to evaluate its capital program in light of business needs, expansion
plans and market conditions for acquiring certain assets.

CHANGES IN FINANCIAL CONDITION

     We had a positive working capital of $139.9 million and $563.9 million as
of December 31, 2000 and 1999, respectively. We had cash and cash equivalents of
$135.3 million and $565.4 million at December 31, 2000 and 1999, respectively.
The Company had $24.3 million and $18.4 million of restricted cash at December
31, 2000 and December 31, 1999, respectively. The restricted cash primarily
relates to cash held in escrow for bank guarantees issued in connection with
fiber and office leases.

     In 2000, 1999 and 1998, the Company's operating activities provided cash of
$103.9 million, $102.7 million and $45.0 million, respectively. The Company used
cash of $518.1 million, $395.3 million and $92.8 million for its investing
activities in 2000, 1999 and 1998, respectively. Of the $518.1 million of 2000
investing activities, $437.1 million of cash was spent on building the Company's
telecommunications networks with the remaining investing activities principally
associated with its acquisition activities. In 1999 and 1998, the principal
investing activities was associated with building the Company's
telecommunications networks. The Company cannot assure you that its operations
will achieve or sustain profitability or positive cash flow in the future. If
the Company cannot achieve and sustain operating profitability or positive cash
flow from operations, the Company may not be able to meet its debt service
obligations or working capital requirements.

     In 1999, the Company issued debt obligations that aggregated approximately
$836 million.

FOREIGN CURRENCY CONSIDERATIONS

     Substantially all of the Company's operations are in Western Europe and
therefore its consolidated financial results are subject to fluctuations in
currency exchange rates. The Company's operations transact their business in the
following significant currencies: the Euro, the British Pound Sterling and the
U.S. Dollar. Although the Company is attempting to match revenues, costs,
borrowing and repayments in terms of their respective currencies, the Company
has experienced, and may continue to experience, losses and a resulting negative
impact on earnings with respect to holdings solely as a result of foreign
currency exchange rate fluctuations, which include foreign currency devaluations
against the U.S. Dollar. Furthermore, certain of the Company's operations have
notes payable and notes receivable which are denominated in a currency other
                                        38
<PAGE>   40

than their own functional currency or loans linked to the U.S. Dollar. The
Company may also experience economic loss and a negative impact on earnings
related to these monetary assets and liabilities.

     The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk. The Company is continuously
evaluating the materiality of foreign exchange exposures in different countries
and the financial instruments available to mitigate this exposure. The Company
designed and implemented reporting processes to monitor the potential exposure
on an ongoing basis in 1998. The Company will use the output of this process to
execute financial hedges to cover foreign exchange exposure when practical and
economically justified.

IMPACT OF THE EURO CURRENCY ON OPERATIONS

     In accordance with the Treaty on EU, signed at Maastricht on February 7,
1992, Stage III of the Economic and Monetary Union (EMU) commenced on January 1,
1999, and a single currency, the "Euro" (E), has been introduced. In addition on
January 1, 1999, eleven of the fifteen member countries of the European Union,
including Belgium, The Netherlands, Ireland, France, Germany, Italy and Spain
established an irrevocable fixed conversion rate between their existing
sovereign currencies and the Euro. The Euro trades on currency exchanges and is
available for non-cash transactions. The Euro exists in parallel with national
currencies, and transactions may be denominated in either currency until
December 31, 2001 (though only notes and coins of the national currencies will
be available for physical exchange). From January 1, 2002, Euro notes and coins
will be introduced and national currencies will be withdrawn by June 30, 2002.
Those participating member states have also transferred authority for conducting
monetary policy to the European Central Bank.

     The Company has significant operations within the EU, including many of the
countries that adopted the Euro. The Company has evaluated and is in the process
of addressing the system issues raised by the adoption of the Euro, including:
preparing business systems for trading in Euros and converting the accounting
systems of companies in the common currency area from their national currency to
Euros; the benefit of the elimination of exchange rate risk in cross border
transactions within the common currency area; the potential impact of increases
in pricing transparency on price differentials between member states; and
training and human resources issues. The Company continues to evaluate the
impact the Euro will have on its continuing business operations and no
assurances can be given that the Euro will not have material adverse affect on
its business, financial condition and results of operations. However, the
Company does not expect the Euro to have a material effect on its competitive
position as a result of price transparency within the European Union as the
Company has always operated as a pan-European business with transparent pricing
in ECU for the majority of its customers. Moreover, the Company is in the
process of updating its information systems to accommodate the adoption of the
Euro and does not expect to incur material costs in the updating of such
systems. In addition, the Company cannot accurately predict the impact the Euro
will have on currency exchange rates or on its currency exchange risk.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company's treasury function manages its funding, liquidity, and
exposure to interest rate and foreign exchange rate risks. The Company's
treasury operations are conducted within a framework of policies and guidelines
authorized by its Board of Managing Directors. In accordance with the Company's
policy, the Company does not enter into any transactions of a speculative
nature.

     The Company is exposed to market risk from changes in interest rates on
long-term obligations and as a global company; the Company also faces exposure
to adverse movements in foreign currency exchange rates. A portion of the
Company's debt obligations are denominated in currencies, which expose the
Company to risks, associated with changes in foreign exchange rates. The Company
has developed risk management policies that establish guidelines for managing
foreign exchange risk and periodically evaluate the materiality of foreign
exchange exposures and the financial instruments available to mitigate this
exposure.

     The Company attempts to mitigate its foreign exchange exposures by
maintaining assets in the exposed currency wherever possible. The Company has
found it impractical to hedge all foreign currency exposure and
                                        39
<PAGE>   41

as a result will continue to experience foreign currency gains and losses. The
introduction of the Euro as a common currency for members of the European Union
occurred on January 1, 1999.

     The following table provides information about the Company's debt
obligations that are sensitive to changes in interest rates.

<TABLE>
<CAPTION>
                                                                                          FAIR VALUE
                             2001   2002   2003   2004   2005   THEREAFTER     TOTAL       12/31/00
                             ----   ----   ----   ----   ----   ----------   ----------   ----------
                                                         (IN THOUSANDS)
<S>                          <C>    <C>    <C>    <C>    <C>    <C>          <C>          <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  Fixed rate...............   --     --     --     --     --    $1,016,106   $1,016,106   $  408,300
  Avg. interest rate.......   --     --     --     --     --          10.9%          --           --
  Variable rate............   --     --     --     --     --    $   94,206   $   94,206   $   94,206
  Avg. interest rate.......   --     --     --     --     --           6.1%          --           --
</TABLE>

     The following table provides information about financial instruments by
functional currency and where applicable, presents such information in US dollar
equivalents. The table summarizes information on foreign currency denominated
debt obligations that are sensitive to foreign currency exchange rates.

<TABLE>
<CAPTION>
                                                                                           FAIR VALUE
                                2001   2002   2003   2004   2005   THEREAFTER    TOTAL      12/31/00
                                ----   ----   ----   ----   ----   ----------   --------   ----------
                                                           (IN THOUSANDS)
<S>                             <C>    <C>    <C>    <C>    <C>    <C>          <C>        <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  US Dollars
     Fixed rate...............   --     --     --     --     --     $465,000    $465,000   $  186,193
     Avg. interest rate.......   --     --     --     --     --         11.0%         --           --
</TABLE>

                                        40
<PAGE>   42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         GLOBAL TELESYSTEMS EUROPE B.V.

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 2000         1999
                                                              ----------   ----------
<S>                                                           <C>          <C>
CURRENT ASSETS
  Cash and cash equivalents.................................  $  135,337   $  565,402
  Restricted cash...........................................      24,271       18,385
  Accounts receivable, net of allowance for doubtful
     accounts of $22,556 and $4,876, respectively...........     118,758       83,267
  Other receivables.........................................      70,775       31,867
  Due from affiliated companies.............................     170,200       49,229
  Prepaid expenses and other current assets.................      28,725       19,390
                                                              ----------   ----------
          TOTAL CURRENT ASSETS..............................     548,066      767,540
  Property and equipment, net...............................   1,159,944      756,452
  Other non-current assets, principally goodwill and
     intangibles............................................     298,756      286,018
                                                              ----------   ----------
          TOTAL ASSETS......................................  $2,006,766   $1,810,010
                                                              ==========   ==========

                        LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable..........................................  $  217,797   $   29,989
  Accrued expenses..........................................      82,695       70,312
  Deferred revenue..........................................      47,251       66,170
  Due to affiliated companies...............................      37,928       26,063
  Current portion of capital lease obligations..............      22,489       11,120
                                                              ----------   ----------
          TOTAL CURRENT LIABILITIES.........................     408,160      203,654
  Long-term debt............................................   1,110,312    1,057,722
  Long-term capital lease obligations.......................     256,594      172,114
  Other non-current liabilities, principally deferred
     revenue................................................     164,323      118,132
                                                              ----------   ----------
          TOTAL LIABILITIES.................................   1,939,389    1,551,622
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
  Common stock, 1000 guilders par value; 297,000 shares
     authorized; 200,634 and 200,316 shares issued and
     outstanding at December 31, 2000 and December 31,1999,
     respectively...........................................     101,644      101,518
  Additional paid-in capital................................     275,572      237,610
  Accumulated other comprehensive loss......................      (8,831)      (5,548)
  Accumulated deficit.......................................    (301,008)     (75,192)
                                                              ----------   ----------
          TOTAL SHAREHOLDERS' EQUITY........................      67,377      258,388
                                                              ----------   ----------
          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........  $2,006,766   $1,810,010
                                                              ==========   ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        41
<PAGE>   43

                         GLOBAL TELESYSTEMS EUROPE B.V.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                 2000        1999       1998
                                                              ----------   --------   --------
<S>                                                           <C>          <C>        <C>
Revenues....................................................  $  464,671   $304,363   $ 85,251
Operating costs and expenses:
  Access and network services...............................     206,162     91,975     41,848
  Selling, general and administrative.......................     139,413     50,909     28,273
  Depreciation and amortization.............................     140,584     68,726     28,638
  Business dispositions and restructuring related charges...     140,155         --         --
                                                              ----------   --------   --------
          Total operating expenses..........................     626,314    211,610     98,759
                                                              ----------   --------   --------
(Loss) income from operations...............................    (161,643)    92,753    (13,508)
Other income/(expense):
  Interest income...........................................      37,250     28,704      9,997
  Interest expense..........................................    (127,435)   (81,133)   (30,852)
  Foreign currency income (loss)............................      29,644        (25)   (11,308)
  Other, net................................................       1,253       (468)      (921)
                                                              ----------   --------   --------
                                                                 (59,288)   (52,922)   (33,084)
                                                              ----------   --------   --------
Net (loss) income before income taxes.......................    (220,931)    39,831    (46,592)
Income taxes................................................       4,885     10,827      2,343
                                                              ----------   --------   --------
Net (loss) income...........................................  $ (225,816)  $ 29,004   $(48,935)
                                                              ==========   ========   ========
Net (loss) income per share:
  Basic.....................................................  $(1,126.72)  $ 146.17   $(255.15)
                                                              ==========   ========   ========
  Diluted...................................................  $(1,126.72)  $ 144.74   $(255.15)
                                                              ==========   ========   ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        42
<PAGE>   44

                         GLOBAL TELESYSTEMS EUROPE B.V.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              2000        1999        1998
                                                            ---------   ---------   ---------
<S>                                                         <C>         <C>         <C>
Operating Activities
  Net (loss) income.......................................  $(225,816)  $  29,004   $ (48,935)
Adjustments to reconcile net (loss) income to net cash
  provided by operating activities:
  Depreciation and amortization...........................    138,230      73,630      29,921
  Business dispositions and restructuring related
     charges..............................................    123,475          --          --
  Adjustment on foreign currency instruments..............    (55,055)    (39,487)     28,650
  Other adjustments.......................................     17,161         682       2,362
  Changes in assets and liabilities:
     Accounts receivable..................................    (21,485)    (76,965)    (37,543)
     Deferred revenues....................................     32,463     116,027      64,819
     Accounts payable and accrued expenses................    144,495      24,116      28,737
     Other changes in assets and liabilities..............    (49,567)    (24,300)    (23,054)
                                                            ---------   ---------   ---------
       Net cash provided by operating activities..........    103,902     102,707      44,957
Investing Activities:
  Purchases of property and equipment.....................   (437,108)   (389,834)   (131,866)
  Acquisitions -- net of cash acquired....................    (75,143)    (15,667)     13,352
  Other investing activities..............................     (5,867)     10,180      25,756
                                                            ---------   ---------   ---------
       Net cash used in investing activities..............   (518,118)   (395,321)    (92,758)
Financing Activities:
  Proceeds from debt......................................    179,056     836,254          --
  Repayments of debt......................................   (117,349)    (47,248)    (32,523)
  Due to affiliates, net..................................    (99,743)    (43,372)     11,285
  Proceeds from liquidation of foreign currency swap......     62,300          --          --
  Other financing activities..............................     (8,975)    (24,041)       (225)
                                                            ---------   ---------   ---------
       Net cash provided by (used in) financing
          activities......................................     15,289     721,593     (21,463)
Effect of exchange rate changes on cash and cash
  equivalents.............................................    (31,138)      6,342      (4,982)
                                                            ---------   ---------   ---------
Net (decrease) increase in cash and cash equivalents......   (430,065)    435,321     (74,246)
Cash and cash equivalents at beginning of year............    565,402     130,081     204,327
                                                            ---------   ---------   ---------
Cash and cash equivalents at end of year..................  $ 135,337   $ 565,402   $ 130,081
                                                            =========   =========   =========
Supplemental Disclosure of Cash Flow Information:
  Capitalization of leases................................  $ 130,643   $  58,939   $ 120,556
                                                            =========   =========   =========
  Push down accounting entry..............................  $  37,174   $ 213,739   $  18,052
                                                            =========   =========   =========
  Offset receivable and payable...........................  $      --   $  32,000   $      --
                                                            =========   =========   =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        43
<PAGE>   45

                         GLOBAL TELESYSTEMS EUROPE B.V.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                         ACCUMULATED
                                         COMMON STOCK      ADDITIONAL       OTHER                         TOTAL
                                      ------------------    PAID-IN     COMPREHENSIVE   ACCUMULATED   SHAREHOLDERS'
                                      SHARES     AMOUNT     CAPITAL         LOSS          DEFICIT        EQUITY
                                      -------   --------   ----------   -------------   -----------   -------------
<S>                                   <C>       <C>        <C>          <C>             <C>           <C>
BALANCE AT JANUARY 1, 1998..........  190,468   $ 96,757    $ 21,829       $(3,665)      $ (55,261)     $  59,660
Proceeds from exercise of stock
  options...........................    6,248      3,353      (2,753)           --              --            600
Compensatory stock options..........       --         --       1,060            --              --          1,060
Pushdown accounting adjustment......       --         --      13,198            --              --         13,198
Translation adjustment..............       --         --          --         2,365              --          2,365
Net loss............................       --         --          --            --         (48,935)       (48,935)
                                                                                                        ---------
Comprehensive loss..................                                                                      (46,570)
                                      -------   --------    --------       -------       ---------      ---------
BALANCE AT DECEMBER 31, 1998........  196,716   $100,110    $ 33,334       $(1,300)      $(104,196)     $  27,948
Proceeds from exercise of stock
  options...........................    3,600      1,408         871            --              --          2,279
Pushdown accounting adjustment......       --         --     203,405            --              --        203,405
Translation adjustment..............       --         --          --        (4,248)             --         (4,248)
Net income..........................       --         --          --            --          29,004         29,004
                                                                                                        ---------
Comprehensive income................                                                                       24,756
                                      -------   --------    --------       -------       ---------      ---------
BALANCE AT DECEMBER 31, 1999........  200,316   $101,518    $237,610       $(5,548)      $ (75,192)     $ 258,388
Proceeds from exercise of stock
  options...........................      318        126         788            --              --            914
Pushdown accounting adjustment......       --         --      37,174            --              --         37,174
Translation adjustment..............       --         --          --        (3,283)             --         (3,283)
Net loss............................       --         --          --            --        (225,816)      (225,816)
                                                                                                        ---------
Comprehensive loss..................                                                                     (229,099)
                                      -------   --------    --------       -------       ---------      ---------
BALANCE AT DECEMBER 31, 2000........  200,634   $101,644    $275,572       $(8,831)      $(301,008)     $  67,377
                                      =======   ========    ========       =======       =========      =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        44
<PAGE>   46

                         GLOBAL TELESYSTEMS EUROPE B.V.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS OPERATIONS

     Global TeleSystems Europe B.V. ("the Company"), is a provider of broadband,
Internet and data to communication carriers, Internet service providers and
other high-usage enterprise customers. As an industry leader in Europe, the
Company operates cross-border fiber-optic network and a Tier-1 IP backbone.

     The Company was formed on July 6, 1993 and is 99.8% owned by Global
TeleSystems, Inc. ("GTS"), a leading independent provider of telecommunications
services to businesses, other high usage customers and telecommunications
carriers in Europe, Russia and the Commonwealth of Independent States.

PUSH-DOWN ACCOUNTING

     For financial reporting purposes, the Company has reflected the accounting
acquisition effect of the incremental purchases, by GTS, from 1993 through 2000,
of the Company's common shares, that were held by shareholders' other than GTS.
Accordingly, the Company's consolidated financial statements have been
retroactively restated for all periods presented to reflect the acquisition
accounting effect, a process generally referred to as "push down" accounting.
The cumulative effect, through December 31, 2000, of the allocation of the
purchase price paid by GTS has resulted in goodwill of approximately $266
million, which is being amortized on a straight-line basis over the estimated
useful lives, generally twenty years.

2000 GTS LEGAL ENTITY STRUCTURE REALIGNMENTS

     Throughout 2000, GTS has been realigning its legal organizational structure
in order to achieve the most beneficial company wide tax structure. Due to this
realignment, the 2000 financial results contained herein now include
subsidiaries that were previously included elsewhere within the GTS
organizational structure during 1999. As a result of the fourth quarter 2000
business restructuring initiatives, discussed in greater detail below, the
Company plans to divest certain of the subsidiaries that it had acquired from
GTS affiliates during 2000 as part of GTS's restructuring and divestiture of its
Esprit subsidiary.

     Further, as required under the Company's debt obligation covenants, GTS
obtained appraisals from an independent appraisal firm to support the
acquisition of net assets by the Company, at their appraised fair market value,
from other GTS affiliates.

FOURTH QUARTER 2000 BUSINESS RESTRUCTURING INITIATIVES

     In November 2000, GTS announced a substantial restructuring (the
"Restructuring") of its operations to focus on those areas of its business,
which management believes have stronger prospects for long-term success and
profitability, and to divest, liquidate or otherwise address those operations,
which are non-strategic or which are unsustainable as currently constituted and
are a drain on GTS' limited financial and other resources. In 2000, these
Business Services businesses recorded revenues of $106.7 million. In addition,
they incurred access and network services costs and selling general and
administrative costs of $104.4 million and $48.3 million, respectively. As a
result, they had a net loss of $172.7 million. As a result of this
Restructuring, the Company plans to divest its businesses that provide voice and
voice-based services ("Business Services") as part of GTS's restructuring and
divestiture of its Esprit subsidiary.

     In connection with the Restructuring, the Company has recorded a charge of
$136.8 million in the fourth quarter 2000 (see Note 3, "Business Disposition and
Restructuring Related Charges").

NOTE 2: MANAGEMENT PLANS & SUBSEQUENT EVENTS

MANAGEMENT PLANS

  Going Concern

     The Company incurred a net loss of $225.8 million for the year ended
December 31, 2000. The Company's consolidated financial statements have been
presented on the basis that it is a going concern, which contemplates continuity
of operations, realization of assets and the satisfaction of liabilities in the
ordinary course of business. The Company's continued existence and plans for
future growth are dependent upon receiving additional funding under its Amended
Bank Facility and from its parent company, GTS, and

                                        45
<PAGE>   47
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

on its ability to successfully divest its Business Services businesses, and on
its ability to effectively compete within the European market for
telecommunication services. Further, during the first and second quarters of
2001, the Company and its parent company have made significant progress in
meeting several of these initiatives (see "Subsequent Events").

     Based on the parent company's and the Company's current cash balances,
projected internally generated funds, recent agreements to divest its voice
focused Business Services business, the sale by the parent company of a majority
of Golden Telecom and available borrowings under the Amended Bank Facility, the
Company believes that it will be able to address its funding requirements into
2002. To address its long-term funding needs, the parent company is in the
process of divesting of its Central European business operations, is exploring
opportunities to reduce its outstanding debt obligations and is seeking
additional funding, including the issuance of new equity or debt securities. If
the Company cannot raise additional capital, the Company may be compelled to
examine and pursue other alternatives, including instituting cash conservation
measures, which may include a substantial curtailment of capital and other
expenditures, a sale of assets (in addition to those units the Company is trying
to sell as part of the Restructuring), a sale of the Company, halting certain
operations of the Company, or seeking the protection of applicable bankruptcy
laws for units of the Company or the Company as a whole.

     The financial statements do not include any adjustments to reflect the
possible effects on recoverability and classification of assets or
classification of liabilities that may result from the inability of the Company
to continue as a going concern.

SUBSEQUENT EVENTS

  Agreement to Sell GTS's Shares in Golden Telecom ("GTI Business Disposition"):

     On April 2, 2001, GTS announced that it had entered into an agreement to
sell, to a group of buyers, 12.2 million shares of the common stock of Golden
Telecom, which GTS owned, for approximately $125 million. The buyers have the
right under certain circumstances to purchase the remainder of GTS's equity
interest in Golden Telecom, see Item 1. "Business -- Recent
Developments -- Agreement to Sell Certain of GTS's Shares in Golden Telecom".

  Restructuring of the Parent Company's Global TeleSystems (Europe) Ltd.
  Subsidiary (Esprit Disposition):

     On March 28, 2001, GTS announced a consensual agreement with an unofficial
committee of the senior noteholders of Global TeleSystems (Europe) Limited,
formerly known as Esprit Telecom Group plc, under which the obligation to repay
approximately $500 million of senior debt owed to the noteholders will be
exchanged for a 90 percent ownership interest in a new business unit comprised
of Esprit and other GTS subsidiaries that comprise GTS's "Business Services"
business unit, subject to approval of a scheme of arrangement by the U.K.
courts. GTS will indirectly own the remaining 10 percent of this new company and
has agreed, upon certain conditions, to provide up to E35 million in senior
secured financing for working capital and up to E20 million in senior secured
debt financing (which will be repaid with preferred stock in the new company
upon consummation of the restructuring of Esprit) to be used by this new company
to purchase backbone transmission services from the Company. On March 28, 2001,
Esprit commenced a consent solicitation to obtain approvals from its noteholders
to allow GTS's senior secured financing to proceed. Esprit obtained the required
consents on April 10, 2001, and on that date it entered into supplemental
indentures related to the senior debt, which will allow such senior secured
financing to proceed.

                                        46
<PAGE>   48
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Amended Bank Facility:

     On April 5, 2001, the Company announced that a subsidiary had reached an
agreement to amend its Bank Facility (the "Amended Bank Facility") while a
longer-term credit facility is negotiated. The Amended Bank Facility provides up
to E300 million in available funds, assuming the satisfaction of certain
conditions, through March 2002, at which time the Amended Bank Facility converts
into a one-year term loan. Effectiveness of the Amended Bank Facility is subject
to certain conditions precedent, including the transfer to the borrower of GTS's
shares in Golden Telecom and its interest in its Central European division,
which conditions the borrower and GTS are in the process of completing. As of
March 31, 2001, the borrower had drawn down E200 million of these funds. The
borrower will have access to available funding under the Amended Bank Facility
limited to the lesser of (i) a range of funding, based on the borrower's
business plan, from E180 million to E300 million from April 2001 through January
2002 (until the termination of the Amended Bank Facility), and (ii) an amount
determined by a monthly calculated rolling three-month annualized cash flow
multiple. See Item 1 -- "Business -- Recent Developments -- Amended Bank
Facility

NOTE 3: BUSINESS DISPOSITIONS AND RESTRUCTURING RELATED CHARGES

FOURTH QUARTER 2000

     In the fourth quarter 2000, the Company recorded a $136.8 million charge
attributable to GTS' plans to restructure its operations to focus on those areas
of its business, which GTS believes have stronger prospects for long-term
success and profitability, and to divest, liquidate or otherwise address those
operations, which are non-strategic or which are unsustainable as currently
constituted and constrains the Company's financial and other resources.

     The components of the $136.8 million charge include $111.8 million
associated with our business disposition initiatives and $25.0 million for the
restructuring of our Ebone business.

     Of the $111.8 million charge for our business disposition initiatives,
$109.4 million represents non-cash items related to the write-off of impaired
goodwill and intangibles of $83.5 million with the remaining $25.9 million
principally related to the write-off of impaired fixed assets. The remaining
$2.4 million of the $111.8 million represents cash items for transaction related
costs and severance for personnel.

     Of the $25.0 million for the restructuring of our Ebone business, $11.9
million represents non-cash items related to the write-off of impaired fixed
assets with the remaining $13.1 million representing cash items that are
principally for contract terminations for excess local access transmission
capacity and facilities.

     At December 31, 2000, $13.0 million of the $15.5 million remains as an
accrual for additional cash payments that the Company expects to pay in 2001.

THIRD QUARTER 2000

     In the third quarter 2000, the Company recorded a $3.4 million charge
attributable to GTS' plans to exit from its residential and pre-paid card
businesses, and streamline its operations by, among other things, consolidating
its headquarters functions, reducing or redeploying headcount, centralizing
finance and billing operations and consolidating sales offices as this plan of
restructuring would have an impact on the Company's current business operations.

     The components of the charge include approximately $1.3 million for
severance costs associated with the termination of personnel and approximately
$2.1 million for costs associated with cancellation of facility leases and
anticipated office closure costs.

     Of the $3.4 million, $2.7 million remains as an accrual at December 31,
2000 for additional cash payments that the Company expects to incur as a part of
its plan for restructuring.

                                        47
<PAGE>   49
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

     The consolidated financial statements include the accounts of Global
TeleSystems Europe B.V. and all wholly-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated upon consolidation.
Results of subsidiaries acquired and accounted for by the purchase method have
been included in operations from the relevant date of acquisition.

COMPARATIVE FIGURES

     Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements in order to conform to the 2000 presentation.

CASH AND CASH EQUIVALENTS

     The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents. The Company had $24.3 million and $18.4
million of restricted cash at December 31, 2000 and 1999, respectively. The
restricted cash at December 31, 2000 is primarily related to cash held in escrow
for contractual obligations associated with the construction of our network.

PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost. Depreciation, which includes the
amortization of assets recorded under capital leases, is calculated on a
straight-line basis over the lesser of the estimated lives ranging from three to
ten years for telecommunications equipment and three to ten years for
non-network property and equipment, or their contractual term. Construction in
process reflects amounts incurred for the configuration and build-out of
telecommunications equipment and telecommunications equipment not yet placed
into service. Depreciation is recorded commencing with the first full month that
assets are placed into service. Maintenance and repairs are charged to expense
as incurred.

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
34, "Capitalization of Interest Costs," the Company capitalizes material
interest costs associated with the construction of capital assets for business
operations and amortizes the costs over the assets' useful lives. The Company
has capitalized interest costs of $27.3 million and $13.0 million during the
years ended December 31, 2000 and 1999, respectively.

GOODWILL AND INTANGIBLE ASSETS

     Goodwill represents the excess of acquisition costs over the fair market
value of the net assets of acquired businesses and is being amortized on a
straight-line basis over the estimated useful lives, ranging from five to twenty
years. Intangible assets, primarily deferred financing costs and licenses are
amortized on a straight-line basis over the lesser of their estimated useful
lives or their contractual term, generally three to ten years. In accordance
with APB 17, "Intangible Assets," the Company continues to evaluate the
amortization period to determine whether events or circumstances warrant revised
amortization periods. Additionally, the Company considers whether the carrying
value of such assets should be reduced based on the future benefits of its
intangible assets.

     During the year ended December 31, 2000, the Company's analysis indicated
that there was an impairment of certain of its goodwill and intangible assets.
In determining the write-down amount, the Company utilized discounted cash flow
analysis and the write-down of goodwill and intangible assets was

                                        48
<PAGE>   50
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

primarily attributable to the Company's Business Services businesses that it is
currently seeking to dispose and has reflected this write-down within the
"Business Disposition and Restructuring Related Charges" line item in the
Company's consolidated statements of operations (see Note 3, "Business
Disposition and Restructuring Related Charges"). No impairment expense was
recognized in 1999 and 1998.

LONG-LIVED ASSETS

     In accordance with SFAS No. 121, long-lived assets to be held and used by
the Company are reviewed to determine whether any events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. For long-lived assets, the Company bases its evaluation on such
impairment indicators as the nature of the assets, the future economic benefit
of the assets, any historical or future profitability measurements, as well as
other external market conditions or factors that may be present. If such
impairment indicators are present or other factors exist that indicate that the
carrying amount of the asset may not be recoverable, the Company determines
whether an impairment has occurred through the use of an undiscounted cash flow
analysis of assets at the lowest level for which identifiable cash flows exist.
If an impairment has occurred, the Company recognizes a loss for the difference
between the carrying amount and the estimated value of the asset. The fair value
of the asset is measured using discounted cash flow analysis or other valuation
techniques.

     During the year ended December 31, 2000, the Company's analysis indicated
that there was an impairment of certain of its long-lived assets. Accordingly,
the Company recorded a write-down of long-lived assets associated with property
and equipment that is primarily attributable to its Business Services businesses
that the Company is currently seeking to dispose (see Note 3, "Business
Disposition and Restructuring Related Charges"). In determining the write-down
amount for its fixed assets, the Company utilized discounted cash flows analysis
and considered fair values that could be achieved in the market for the sale of
its assets; however, due to the significant down-turn in the financial markets
for telecommunication providers the re-sale market for used telecommunication
equipment has also become unfavorable. No impairment expense was recognized in
1999 and 1998.

INCOME TAXES

     The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements. Deferred taxes are reflected net of permanent differences for
pushdown accounting adjustments.

FOREIGN CURRENCY TRANSLATION

     The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). As of January 1, 1999, the functional currency for the
Company has been the Euro. Prior to January 1, 1999, the functional currency of
the Company was the Belgian franc. In most instances, either the local currency
or the Euro is considered the functional currency for the Company's
subsidiaries. The accounting records of the subsidiaries are remeasured into the
functional currency, consolidated and then translated into U.S. dollars for the
purpose of preparing the accompanying financial statements in accordance with
accounting principles generally accepted in the United States. Assets and
liabilities are translated at the rates of exchange at the balance sheet date.
Income and expense accounts are translated at average monthly rates of exchange.
The resultant translation adjustments are included in accumulated other
comprehensive loss, a separate component of shareholders' equity. Gains and
losses from foreign currency transactions are included in operations.

                                        49
<PAGE>   51
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Post 2000 Accounting and Reporting

     The Company intends to report its financial results in the Euro (E)
reporting currency as compared to the United States dollar, within its 2001
reports filed with the United States Securities and Exchange Commission ("SEC").
This change in reporting is reflective of management's analysis of its foreign
currency indicators; that is, the Company does not have significant assets or
operations within the United States, most of the Company's transactions are
transacted in the Euro currency (the Company's functional currency) and
management does anticipate significant foreign currency translation effects
under SFAS No. 52.

REVENUE RECOGNITION

     The Company's revenue from service contracts is associated with its
customers' right to use the network and is recognized on a straight-line basis
over the terms of the customer contracts. The Company records as voice revenue
the amount of telecommunications services rendered, as measured primarily by the
minutes of traffic processed, after deducting an estimate of the traffic that
will be neither billed nor collected. Billings received in advance of service
being performed are deferred and recognized as revenue as the service is
performed. In addition, the Company defers telecommunications installation
revenue and capitalizes telecommunication connection costs. Further, the
deferred revenue and capitalized costs is recognized over the estimated life of
the customer contract.

     The adoption of SEC Staff Accounting Bulletin No. 101 did not have a
material impact on the Company's results of operations or financial position.

ADVERTISING COSTS

     Costs for advertising products and services or corporate image are expensed
as incurred.

SEGMENT INFORMATION

     Based on its organizational structure, the Company operates in one
reportable segment providing telecommunications services primarily to businesses
and other organizations located principally in the European Union.

NET LOSS PER SHARE

     Basic and diluted loss per share is calculated in accordance with SFAS No.
128, "Earnings Per Share." The Company's net loss per share calculation (basic
and diluted) is based upon the weighted average common shares issued. Employee
stock options have been excluded from the 2000 and 1998 net loss per share
calculation because their effect would be anti-dilutive. There are no
reconciling items in the numerator of the Company's net income (loss) per share
calculation. The following is a reconciliation of the denominator of the
Company's net income (loss) per share calculation:

<TABLE>
<CAPTION>
                                                              AS OF DECEMBER 31,
                                                          ---------------------------
                                                           2000      1999      1998
                                                          -------   -------   -------
<S>                                                       <C>       <C>       <C>
Weighted Average Shares Outstanding.....................  200,419   198,431   191,790
Common Stock Equivalents................................       --     1,952        --
                                                          -------   -------   -------
Diluted Shares Outstanding..............................  200,419   200,383   191,790
                                                          =======   =======   =======
</TABLE>

                                        50
<PAGE>   52
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts for cash, accounts receivable, accounts payable, and
accrued liabilities approximate their fair value. The fair value of the
long-term debt is determined based on quoted market rates. The fair value of the
Company's principal long-term debt is as follows (in thousands):

<TABLE>
<CAPTION>
                                                          AS OF DECEMBER 31,
                                             ---------------------------------------------
                                                     2000                    1999
                                             ---------------------   ---------------------
                                                          CARRYING                CARRYING
                                             FAIR VALUE    VALUE     FAIR VALUE    VALUE
                                             ----------   --------   ----------   --------
<S>                                          <C>          <C>        <C>          <C>
Senior Notes Due August 2007...............   $106,000    $265,000    $272,950    $265,000
Senior Notes Due December 2009.............    104,500     259,067     281,416     278,630
Senior Notes Due December 2006.............     85,500     211,964     229,680     227,970
Senior Notes Due January 2009..............     80,193     200,000     197,903     200,000
Senior Notes Due January 2006..............     32,107      80,075      85,219      86,122
</TABLE>

     In addition, since December 31, 2000, there has been significant change in
the fair market value of the financial instruments identified above, current
fair market value, as of March 30, 2001, was $294.6 million as compared with
$408.3 million as of December 31, 2000.

     Further, the recorded amount for the Company's bank facility, approximates
fair value.

OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents, most of which are
maintained in high-quality financial institutions. The Company extends credit to
various customers and establishes an allowance for doubtful accounts for
specific customers that it determines to have significant credit risk. The
Company generally does not require collateral to extend credit to its customers
and provides allowances for potential credit losses when necessary.

DERIVATIVE FINANCIAL INSTRUMENTS

     The Company has developed risk management policies that establish
guidelines for managing foreign exchange risk and periodically evaluates the
materiality of foreign exchange exposures in different countries and the
financial instruments available to mitigate this exposure. The Company finds it
impractical to hedge all foreign currency exposures and as a result, will
continue to experience foreign currency gains and losses.

     Prior to January 1, 2001, the Company accounted for its existing derivative
under SFAS No. 52, "Foreign Currency Translation." In June 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which was amended in June 1999. The Company will adopt the new statement, which
is effective for fiscal years beginning after June 15, 2000, on January 1, 2001.
The statement requires the Company to recognize all derivatives on the balance
sheet at fair value. Due to our minimal use of derivatives, the adoption of the
new statement did not have a significant effect on our results of operations or
financial position.

     The Company enters into foreign currency forward contracts to minimize
foreign exchange risk. The Company utilizes foreign currency agreements that are
short term in duration (generally one week or less). As of December 31, 2000,
the Company had no outstanding forward contracts. Additionally, the Company had
maintained a foreign currency swap transaction agreement which was liquidated in
November 2000 (see Note 8, "Foreign Currency Transactions").

                                        51
<PAGE>   53
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK BASED COMPENSATION

     SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and is recognized over the
service period. SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions of
APB No. 25, "Accounting for Stock Issued to Employees." The Company has elected
to account for its stock-based compensation in accordance with the provisions of
APB No. 25 and presents pro forma disclosures of net loss as if the fair value
method had been adopted.

USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

     The preparation of these consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NOTE 5: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS

2000 ACTIVITIES

     As a result of GTS' realignment of its legal organization structure, in
order to achieve the most beneficial company wide tax structure, the Company
acquired several GTS affiliated subsidiaries during 2000. In addition, as
required under the Company's debt obligation covenants, GTS obtained appraisals
from an independent appraisal firm to support the acquisition of net assets by
the Company, at their appraised fair market value. Further, in connection with
these acquisitions, the Company recorded goodwill of $81.1 million, since on an
aggregate basis, the purchase price paid by the Company of approximately $83.1
million, exceeded the net assets acquired of the respective GTS subsidiaries. In
addition, as a result of the previously discussed Restructuring, the Company's
analysis had indicated that there was an impairment of the goodwill that was
previously recorded for these acquired GTS subsidiaries. Accordingly, the
Company recorded an impairment charge of $78.4 million in order to reflect its
investment in these subsidiaries at the fair value in the December 31, 2000
consolidated balance sheet (see Note 3, "Business Disposition and Restructuring
Related Charges").

     Further, in connection with the previously discussed Restructuring, the
Company intends to divest certain of the GTS affiliated subsidiaries that it
acquired in 2000.

1999 ACTIVITIES

     On May 25, 1999, the Company purchased the remaining 25% minority interest
in Ebone from the Association for a purchase price of E35 million. The purchase
price was comprised of cash of E15 million and the issuance to the Association
of capacity rights on the Network valued at E20 million (the "Rights"). Rights
may be applied by members of the Association, in lieu of cash, to the payment of
future invoices related to services provided by the Company or Ebone on
contracts for services entered into through May 31, 2003. The Association
assigned these Rights among its members by October 1, 1999 and once assigned,
the Rights are non-transferable. The remaining balance of the Rights was $7.2
million and $16.0 million at December 31, 2000 and 1999, respectively and was
reflected as deferred revenue within our balance sheet. The excess of the
purchase price over the fair value of the assets acquired of $9.2 million was
allocated to goodwill.

                                        52
<PAGE>   54
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6: SUPPLEMENTAL BALANCE SHEET INFORMATION

     Property and equipment consists of:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 2000        1999
                                                              ----------   --------
                                                                 (IN THOUSANDS)
<S>                                                           <C>          <C>
Communications Equipment....................................  $  840,427   $518,018
Non-network property and equipment..........................      27,058     16,153
Construction in process.....................................     526,174    300,954
                                                              ----------   --------
          Total.............................................   1,393,659    835,125
Less: Accumulated depreciation..............................    (195,906)   (78,673)
          Accumulated impairment write off..................     (37,809)        --
                                                              ----------   --------
                                                              $1,159,944   $756,452
                                                              ==========   ========
</TABLE>

     As previously discussed in Note 4, "Summary of Significant Accounting
Policies -- Long-Lived Assets," the Company determined that an impairment
write-off of certain property and equipment that is primarily attributable to
its Business Services businesses was required to in order to properly reflect
the value of the aforementioned property and equipment at its net realizable
value.

     Goodwill and intangibles consists of:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Goodwill....................................................  $373,072   $255,008
Intangibles.................................................    50,611     38,663
                                                              --------   --------
          Total.............................................   423,683    293,671
Less: Accumulated Amortization..............................   (48,758)   (25,094)
          Accumulated impairment write off..................   (83,484)        --
                                                              --------   --------
                                                              $291,441   $268,577
                                                              ========   ========
</TABLE>

     As previously discussed in Note 4, "Summary of Significant Accounting
Policies -- Goodwill and Intangible Assets," the Company determined that an
impairment write-off of goodwill and intangible assets that is primarily
attributable to its Business Services businesses was required to in order to
properly reflect the value of the aforementioned goodwill and intangible assets
at their future economic value.

     Accrued expenses consists of:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      1999
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Interest payable............................................  $33,719   $42,456
Restructuring related accruals..............................   15,666        --
Other accrued expenses......................................   33,310    27,856
                                                              -------   -------
Total accrued expenses......................................  $82,695   $70,312
                                                              =======   =======
</TABLE>

                                        53
<PAGE>   55
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7: DEBT OBLIGATIONS

     Company debt consists of (in thousands):

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 2000         1999
                                                              ----------   ----------
<S>                                                           <C>          <C>
SENIOR NOTES.
  Due August 15, 2007.......................................  $  265,000   $  265,000
  Due December 1, 2009......................................     259,067      278,630
  Due December 1, 2006......................................     211,964      227,970
  Due January 15, 2009......................................     200,000      200,000
  Due January 15, 2006......................................      80,075       86,122
  Bank facility, due July 14, 2008..........................      94,206           --
Capital lease obligations...................................     279,083      183,234
                                                              ----------   ----------
                                                               1,389,395    1,240,956
Less: debt and capital lease obligations maturing within one
  year......................................................      22,489       11,120
                                                              ----------   ----------
          Total long-term debt and capital lease
            obligations.....................................  $1,366,906   $1,229,836
                                                              ==========   ==========
</TABLE>

     On July 14, 2000, a subsidiary of the Company executed an eight year, $550
million, multi-currency bank credit facility ("the Bank Facility"). The Bank
Facility will be applied to the purchase of additional network assets; to
construct the Company's proposed hosting centers and city enterprise networks;
to pursue business development opportunities in the telecommunications field;
and for general corporate purposes in the telecommunications business.
Borrowings under the Bank Facility bear interest at LIBOR (for non-Euro
dominated borrowings) or EURIBOR (for Euro dominated borrowings) plus additional
basis points based on current financial performance. The Company also pays
commitment fees on the unused portion of the Bank Facility. In addition, the
Bank Facility agreement requires compliance with certain financial covenants,
including interest coverage. The outstanding borrowings under the Bank Facility
was E100 million as of December 31, 2000. We have reflected the borrowing under
the Bank Facility as a long-term debt obligation within our consolidated balance
sheet, since any amounts outstanding at a given time will, in effect,
continually be re-financed by subsequent borrowings until its maturity. On April
5, 2001, the Company announced that a subsidiary had reached an agreement to
amend its Bank Facility (the "Amended Bank Facility") while a longer-term credit
facility is negotiated. The Amended Bank Facility provides up to E300 million in
available funds, assuming the satisfaction of certain conditions, through March
2002, at which time the Amended Bank Facility converts into a one-year term
loan. Effectiveness of the Amended Bank Facility is subject to certain
conditions precedent, including the transfer to the borrower of GTS's shares in
Golden Telecom and its interest in its Central European division, which
conditions the borrower and GTS are in the process of completing. As of March
31, 2001, the borrower had drawn down E200 million of these funds. The borrower
will have access to available funding under the Amended Bank Facility at the
lesser of (i) a range of funding, based on the borrower's business plan, from
E180 million to E300 million from April 2001 through January 2002 (until the
termination of the Amended Bank Facility), and (ii) an amount determined by a
monthly calculated rolling three-month annualized cash flow multiple (see Note
2, "Management Plans and Subsequent Events").

     In November 1999, the Company issued E225.0 million aggregate principal
amount of 10.50% Senior Notes due December 1, 2006 (the "10.5% Senior Notes due
2006") and E275.0 million aggregate principal amount of 11% Senior Notes due
December 1, 2009 (the "11% Senior Notes due 2009"). Interest is payable
semiannually in December and June. The 10.5% Senior Notes due 2006 and 11%
Senior Notes due 2009 notes were issued pursuant to two indentures with terms
that are substantially similar to the indentures governing the 11.5% Senior
Notes due 2007, which were issued by the Company in August 1997, and the 10.375%
Se-

                                        54
<PAGE>   56
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

nior Notes due 2006 and the 10.375% Senior Notes due 2009, which were issued by
the Company in January 1999.

     The 11% Senior Notes due 2009 are redeemable in whole or in part, at the
Company's option at any time on or after December 1, 2004 at a price ranging
from 105.50% to 100.0% of the principal amount, plus accrued and unpaid
interest. The Company may also redeem up to 35% of the principal amount of the
11% Senior Notes due 2009 at any time prior to prior to December 1, 2002 at a
redemption price equal to 111% of the principal amount of the notes redeemed,
plus accrued and unpaid interest, with the net cash proceeds of public equity
offerings of GTS Europe B.V. or strategic equity investments of at least $75.0
million, provided that following such redemption at least 65% of the original
principal amount of the 11% Senior Notes due 2009 remains outstanding. The 10.5%
Senior Notes due 2006 notes are not so redeemable.

     In January 1999, the Company issued $200 million aggregate principal amount
of 10.375% Senior Notes due January 15, 2009 (the "10.375% Senior Notes due
2009") and E85 million aggregate principal amount of Senior Notes due January
15, 2006 (the "10.375% Senior Notes due 2006" and together with the 10.375%
Senior Notes due 2009, the "10.375% Senior Notes due 2006 and 2009"). Interest
is payable semiannually in January and July, commencing July 15, 1999. The
10.375% Senior Notes due 2009 are redeemable in whole or in part, at our option
at any time on or after January 15, 2004 at a price ranging from 105.188% to
100.0% of the principal amount, plus accrued and unpaid interest. The 10.375%
Senior Notes due 2006 are redeemable in whole or in part, at our option at any
time on or after January 15, 2003 at a price ranging from 105.188% to 100.0% of
the principal amount, plus accrued unpaid interest. The Company may also redeem
up to one-third of the principal amount of the 10.375% Senior Notes due 2006 and
2009 prior to January 15, 2002 at a redemption price equal to 110.375% of the
principal amount of the notes so redeemed, plus accrued and unpaid interest
thereon, with the net cash proceeds of one or more public equity offerings of
the Company or strategic equity investments of at least $75.0 million, provided,
however, that following such redemption, at least two-thirds of the original
principal amount of such notes remains outstanding.

     In August 1997, the Company issued $265.0 million aggregate principal
amount of senior notes due August 15, 2007 (the "Senior Notes"). The Senior
Notes pay interest semiannually in February and August at a rate of 11.5%.
Approximately $56.6 million of the net proceeds of the offering of the Senior
Notes was initially placed in escrow for the first four semiannual interest
payments commencing February 15, 1998. The Company may redeem the Senior Notes,
in whole or in part, any time on or after August 15, 2002 at a price ranging
from 105.75% to 100.0% of the principal amount, plus accrued and unpaid
interest.

     Aggregate maturities of long-term debt of $1,110.3 million, as of December
31, 2000, are subsequent to 2005.

     The Company paid interest of $158.7 million, $60.3 million and $36.0
million in 2000, 1999 and 1998, respectively.

NOTE 8: FOREIGN CURRENCY TRANSACTIONS

     On April 19, 1998, the Company entered into a foreign currency swap
transaction agreement (the "Swap") with Rabobank International ("Rabo") in order
to minimize the foreign currency exposure resulting from the issuance in August
1997 of $265.0 million aggregate principal amount 11.5% Senior Notes due 2007
(the "Senior Notes"). As of December 31, 1999, the Swap was valued at $11.1
million and was reflected as a non-current asset within our consolidated balance
sheet.

     On November 21, 2000, GTS Europe B.V. liquidated the Swap with Rabo for
cash proceeds of $62.3 million.

                                        55
<PAGE>   57
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9: EMPLOYEE BENEFIT PLANS

     The Company established a defined benefit pension plan in 1995 that covers
substantially all of its employees upon twenty-five years of age and at least
one year of service. The benefits are based on years of service and the
employee's compensation. The Company has entered into an arrangement, an
investment contract, with an insurance company for the provision of a group
insurance policy ("the Policy"). Premium payments for the Policy are partly paid
by the employee, based on specified terms that reflect the employee's annual
salary, with the remaining premium paid by the employer. The Company's pension
costs for 2000, 1999 and 1998 were $0.5 million, $1.8 million and $1.0 million,
respectively.

     The Company maintains the Stock Option Plan, with the maximum number of
shares of common stock available for grant under the Stock Option Plan of
24,760. All options granted under the Stock Option Plan were at exercise prices
that were at least equal to the fair market value of common stock at the date of
grant. Generally, all options granted under the Stock Option Plan vest over a
three-year period from the date of grant and expire ten years from the date of
grant. As of September 30, 2000, the Company ceased to have any unexercised
options outstanding and the Company does not currently plan to issue new stock
option grants.

     The Company applies the provisions of APB No. 25 in accounting for its
stock option incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss for
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company would
have recognized $0.1 million and $0.2 million of additional expenses for the
years ended December 31, 1999 and 1998, respectively.

     Additional information with respect to stock option activity is summarized
as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                 ---------------------------------------
                                                        2000                 1999
                                                 ------------------   ------------------
                                                          WEIGHTED             WEIGHTED
                                                           AVERAGE              AVERAGE
                                                          EXERCISE             EXERCISE
                                                 SHARES     PRICE     SHARES     PRICE
                                                 ------   ---------   ------   ---------
<S>                                              <C>      <C>         <C>      <C>
Outstanding at beginning of year...............    318    $2,887.62    3,918   $  815.68
Options granted................................     --           --       --          --
Options exercised..............................   (318)    2,887.62   (3,600)     632.46
Options canceled or expired....................     --           --       --          --
                                                  ----    ---------   ------   ---------
Outstanding at end of year.....................     --           --      318    2,887.62
                                                  ====    =========   ======   =========
Options exercisable at year end................     --           --       --          --
</TABLE>

     As of December 31, 2000, no stock options were outstanding.

NOTE 10: INCOME TAXES

     The components of income/(loss) before income taxes were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                      -------------------------------
                                                        2000        1999       1998
                                                      ---------   --------   --------
<S>                                                   <C>         <C>        <C>
Pretax income (loss):
  Domestic (the Netherlands)........................  $(272,118)  $(12,323)  $(32,617)
  Foreign...........................................     51,187     52,154    (13,975)
                                                      ---------   --------   --------
                                                      $(220,931)  $ 39,831   $(46,592)
                                                      =========   ========   ========
</TABLE>

                                        56
<PAGE>   58
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     For the years ended December 31, 2000, 1999 and 1998, the Company recorded
$4.9 million, $10.8 million, and $2.3 million respectively, in income tax
expense that related exclusively to its current provision for foreign taxes.

     The Company paid income taxes of $0.9 million, $2.7 million and $2.8
million in 2000, 1999 and 1998, respectively.

     A deferred tax asset is recorded on temporary differences between earnings
as reported in the financial statements and earnings for income tax purposes.
The following table summarizes major components of the Company's deferred tax
assets (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $ 53,552   $ 29,000
                                                              --------   --------
          Total deferred tax asset..........................    53,552     29,000
  Less: valuation allowance.................................   (53,552)   (29,000)
                                                              --------   --------
          Total.............................................  $     --   $     --
                                                              ========   ========
</TABLE>

     As of December 31, 2000, the Company had net operating loss carry forwards
for Belgian, Dutch and Irish income tax purposes of approximately $330.7
million, which are recoverable from profits for an unlimited period of time.

NOTE 11: COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

     The Company has various operating leases for office space, equipment and
car rental. The obligations extend through 2022. Beginning in 2002, certain of
the leases have options to cancel upon payment of certain penalties.

     Rental expense aggregated approximately $5.9 million, $3.3 million and $2.0
million for the years ended December 31, 2000, 1999 and 1998, respectively.

CAPITAL LEASES

     Assets and liabilities under capital leases are included in the
consolidated balance sheets as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Telecommunications equipment................................  $413,686   $295,732
Less: accumulated amortization..............................    54,204     30,839
                                                              --------   --------
                                                              $359,482   $264,893
                                                              ========   ========
</TABLE>

                                        57
<PAGE>   59
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Future minimum payments, by year and in the aggregate, under the capital
leases and other non-cancelable operating leases with initial or remaining terms
in excess of one year as of December 31, 2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                               CAPITAL    OPERATING
                                                               LEASES      LEASES
                                                              ---------   ---------
<S>                                                           <C>         <C>
December 31, 2001...........................................  $  41,111    $ 5,365
  2002......................................................     42,758      4,827
  2003......................................................     43,304      4,113
  2004......................................................     43,614      3,432
  2005......................................................     44,537      2,624
Thereafter..................................................    337,356      8,675
                                                              ---------    -------
          Total minimum lease payments......................    552,680    $29,136
                                                                           =======
Less amount representing interest...........................   (273,597)
                                                              ---------
Present value of net minimum lease payments.................    279,083
Less current portion of capital lease obligations...........    (22,489)
                                                              ---------
Long-term portion of capital lease obligations..............  $ 256,594
                                                              =========
</TABLE>

OTHER COMMITMENTS AND CONTINGENCIES

     The Company has future purchase commitments amounting to $54.0 million as
of December 31, 2000.

MAJOR CUSTOMERS

     There were no major customers in 2000 or in 1999. In 1998, the Company had
two major customers, representing $9.5 million and $9.3 million or 11.1% and
10.9% of revenue, respectively.

OTHER MATTERS

     In the ordinary course of business, the Company may be party to various
legal and tax proceedings, and subject to claims, certain of which relate to the
regulatory environments in which the Company currently operates or intends to
operate. In the opinion of management, the Company's liability, if any, in all
pending litigation, or other legal proceeding or other matter other than what is
discussed above, will not have a material effect upon the financial condition,
results of operations or liquidity of the Company.

NOTE 12: RELATED PARTY TRANSACTIONS

     On October 15, 1999, GTS entered into an exchange agreement with all of the
minority interest holders of the Company's common shares and grantees of stock
options to purchase common shares of the Company that provides for the
acquisition by GTS of their equity interest in the Company. Specifically, the
agreement provides that GTS will acquire the respective minority interest
holders' common shares in the Company that have been held by them for a period
greater than six months based on the current fair market value of the Company on
the date of the exchange, as determined by a globally-recognized investment
banking firm that is mutually acceptable to the parties to the agreement. The
agreement also provides that GTS would issue its common shares to the Company's
minority interest holders based on the fair market value of GTS common shares on
the date of the exchange.

     Pursuant to this agreement and effective October 15, 1999, GTS exchanged
5,985,930 of its common shares for 6,565 of the Company's common shares. This
transaction resulted in aggregate purchase consideration of approximately $134.2
million and as a result the Company reflected incremental goodwill of
approximately $133.0 million. In addition, on July 26, 2000, GTS exchanged
3,166,528 of its common shares

                                        58
<PAGE>   60
                         GLOBAL TELESYSTEMS EUROPE B.V.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for 3,283 of the Company's common shares with the minority interest holders of
the Company, who were grantees of the Company's stock options. The July 26, 2000
exchange of GTS common shares was based on the fair market value of the Company
as of the date of the exchange, and the transaction resulted in excess purchase
price over the fair value of assets acquired of approximately $37.2 million,
which was recorded in July 2000.

     In September 2000, the remaining 318 options of the Company were exercised.
As a result of this transaction, as of September 2000, 99.8% of the outstanding
common shares of the Company are owned by GTS. GTS is obligated to exchange its
common stock for the remaining 318 shares of the Company's stock during 2001.

     In January 1999, a subsidiary of GTS entered into an agreement with FLAG
Telecom, to establish a 50/50 joint venture, called FLAG Atlantic Limited, to
build and operate the world's first transatlantic dual cable system designed to
carry voice, high-speed data and video traffic. On October 13, 1999, GTS
announced that it has committed to purchase one dedicated fiber pair from FLAG
Atlantic Limited. In December 1999, the Company purchased the dedicated fiber
pair from GTS for $250 million. In connection with this purchase in December
1999, GTS made an equity contribution of $50 million to the Company. These
transactions have been recorded on a net basis. On October 31, 2000, GTS
announced that it has reached an agreement to sell its 50% equity interest in
FLAG Atlantic Limited to FLAG Telecom while retaining ownership over certain
infrastructure, including the dedicated fiber pair on the FLAG Atlantic-1
transatlantic link, previously purchased from the joint venture.

     In June 1999, GTS Carrier Services, Inc. acquired SNCB/NMBS' ownership
interest of 13,610 common shares in the Company for approximately $101.3
million. In October 1998, GTS Carrier Services, Inc. acquired AB Swed Carrier's
ownership interest of 6,551 common shares in the Company for approximately $5.8
million. In connection with these purchases, GTS Carriers Services, Inc. paid
approximately $10.0 million to a company that was affiliated with a board member
for negotiating with AB Swed Carrier and SNCB/ NMBS on behalf of GTS Carrier
Services, Inc. to purchase their respective ownership interest in the Company.

     Included in revenue for the years ended December 31, 2000, 1999 and 1998,
respectively, is $68.1 million, $28.2 million and $0.9 million of revenue from
GTS affiliates. Costs of revenue from GTS affiliates were $24.6 million and $1.4
million for the years ended December 31, 2000 and 1999, respectively. There was
no cost of revenue from affiliates in 1998.

     As part of the restructuring of GTS's Espirit subsidiary, the Company will
transfer certain subsidiaries providing voice services to a new unaffiliated
company.

                                        59
<PAGE>   61

                  REPORT OF ERNST & YOUNG INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF
GLOBAL TELESYSTEMS EUROPE B.V.

     We have audited the accompanying consolidated balance sheets of Global
TeleSystems Europe B.V. as of December 31, 2000 and 1999, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Global
TeleSystems Europe B.V. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, based on our
audits, the related financial statement schedule when considered in relation to
the basic financial statements taken as a whole, represent fairly in all
material respects the information set forth therein.

                                                       ERNST & YOUNG

London, England
April 5, 2001

                                        60
<PAGE>   62

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MEMBERS OF THE BOARD OF SUPERVISORY DIRECTORS AND THE BOARD OF MANAGING
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     Our general affairs and business and the executive board which manages the
company (the "Board of Managing Directors") (Directie) are supervised by a board
appointed by the general meeting of shareholders (the "Board of Supervisory
Directors") (Raad van Commissarissen).

     Under the law of the Netherlands, a member of the Board of Supervisory
Directors of a company cannot be a member of the Board of Managing Directors of
the same company. The members of the Board of Supervisory Directors are
appointed by the general meeting of shareholders. The Board of Supervisory
Directors elects a chairman from among its members. The Board of Supervisory
Directors meets at least four times a year and also upon the request of its
chairman or the Board of Managing Directors. Pursuant to the Articles of
Association of the Company, Supervisory Directors may be suspended or dismissed
by the general meeting of shareholders. The remuneration or compensation of the
Supervisory Directors is determined by the general meeting of shareholders.

     While the Board of Managing Directors is the executive body of the Company
and is responsible for managing its affairs and representing the Company in its
dealings with third parties, the primary responsibility of the Board of
Supervisory Directors is to supervise the policies enacted by the Board of
Managing Directors and the general course of our affairs. The Board of
Supervisory Directors advises the Board of Managing Directors. In the fulfilment
of their duties, members of the Board of Supervisory Directors are required to
act in the best interests of the Company.

     The members of the Board of Managing Directors are appointed by the general
meeting of shareholders. The general meeting of shareholders may suspend or
dismiss a member of the Management Board by a vote of a majority of votes cast
in a meeting in which at least four-fifths of the issued capital is present or
represented. The compensation and other terms and conditions of employment of
the members of the Board of Managing Directors is determined by the general
meeting of shareholders.

                                        61
<PAGE>   63

     The Members of the Board of Supervisory Directors and the Board of Managing
Directors and executive officers and their respective ages as of December 31,
2000 and positions are set forth below.

BOARD OF SUPERVISORY DIRECTORS

<TABLE>
<CAPTION>
                                                PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                AGE       MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                ---       --------------------------------------------------
<S>                                 <C>   <C>
Robert J. Amman...................  63    Mr. Amman was elected Chairman of the Board of Directors
                                          and Chief Executive Officer of GTS in September 2000. Mr.
                                          Amman was initially elected to GTS's Board of Directors in
                                          May 1998 and was appointed President of GTS in March 1999.
                                          Mr. Amman was Chairman, President and Chief Executive
                                          Officer of John H. Harland Company, a printing firm, from
                                          1995 to 1998. Previously, from 1994 to 1995, he served as
                                          Vice Chairman of First Financial Management Corporation,
                                          where he was responsible for the merchant services
                                          businesses consisting of Western Union, NaBanco,
                                          Telecheck, Nationwide Credit and International Banking
                                          Technologies. From 1988 to 1994, Mr. Amman served as
                                          President and Chief Executive Officer of Western Union
                                          Corporation, where he oversaw the transformation of the
                                          firm from a telecommunications to a financial services
                                          company. Mr. Amman is a member of the Executive Committee
                                          of the Board of Directors.
Grier C. Raclin...................  48    Mr. Raclin joined GTS as its Senior Vice President and
                                          General Counsel in September, 1997, and was elected
                                          Corporate Secretary of the Company in December 1997. In
                                          March 1999, Mr. Raclin was elected Senior Vice
                                          President -- External Affairs, General Counsel and
                                          Corporate Secretary. In October 2000, he was appointed an
                                          Executive Vice President and was named Chief
                                          Administrative Officer. Prior to joining GTS, Mr. Raclin
                                          served as Vice-Chairman and a Managing Partner of the
                                          Washington, D.C. office of Gardner, Carton & Douglas, a
                                          250-attorney, corporate law firm based in Chicago,
                                          Illinois, where his practice was concentrated in the area
                                          of international telecommunications. Mr. Raclin received
                                          his undergraduate and law degrees from Northwestern
                                          University and attended the University of Chicago School
                                          of Business Executive Program.
</TABLE>

BOARD OF MANAGING DIRECTORS AND EXECUTIVE OFFICER

<TABLE>
<CAPTION>
                                                PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                AGE       MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                ---       --------------------------------------------------
<S>                                 <C>   <C>
Duncan Lewis......................  49    Mr. Lewis is a member of the Company's Board of Managing
                                          Directors. Mr. Lewis joined GTS in January 2001 as
                                          President and Chief Operating Officer, overseeing the day
                                          to day operations of the Company. He has more than 20
                                          years experience in senior positions in the global data
                                          and telecommunications industry. Prior to joining GTS, Mr.
                                          Lewis was Managing Director and Chief Corporate
                                          Development Officer of Equant NV. Prior to Equant, Mr.
                                          Lewis' senior positions included: Chief Executive Officer,
                                          Mercury Communications; Managing Director, Cable and
                                          Wireless Europe, and Business Networks; and Chief
                                          Executive Officer, Granada Media. He has also held various
                                          senior positions at British Telecommunications, including
                                          Director -- Procurement, Strategy and Network Services.
</TABLE>

                                        62
<PAGE>   64

<TABLE>
<CAPTION>
                                                PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                AGE       MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                ---       --------------------------------------------------
<S>                                 <C>   <C>
Jeffrey H. Von Deylen.............  37    Mr. Von Deylen is the Company's Chief Financial Officer.
                                          Mr. Von Deylen joined GTS as Senior Vice President,
                                          Finance in October 1999. Prior to his appointment, Mr. Von
                                          Deylen was Vice President, Corporate Controller at Qwest
                                          Communications International, Inc. He was with Qwest and
                                          LCI International, which Qwest acquired in 1998, for six
                                          years. Before his tenure at Qwest and LCI, Mr. Von Deylen
                                          was with Arthur Andersen, the auditing firm.
Stephen B. Baus...................  35    Mr. Baus is a member of the Company's Board of Managing
                                          Directors and is Senior Vice President, Strategic
                                          Development and Operations of GTS. Before joining GTS in
                                          1995, Mr. Baus worked as a management consultant at
                                          PricewaterhouseCoopers. Mr. Baus received an MBA from The
                                          Wharton School at The University of Pennsylvania and an
                                          undergraduate degree in International Political Economy
                                          from the University of California, Berkeley.
Maurice Woolf.....................  31    Mr. Woolf is a member of the Company's Board of Managing
                                          Directors. He is Senior Vice President and Deputy General
                                          Counsel of the Company. Mr. Woolf joined GTS in February
                                          1996 as legal counsel, based in Brussels. Previously, he
                                          was employed by the London law firm, Denton Hall. Mr.
                                          Woolf has a degree in Law from King's College, University
                                          of London and is a qualified solicitor.
</TABLE>

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

     The directors on the Board of Supervising Directors and the Board of
Managing Directors receive no fees from the Company for serving as directors.

EXECUTIVE COMPENSATION

     Except for Mr. Amman, the above-named persons were not executive officers
as of December 31, 2000. The following table sets forth each component of
compensation paid or awarded to, or earned by, Mr. Amman for the years
indicated. The compensation disclosed relates solely to that earned while
serving as Chief Executive Officer and as President and Chief Operating Officer
of GTS.

<TABLE>
<CAPTION>
                                                                                          LONG-TERM
                                                                                     COMPENSATION AWARDS
                                                   ANNUAL COMPENSATION            -------------------------
                                          -------------------------------------   RESTRICTED    SECURITIES
                                                                   OTHER ANNUAL     STOCK       UNDERLYING     ALL OTHER
                                            SALARY       BONUS     COMPENSATION    AWARD(S)     OPTIONS/SAR   COMPENSATION
NAME AND PRINCIPAL POSITION        YEAR      ($)          ($)          ($)           ($)            (#)          ($)(5)
---------------------------        ----   ----------    --------   ------------   ----------    -----------   ------------
<S>                                <C>    <C>           <C>        <C>            <C>           <C>           <C>
Robert Amman.....................  2000   $  487,500    $403,250     $275,908(2)  $  588,759(3)  2,346,667(4)   $ 5,874
  Chairman, President and Chief    1999   $  312,307     213,552      148,781(2)                 1,050,000(4)     5,532
  Executive Officer of GTS(1)
</TABLE>

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

 (1) Mr. Amman was President and Chief Operating Officer of GTS until September
     2000 when he was elected Chairman and Chief Executive Officer of GTS.

 (2) Mr. Amman resides in a company apartment for which the company paid the
     equivalent of $227,760 and $147,420 per year in rent in 2000 and 1999,
     respectively.

 (3) Mr. Amman received 300,000 shares of GTS common stock in restricted stock
     awards in 2000, respectively. The dollar amount represents the quantity of
     shares of restricted stock granted on

                                        63
<PAGE>   65

     October 27, 2000 when the closing price of the Company's common stock on
     the New York Stock Exchange was $2.0625. The restrictions on the 2000
     restricted stock awards will lapse on January 1, 2002.

 (4) Shares of common stock underlying stock options awarded under the Stock
     Option Plan.

 (5) Amounts disclosed hereunder represent premiums paid by GTS for $1 million
     in group term life insurance for Mr. Amman and contributions by GTS under
     the GTS 401(k) Plan to his account. GTS paid 401(k) Plan contributions of
     $4,250 in 2000 and $4,000 was paid in 1999.

                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

     The following table provides information on stock option grants to Mr.
Amman under the GTS Stock Option Plan

<TABLE>
<CAPTION>
                                                   % OF TOTAL
                                      NUMBER OF      OPTIONS
                                      SECURITIES   GRANTED TO
                                      UNDERLYING    EMPLOYEES    EXERCISE OR                 GRANT DATE
                                       OPTIONS      IN FISCAL        BASE       EXPIRATION     PRESENT
NAME                                  GRANTED(#)      YEAR       PRICE($/SH.)      DATE      VALUE($)(4)
----                                  ----------   -----------   ------------   ----------   -----------
<S>                                   <C>          <C>           <C>            <C>          <C>
Robert Amman........................    100,000(1)    0.2%          $ 9.63        5/23/10    $  532,000
                                        450,000(2)    1.1%           10.50        5/31/10     2,605,500
                                        700,000(3)    1.7%            2.00       10/28/10       770,000
                                      1,096,667(3)    2.7%            0.38       12/22/10       230,300
</TABLE>

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

(1) These options are 100% vested after eighteen months.

(2) These options vest over a three-year term, 33% after one year and one
    thirty-sixth every month thereafter.

(3) These options vest over an eighteen month term, 33% after six months,
    another 33% six months later, with the remaining options vesting after the
    following six month period.

(4) The present value of each grant is estimated on the date of the grant using
    the Black-Scholes option pricing model with the following weighted average
    assumptions: dividend yield 0%, expected life of two years, risk free
    interest rates between 5.10% and 6.83% and expected volatility of 100%.

  AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

     The following table provides information on the number and value of GTS
stock options exercised by Mr. Amman, the number of options under the Stock
Option Plan held by him at December 31, 2000, and the value of all unexercised
options held by him as of that date.

<TABLE>
<CAPTION>
                                                        NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                                       UNDERLYING UNEXERCISED             IN-THE-MONEY
                           SHARES                       OPTIONS AT FY-END(#)         OPTIONS AT FY-END($)(1)
                         ACQUIRED ON      VALUE      ---------------------------   ---------------------------
NAME                     EXERCISE(#)   REALIZED($)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                     -----------   -----------   -----------   -------------   -----------   -------------
<S>                      <C>           <C>           <C>           <C>             <C>           <C>
Robert Amman...........      --            --           299,169      3,142,498         $0          $474,308
</TABLE>

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

(1) Based on the closing price of $0.8125 on the New York Stock Exchange of the
    Common Stock on December 31, 2000.

KEY EMPLOYEE STOCK OPTION PLAN OF GLOBAL TELESYSTEMS EUROPE B.V.

     We have adopted the Key Employee Stock Option Plan of GTS Europe (the "New
Plan"). Under the New Plan certain employees of GTS Europe will be granted stock
options to purchase its common stock. Subject to adjustment in the event of
certain changes in capitalization, a maximum of 24,760 shares of GTS Europe
common stock are authorized for grant under the New Plan. As of September 30,
2000, the Company ceased to have any unexercised options outstanding and the
Company does not currently plan to issue new stock option grants.
                                        64
<PAGE>   66

     The New Plan is administered by a committee composed of two members of the
Board of Supervising Directors which will have broad discretion to determine who
shall receive awards under the New Plan, the terms of such awards and interpret
the New Plan. The New Plan shall become effective upon its adoption by the Board
of Supervising Directors and shall continue in effect until 2004, unless
terminated earlier by the Board of Supervising Directors.

     Each stock option granted under the New Plan shall have a term of ten
years, except those granted in 1997 reflected in the table above. The exercise
price of each such stock option will be determined at the time of grant. In
addition the stock options granted under the New Plan will become exercisable at
such times and under such conditions as determined by the committee.

     The Board of Supervising Directors may amend or terminate the New Plan at
any time, provided that the rights of participants are not impaired.

PENSION PLAN

     In 1995, we established a defined benefit pension plan (the "Pension Plan")
that covers substantially all of its employees that are at least twenty-five
years of age and have at least one year of service. The benefits are based on
years of service and the employee's compensation at retirement. Each participant
in the Pension Plan will receive a lump sum at retirement equal to 450% of final
annual salary up to a specified ceiling which changes every year (in 1998 the
ceiling was BF1,352,000) plus 910% of the excess multiplied by the years of
service divided by 35. The maximum years of service taken into account under the
formula is 35. The normal retirement age is 60. We have entered into an
agreement with an insurance company for the provision of a group insurance
policy (the "Policy"). Premium payments for the Policy are partly paid by the
employee based on specified terms that consider the employee's annual salary,
with the remaining premium paid by us. Premiums are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future. (See Note 9 to the Notes to Consolidated Financial
Statements). Upon termination of employment prior to retirement age, employer
contributions cease and the participant may decide to receive the cash surrender
value of the policy, to continue paying premiums or cease paying premiums but in
either case maintaining the policy which is paid out according to its terms.

                               PENSION PLAN TABLE

<TABLE>
<CAPTION>
                                                  YEARS OF SERVICE
                           --------------------------------------------------------------
REMUNERATION                   15           20           25           30           35
------------               ----------   ----------   ----------   ----------   ----------
<S>                        <C>          <C>          <C>          <C>          <C>
$125,000.................  $  370,313   $  493,750   $  617,188   $  740,625   $  863,200
$150,000.................     467,870      623,829      779,786      935,744    1,090,610
$175,000.................     565,508      754,011      942,513    1,131,056    1,318,200
$200,000.................     663,100      884,140    1,105,170    1,326,210    1,545,700
$225,000.................     760,703    1,014,271    1,267,838    1,521,405    1,773,200
$250,000.................     858,300    1,144,400    1,430,500    1,716,600    2,000,000
$300,000.................   1,053,490    1,404,660    1,755,820    2,106,990    2,455,700
$400,000.................   1,443,880    1,925,181    2,406,476    2,887,771    3,365,700
$450,000.................   1,639,080    2,185,440    2,731,800    3,278,160    3,820,700
$500,000.................   1,834,270    2,445,700    3,057,120    3,668,550    4,275,700
</TABLE>

The above pension benefits are based on the following formula: (260% S1 + 910%
S2) (LOGO) N/35

<TABLE>
<S>  <C>   <C>
S      =   annual salary
S1     =   S up to the "ceiling"
S2     =   S above the "ceiling"
N      =   years of service up to a maximum of 35
</TABLE>

For purposes of this calculation, the "ceiling" is U.S. $42,200.

                                        65
<PAGE>   67

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of the common shares of GTS Europe, as of December 31, 2000 by each
beneficial owner of 5% or more of the common shares and by directors and
officers of GTS Europe. For the purpose of this table, a person or group of
persons is deemed to have "beneficial ownership" of any shares which such person
or group has the right to acquire within 60 days after such date, but such
shares are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.

<TABLE>
<CAPTION>
                                                                 SHARES OF STOCK
                                                                BENEFICIALLY OWNED
                                                              ----------------------
                                                              NUMBER OF
NAME OF BENEFICIAL OWNER                                       SHARES     PERCENTAGE
------------------------                                      ---------   ----------
<S>                                                           <C>         <C>
Global TeleSystems, Inc. ...................................   200,316       99.8%
Steve Andrews(1)............................................       318          *
                                                               -------
          Total of above....................................   200,634
                                                               =======
</TABLE>

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

 *  Less than 1%.

(1) Steve Andrews was a former employee who exercised his remaining option in
    the Company in September 2000. GTS is obligated to exchange its common stock
    for the outstanding common shares by Mr. Andrews in 2001. The Company does
    not intend to grant additional options to purchase common shares of the
    Company. See "Management -- Executive Compensation."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

EXCHANGE AGREEMENT WITH EMPLOYEE'S FOR GTS SECURITIES

     On October 15, 1999, GTS entered into an exchange agreement with all of the
minority interest holders of the Company's common shares and grantees of stock
options to purchase common shares of the Company that provides for the
acquisition by GTS of their equity interest in the Company. Specifically, the
agreement provides that GTS will acquire the respective minority interest
holders' common shares in the Company that have been held by them for a period
greater than six months based on the current fair market value of the Company on
the date of the exchange, as determined by a globally-recognized investment
banking firm that is mutually acceptable to the parties to the agreement. The
agreement also provides that GTS would issue its common shares to the Company's
minority interest holders based on the fair market value of GTS common shares on
the date of the exchange.

     Pursuant to this agreement and effective October 15, 1999, GTS exchanged
5,985,930 of its common shares for 6,565 of the Company's common shares. This
transaction resulted in aggregate purchase consideration of approximately $134.2
million and as a result the Company reflected incremental goodwill of
approximately $133.0 million. In addition, on July 26, 2000, GTS exchanged
3,166,528 of its common shares for 3,283 of the Company's common shares with the
minority interest holders of the Company, who were grantees of the Company's
stock options. The July 26, 2000 exchange of GTS common shares was based on the
fair market value of the Company as of the date of the exchange, and the
transaction resulted in excess purchase price over the fair value of assets
acquired of approximately $37.2 million, which was recorded in July 2000.

     In September 2000, the remaining 318 options of the Company were exercised.
As a result of this transaction, as of September 2000, 99.8% of the outstanding
common shares of the Company are owned by GTS. GTS is obligated to exchange its
common stock for the remaining 318 shares of the Company's stock during 2001.

PURCHASE OF TRANSATLANTIC FIBER CAPACITY

     In January 1999, a subsidiary of GTS entered into an agreement with FLAG
Telecom, to establish a 50/50 joint venture, called FLAG Atlantic Limited, to
build and operate the world's first transatlantic dual

                                        66
<PAGE>   68

cable system designed to carry voice, high-speed data and video traffic. On
October 13, 1999, GTS announced that it has committed to purchase one dedicated
fiber pair from FLAG Atlantic Limited. In December 1999, the Company purchased
the dedicated fiber pair from GTS for $250 million. In connection with this
purchase in December 1999, GTS made an equity contribution of $50 million to the
Company. These transactions have been recorded on a net basis. On October 31,
2000, GTS announced that it has reached an agreement to sell its 50% equity
interest in FLAG Atlantic Limited to FLAG Telecom while retaining ownership over
certain infrastructure, including the dedicated fiber pair on the FLAG
Atlantic-1 transatlantic link, previously purchased from the joint venture.

PURCHASE OF SHARES BY GTS CARRIER SERVICES

     In connection with its purchases of AB Swed Carrier's and SNCB/NMBS's
minority common share interests in GTS Europe in December 1998 and June 1999,
respectively, GTS Carrier Services paid approximately $10.0 million to a company
that is affiliated with a member of the Supervisory Board of GTS Europe for
negotiating with AB Swed Carrier and SNCB/NMBS on behalf of GTS Carrier Services
to purchase their respective ownership interests in GTS Europe.

TRANSACTIONS WITH AFFILIATED COMPANIES

     Included in revenue for the years ended December 31, 2000, 1999 and 1998,
respectively, is $68.1 million, $28.2 million and $0.9 million of revenue from
GTS affiliates. Costs of revenue from GTS affiliates were $24.6 million and $1.4
million for the years ended December 31, 2000 and 1999, respectively. There was
no cost of revenue from GTS affiliates in 1998.

     See Item 1 -- "Business -- Recent Developments" for a description of
certain transactions which are contemplated among the Company, GTS and Esprit.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     a) The following documents are filed as part of this report:

          1  Consolidated Financial Statements

          The following consolidated financial statements of GTS Europe B.V. are
     included in Part II, Item 8 of this report:

        - Report of Ernst & Young, Independent Auditors

        - Consolidated Balance Sheets as of December 31, 2000 and 1999

        - Consolidated Statements of Operations for each of the Three Years
          Ended December 31, 2000

        - Consolidated Statements of Cash Flows for each of the Three Years
          Ended December 31, 2000

        - Consolidated Statements of Changes in Stockholders' Equity for each of
          the Three Years Ended December 31, 2000

        - Notes to Consolidated Financial Statements

          2  Consolidated Financial Statement Schedules

          We have furnished Schedule II Valuation and Qualifying Accounts.

          All other schedules are omitted because they are not applicable or not
     required, or because the required information is either incorporated herein
     by reference or included in the financial statements or notes thereto
     included in this report.

                                        67
<PAGE>   69

     b) Reports on Form 8-K

<TABLE>
<CAPTION>
     DATE OF REPORT                           SUBJECT OF REPORT
     --------------                           -----------------
<C>                      <S>
                         None.

</TABLE>

     c) Exhibits

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
          3.1*           -- Deed of Incorporation and Articles of Association, as
                            amended to date
          4.1*           -- Form of Outstanding Note (contained in Indenture filed as
                            Exhibit 4.3)
          4.2*           -- Form of Exchange Note (contained in Indenture filed as
                            Exhibit 4.3)
          4.3*           -- Indenture, dated August 19, 1998, among the Company,
                            Global TeleSystems Group, Inc. and The Bank of New York,
                            as Trustee
          4.4*           -- Registration Rights Agreement, dated August 19, 1998,
                            between the Company and Donaldson, Lufkin & Jenrette
                            Securities Corporation, UBS Securities LLC and Lehman
                            Brothers Inc.
          4.5*           -- Escrow Agreement, dated August 19, 1998, among the
                            Company and The Bank of New York, as Trustee and as
                            Escrow Agent
          4.6***         -- Form of Outstanding Dollar Note for the Registrant's
                            10 3/8% Senior Notes due 2009 (contained in Dollar
                            Indenture filed as Exhibit 4.10)
          4.7***         -- Form of Outstanding Euro Note for the Registrant's
                            10 3/8% Senior Notes due 2006 (contained in Euro
                            Indenture filed as Exhibit 4.11)
          4.8***         -- Form of Dollar Exchange Note for the Registrant's 10 3/8%
                            Senior Notes due 2009 (contained in Dollar Indenture
                            filed as Exhibit 4.10)
          4.9***         -- Form of Euro Exchange Note for the Registrant's 10 3/8%
                            Senior Notes due 2006 (contained in Euro Indenture filed
                            as Exhibit 4.11)
          4.10***        -- Dollar Indenture, dated as of January 4, 1999, between
                            Hermes Railtel and The Bank of New York of New York, as
                            Trustee
          4.11***        -- Euro Indenture dated as of January 4, 1999, between
                            Hermes Railtel and The Bank of New York, as Trustee
          4.12***        -- Dollar Registration Rights Agreement, dated as of January
                            4, 1999, between Hermes Railtel and Initial Purchasers
          4.13***        -- Euro Registration Rights Agreement, dated as of January
                            4, 1999, between Hermes Railtel and Initial Purchasers
          4.14****       -- Form of Outstanding Note for the Registrant's 10 1/2%
                            Senior Notes due 2006 (contained in Indenture filed as
                            Exhibit 4.18)
          4.15****       -- Form of Outstanding Note for the Registrant's 11% Senior
                            Notes due 2009 (contained in Indenture filed as Exhibit
                            4.19)
          4.16****       -- Form of Exchange Note for the Registrant's 10 1/2% Senior
                            Notes due 2006 (contained in Indenture filed as Exhibit
                            4.18)
          4.17****       -- Form of Exchange Note for the Registrant's 11% Senior
                            Notes due 2009 (contained in Indenture filed as Exhibit
                            4.19)
          4.18****       -- Indenture relating to the 10 1/2% Senior Notes due 2006,
                            dated as of November 24, 1999, between the Company and
                            United States Trust Company of New York, as Trustee
</TABLE>

                                        68
<PAGE>   70

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
          4.19****       -- Indenture relating to the 11% Senior Notes due 2009,
                            dated as of November 24, 1999, between the Company and
                            United States Trust Company of New York, as Trustee
          4.20****       -- Registration Rights Agreement, dated as of November 24,
                            1999, between the Company and Initial Purchases
         10.1*           -- Shareholders Agreement among the Company, GTS-Hermes
                            Inc., HIT Rail B.V., SNCB/NMBS and AB Swed Carrier
         10.2            -- [Reserved]
         10.3            -- [Reserved]
         10.4            -- [Reserved]
         10.5            -- [Reserved]
         10.6            -- [Reserved]
         10.7*           -- License, dated December 18, 1997, granted by the
                            Secretary of State for Trade and Industry relating to the
                            United Kingdom
         10.8*           -- Registration, dated July 26, 1997, granted by IBPT
                            relating to Belgium
         10.9*           -- Authorization Letter, dated August 1, 1997, granted by
                            Hoofdirectie Telecommunicate & Post relating to the
                            Netherlands
         10.10*          -- License, dated May 28, 1998, granted by BMPT relating to
                            Germany
         10.11*+         -- Agreement, dated April 1, 1998, between Eastern Group
                            Telecoms Limited and the Company
         10.12*+         -- Agreement, dated January 16, 1998, between SNCB/NMBS and
                            the Company
         10.13*+         -- Agreement, dated February 3, 1998, between SANEF and the
                            Company
         10.14**         -- License, dated October 22, 1998 granted by the Secretary
                            of State of Industry relating to France
         10.15**         -- Authorization Letter, dated March 16, 1999, granted by
                            the Deputy Director of Federal Communication Office
                            relating to Switzerland.
         10.16**+        -- Fiber Agreement, dated September 24, 1998
         10.17**+        -- Fiber Agreement, dated October 8, 1998
         10.18**+        -- Fiber Agreement, dated December 15, 1998
         10.19***+       -- Agreement, dated November 24, 1998 between COLT and
                            Hermes Railtel
         10.20***+       -- Authorization Letter, dated March 16, 1999, granted by
                            the Deputy Director of Federal Communication Office
                            relating to Switzerland
         10.21***+       -- Agreement dated April 3, 1999 between AT&T Unisource and
                            Hermes Railtel
         10.22***+       -- Agreement dated November 3, 1999 between Cable & Wireless
                            and Hermes Railtel
         21.1*****       -- List of Subsidiaries
         24.1*****       -- Power of Attorney (included on signature page to this
                            report)
</TABLE>

                                        69
<PAGE>   71

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         99.1******      -- Share Purchase Agreement dated April 2, 2001 among the
                            Global TeleSystems, Inc., as seller, and Alfa Bank
                            Holdings, Capital Global, Cavendish Nominees Limited,
                            First NIS Regional Fund. SICAV, as purchasers.
         99.2*******     -- Form of Lock-Up Agreement dated as of March 27, 2001
                            between Global TeleSystems, Inc., Global TeleSystem
                            (Europe) Limited and the Bondholder Group, and Summary of
                            Terms thereto.
         99.3*******     -- Supplemental Agreement dated April 6, 2001 relating to
                            the Facilities of up to US $550,000,000 (to be reduced to
                            E300,000,000) among Global TeleSystems Europe Holdings
                            B.V., Bank of America International Limited, Deutsche
                            Bank AG London and Dresdner AG London Branch, with Form
                            of Amended an Restated Loan Agreement for E300,000,000
                            Revolving Credit Facility with a Term Out Option.
</TABLE>

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

       * Incorporated by reference to the correspondingly numbered Exhibit to
         Amendment No. 4 to the Company's Registration Statement on Form S-4
         (Commission File No. 333-37719).

      ** Incorporated by reference to the correspondingly numbered Exhibit to
         the Company's annual report on Form 10-K for the year ended December
         31, 1998.

     *** Incorporated by reference to the Exhibits to Amendment No. 1 to the
         Company's Registration Statement on Form S-4 (Commission File No.
         333-70723) as follows: Exhibit 4.6 was Exhibit 4.1 to the Form S-4
         Registration Statement; Exhibit 4.7 was Exhibit 4.2 to the Form S-4
         Registration Statement; Exhibit 4.8 was Exhibit 4.3 to the Form S-4
         Registration Statement; Exhibit 4.9 was Exhibit 4.4 to the S-4
         Registration Statement; Exhibit 4.10 was Exhibit 4.5 to the Form S-4
         Registration Statement; Exhibit 4.11 was Exhibit 4.6 to the Form S-4
         Registration Statement; Exhibit 4.12 was Exhibit 4.7 to the Form S-4
         Registration Statement; Exhibit 4.13 was Exhibit 4.8 to the Form S-4
         Registration Statement; Exhibit 10.19 was Exhibit 10.15 to the Form S-4
         Registration Statement; Exhibit 10.20 was Exhibit 10.16 to the Form S-4
         Registration Statement; Exhibit 10.21 was Exhibit 10.17 to the Form S-4
         Registration Statement; and Exhibit 10.22 was Exhibit 10.18 to the Form
         S-4 Registration Statement.

   **** Incorporated by reference to the Exhibits to Amendment No. 1 to the
        Company's Registration Statement on Form S-4 (Commission File No.
        333-94339) as follows: Exhibit 4.14 was Exhibit 4.1 to the Form S-4
        Registration Statement; Exhibit 4.15 was Exhibit 4.2 to the Form S-4
        Registration Statement; Exhibit 4.16 was Exhibit 4.3 to the Form S-4
        Registration Statement; Exhibit 4.17 was Exhibit 4.4 to the Form S-4
        Registration Statement; Exhibit 4.18 was Exhibit 4.5 to the Form S-4 to
        the Form S-4 Registration Statement; Exhibit 4.19 was Exhibit 4.6 to the
        Form S-4 Registration Statement; and Exhibit 4.20 was Exhibit 4.7 to the
        Form S-4 Registration Statement.

  ***** Filed herewith.

 ****** Incorporated by reference to Exhibit 99.1 to the Schedule 13D/A
        (Amendment No. 1) Regarding Golden Telecom, Inc. filed by Global
        TeleSystems, Inc. with the SEC on April 5, 2001.

******* Incorporated by reference to the correpondingly numbered exhibit to
        Global TeleSystems, Inc.'s Annual Report on Form 10-K for the Year Ended
        December 31, 2000 filed with the Commission on April 13, 2001.

       + Confidential material has been redacted and filed separately with the
         Securities and Exchange Commission.

                                        70
<PAGE>   72

                                   SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Hoeilaart, Belgium,
on this 16th day of April, 2001.

                                            GLOBAL TELESYSTEMS EUROPE B.V.

                                            By:     /s/ ROBERT J. AMMAN
                                              ----------------------------------
                                                       Robert J. Amman
                                               President and Managing Director
                                                (Principal Executive Officer)

     Each person whose signature appears below constitutes and appoints, Jeffrey
H. Von Deylen, Grier C. Raclin and Arnold Y. Dean and each of them singly, as
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him, and in his name, place and stead, in any and all
capacities to sign any and all amendments and supplements to this annual report
on Form 10-K and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or their
substitute or substitutes may lawfully do or cause to be done by virtue thereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 16th day of April, 2001.

<TABLE>
<CAPTION>
                      SIGNATURE                                                TITLE
                      ---------                                                -----
<C>                                                         <S>

                 /s/ ROBERT J. AMMAN                        President and Managing Director (Principal
-----------------------------------------------------         Executive Officer) and Chairman of
                  (Robert J. Amman)                           Supervisory Board

              /s/ JEFFREY H. VON DEYLEN                     Chief Financial Officer (Principal Financial
-----------------------------------------------------         and Accounting Officer)
               (Jeffrey H. Von Deylen)

                  /s/ DUNCAN LEWIS                          Member of Board of Managing Directors
-----------------------------------------------------
                   (Duncan Lewis)

                 /s/ STEPHEN B. BAUS                        Member of Board of Managing Directors
-----------------------------------------------------
                  (Stephen B. Baus)

                  /s/ MAURICE WOOLF                         Member of Board of Managing Directors
-----------------------------------------------------
                   (Maurice Woolf)
</TABLE>

                                        71
<PAGE>   73

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
COL. A                                  COL. B               COL. C               COL. D        COL. E
------                                ----------    ------------------------    ----------    ----------
                                                           ADDITIONS
                                                    ------------------------
                                      BALANCE AT    CHARGED TO    CHARGED TO                  BALANCE AT
                                      BEGINNING     COSTS AND       OTHER                       END OF
DESCRIPTION                           OF PERIOD      EXPENSES      ACCOUNTS     DEDUCTIONS      PERIOD
-----------                           ----------    ----------    ----------    ----------    ----------
<S>                                   <C>           <C>           <C>           <C>           <C>
Allowance for doubtful accounts at
  12/31/00..........................    4,876         17,680(1)                                 22,556
Allowance for doubtful accounts at
  12/31/99..........................      887          3,989                                     4,876
Allowance for doubtful accounts at
  12/31/98..........................      -0-            887                                       887
</TABLE>

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

(1) As discussed within Part 2, Item 7. "Management's Discussion and Analysis of
    Financial Condition and Results of Operations -- Results of Operations," the
    Company experienced an increase in bad debt expenses in the fourth quarter
    2000 as a result of the failure of several customers during fourth quarter
    2000 and first quarter 2001.

                                        72
<PAGE>   74

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
          3.1*           -- Deed of Incorporation and Articles of Association, as
                            amended to date
          4.1*           -- Form of Outstanding Note (contained in Indenture filed as
                            Exhibit 4.3)
          4.2*           -- Form of Exchange Note (contained in Indenture filed as
                            Exhibit 4.3)
          4.3*           -- Indenture, dated August 19, 1998, among the Company,
                            Global TeleSystems Group, Inc. and The Bank of New York,
                            as Trustee
          4.4*           -- Registration Rights Agreement, dated August 19, 1998,
                            between the Company and Donaldson, Lufkin & Jenrette
                            Securities Corporation, UBS Securities LLC and Lehman
                            Brothers Inc.
          4.5*           -- Escrow Agreement, dated August 19, 1998, among the
                            Company and The Bank of New York, as Trustee and as
                            Escrow Agent
          4.6***         -- Form of Outstanding Dollar Note for the Registrant's
                            10 3/8% Senior Notes due 2009 (contained in Dollar
                            Indenture filed as Exhibit 4.10)
          4.7***         -- Form of Outstanding Euro Note for the Registrant's
                            10 3/8% Senior Notes due 2006 (contained in Euro
                            Indenture filed as Exhibit 4.11)
          4.8***         -- Form of Dollar Exchange Note for the Registrant's 10 3/8%
                            Senior Notes due 2009 (contained in Dollar Indenture
                            filed as Exhibit 4.10)
          4.9***         -- Form of Euro Exchange Note for the Registrant's 10 3/8%
                            Senior Notes due 2006 (contained in Euro Indenture filed
                            as Exhibit 4.11)
          4.10***        -- Dollar Indenture, dated as of January 4, 1999, between
                            Hermes Railtel and The Bank of New York of New York, as
                            Trustee
          4.11***        -- Euro Indenture dated as of January 4, 1999, between
                            Hermes Railtel and The Bank of New York, as Trustee
          4.12***        -- Dollar Registration Rights Agreement, dated as of January
                            4, 1999, between Hermes Railtel and Initial Purchasers
          4.13***        -- Euro Registration Rights Agreement, dated as of January
                            4, 1999, between Hermes Railtel and Initial Purchasers
          4.14****       -- Form of Outstanding Note for the Registrant's 10 1/2%
                            Senior Notes due 2006 (contained in Indenture filed as
                            Exhibit 4.18)
          4.15****       -- Form of Outstanding Note for the Registrant's 11% Senior
                            Notes due 2009 (contained in Indenture filed as Exhibit
                            4.19)
          4.16****       -- Form of Exchange Note for the Registrant's 10 1/2% Senior
                            Notes due 2006 (contained in Indenture filed as Exhibit
                            4.18)
          4.17****       -- Form of Exchange Note for the Registrant's 11% Senior
                            Notes due 2009 (contained in Indenture filed as Exhibit
                            4.19)
          4.18****       -- Indenture relating to the 10 1/2% Senior Notes due 2006,
                            dated as of November 24, 1999, between the Company and
                            United States Trust Company of New York, as Trustee
          4.19****       -- Indenture relating to the 11% Senior Notes due 2009,
                            dated as of November 24, 1999, between the Company and
                            United States Trust Company of New York, as Trustee
          4.20****       -- Registration Rights Agreement, dated as of November 24,
                            1999, between the Company and Initial Purchases
         10.1*           -- Shareholders Agreement among the Company, GTS-Hermes
                            Inc., HIT Rail B.V., SNCB/NMBS and AB Swed Carrier
</TABLE>
<PAGE>   75

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         10.2            -- [Reserved]
         10.3            -- [Reserved]
         10.4            -- [Reserved]
         10.5            -- [Reserved]
         10.6            -- [Reserved]
         10.7*           -- License, dated December 18, 1997, granted by the
                            Secretary of State for Trade and Industry relating to the
                            United Kingdom
         10.8*           -- Registration, dated July 26, 1997, granted by IBPT
                            relating to Belgium
         10.9*           -- Authorization Letter, dated August 1, 1997, granted by
                            Hoofdirectie Telecommunicate & Post relating to the
                            Netherlands
         10.10*          -- License, dated May 28, 1998, granted by BMPT relating to
                            Germany
         10.11*+         -- Agreement, dated April 1, 1998, between Eastern Group
                            Telecoms Limited and the Company
         10.12*+         -- Agreement, dated January 16, 1998, between SNCB/NMBS and
                            the Company
         10.13*+         -- Agreement, dated February 3, 1998, between SANEF and the
                            Company
         10.14**         -- License, dated October 22, 1998 granted by the Secretary
                            of State of Industry relating to France
         10.15**         -- Authorization Letter, dated March 16, 1999, granted by
                            the Deputy Director of Federal Communication Office
                            relating to Switzerland.
         10.16**+        -- Fiber Agreement, dated September 24, 1998
         10.17**+        -- Fiber Agreement, dated October 8, 1998
         10.18**+        -- Fiber Agreement, dated December 15, 1998
         10.19***+       -- Agreement, dated November 24, 1998 between COLT and
                            Hermes Railtel
         10.20***+       -- Authorization Letter, dated March 16, 1999, granted by
                            the Deputy Director of Federal Communication Office
                            relating to Switzerland
         10.21***+       -- Agreement dated April 3, 1999 between AT&T Unisource and
                            Hermes Railtel
         10.22***+       -- Agreement dated November 3, 1999 between Cable & Wireless
                            and Hermes Railtel
         21.1*****       -- List of Subsidiaries
         24.1*****       -- Power of Attorney (included on signature page to this
                            report)
         99.1******      -- Share Purchase Agreement dated April 2, 2001 among the
                            Global TeleSystems, Inc., as seller, and Alfa Bank
                            Holdings, Capital Global, Cavendish Nominees Limited,
                            First NIS Regional Fund. SICAV, as purchasers.
         99.2*******     -- Form of Lock-Up Agreement dated as of March 27, 2001
                            between Global TeleSystems, Inc., Global TeleSystem
                            (Europe) Limited and the Bondholder Group, and Summary of
                            Terms thereto.
         99.3*******     -- Supplemental Agreement dated April 6, 2001 relating to
                            the Facilities of up to US $550,000,000 (to be reduced to
                            E300,000,000) among Global TeleSystems Europe Holdings
                            B.V., Bank of America International Limited, Deutsche
                            Bank AG London and Dresdner AG London Branch, with Form
                            of Amended an Restated Loan Agreement for E300,000,000
                            Revolving Credit Facility with a Term Out Option.
</TABLE>

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

       * Incorporated by reference to the correspondingly numbered Exhibit to
         Amendment No. 4 to the Company's Registration Statement on Form S-4
         (Commission File No. 333-37719).
<PAGE>   76

      ** Incorporated by reference to the correspondingly numbered Exhibit to
         the Company's annual report on Form 10-K for the year ended December
         31, 1998.

     *** Incorporated by reference to the Exhibits to Amendment No. 1 to the
         Company's Registration Statement on Form S-4 (Commission File No.
         333-70723) as follows: Exhibit 4.6 was Exhibit 4.1 to the Form S-4
         Registration Statement; Exhibit 4.7 was Exhibit 4.2 to the Form S-4
         Registration Statement; Exhibit 4.8 was Exhibit 4.3 to the Form S-4
         Registration Statement; Exhibit 4.9 was Exhibit 4.4 to the S-4
         Registration Statement; Exhibit 4.10 was Exhibit 4.5 to the Form S-4
         Registration Statement; Exhibit 4.11 was Exhibit 4.6 to the Form S-4
         Registration Statement; Exhibit 4.12 was Exhibit 4.7 to the Form S-4
         Registration Statement; Exhibit 4.13 was Exhibit 4.8 to the Form S-4
         Registration Statement; Exhibit 10.19 was Exhibit 10.15 to the Form S-4
         Registration Statement; Exhibit 10.20 was Exhibit 10.16 to the Form S-4
         Registration Statement; Exhibit 10.21 was Exhibit 10.17 to the Form S-4
         Registration Statement; and Exhibit 10.22 was Exhibit 10.18 to the Form
         S-4 Registration Statement.

   **** Incorporated by reference to the Exhibits to Amendment No. 1 to the
        Company's Registration Statement on Form S-4 (Commission File No.
        333-94339) as follows: Exhibit 4.14 was Exhibit 4.1 to the Form S-4
        Registration Statement; Exhibit 4.15 was Exhibit 4.2 to the Form S-4
        Registration Statement; Exhibit 4.16 was Exhibit 4.3 to the Form S-4
        Registration Statement; Exhibit 4.17 was Exhibit 4.4 to the Form S-4
        Registration Statement; Exhibit 4.18 was Exhibit 4.5 to the Form S-4 to
        the Form S-4 Registration Statement; Exhibit 4.19 was Exhibit 4.6 to the
        Form S-4 Registration Statement; and Exhibit 4.20 was Exhibit 4.7 to the
        Form S-4 Registration Statement.

  ***** Filed herewith.

 ****** Incorporated by reference to Exhibit 99.1 to the Schedule 13D/A
        (Amendment No. 1) Regarding Golden Telecom, Inc. filed by Global
        Telesystems, Inc. with the SEC on April 5, 2001.

******* Incorporated by reference to the correpondingly numbered exhibit to
        Global TeleSystems, Inc.'s Annual Report on Form 10-K for the Year Ended
        December 31, 2000 filed with the Commission on April 13, 2001.

       + Confidential material has been redacted and filed separately with the
         Securities and Exchange Commission.