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                                UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549


                                   FORM 10-K

                 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
          SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
    |X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
          SECURITIES EXCHANGE ACT OF 1934
            For the fiscal year ended December 31, 1996

    |_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
          SECURITIES EXCHANGE ACT OF 1934
            For the transition period from    to

                      COMMISSION FILE NUMBER : 000-21261

                                 VIATEL, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

         DELAWARE                                          13-378366
(STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)


800 THIRD AVENUE, NEW YORK, NEW YORK                    10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)             (ZIP CODE)

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 350-9200

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                     NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                    COMMON STOCK, PAR VALUE $0.01 PER SHARE

     INDICATE BY CHECK MARK  WHETHER THE  REGISTRANT:  (1) HAS 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) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO

     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT  FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S  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 [ ].

     THE AGGREGATE  MARKET VALUE OF THE VOTING STOCK HELD BY  NON-AFFILIATES  OF
THE REGISTRANT AS OF MARCH 27, 1997 WAS APPROXIMATELY  $85,339,595.  AS OF MARCH
27, 1997,  22,609,213 SHARES OF THE REGISTRANT'S  COMMON STOCK, $0.01 PAR VALUE,
WERE OUTSTANDING.

     DOCUMENTS INCORPORATED BY REFERENCE. THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE COMPANY'S
1997 ANNUAL MEETING OF STOCKHOLDERS,  WHICH WILL BE FILED ON OR BEFORE APRIL 30,
1997.


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                               TABLE OF CONTENTS

                                                                          PAGE

PART I.....................................................................  1

      ITEM 1.  BUSINESS....................................................  1
               General.....................................................  1
               Business Strategy...........................................  1
               Market Opportunity..........................................  3
               Services....................................................  4
               The Viatel Network..........................................  5
               Information Systems.........................................  7
               Sales and Marketing; Customers..............................  8
               Carrier Contracts...........................................  9
               Competition.................................................  9
               Government Regulation......................................  10
               Employees..................................................  13

      ITEM 2.  PROPERTIES.................................................  13

      ITEM 3.  LEGAL PROCEEDINGS..........................................  14

      ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........  14

PART II.................................................................... 16

      ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
               STOCKHOLDER MATTERS......................................... 16

      ITEM 6.  SELECTED FINANCIAL DATA..................................... 16

      ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS......................... 19

      ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 30

      ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE......................... 48

PART III................................................................... 48

      ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 48

      ITEM 11.   EXECUTIVE COMPENSATION.................................... 48

      ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
               OWNERS AND MANAGEMENT. ..................................... 48

      ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 48

ITEM IV.....................................................................48

      ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
               REPORTS ON FORM 8-K......................................... 48



<PAGE>

             CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

   CERTAIN STATEMENTS  CONTAINED HEREIN WHICH EXPRESS "BELIEF,"  "ANTICIPATION,"
"EXPECTATION,"  OR "INTENTION"  OR ANY OTHER  PROJECTION,  INCLUDING  STATEMENTS
CONCERNING THE DESIGN, CONFIGURATION,  FEATURE AND PERFORMANCE OF VIATEL, INC.'S
NETWORK AND RELATED  SERVICES,  THE DEVELOPMENT AND EXPANSION OF VIATEL,  INC.'S
BUSINESS,  THE MARKETS IN WHICH VIATEL,  INC.'S SERVICES ARE OR WILL BE OFFERED,
CAPITAL   EXPENDITURES  AND  REGULATORY  REFORM,   INSOFAR  AS  THEY  MAY  APPLY
PROSPECTIVELY  AND ARE NOT HISTORICAL  FACTS, ARE  "FORWARD-LOOKING"  STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE  SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES  EXCHANGE ACT OF 1934.  BECAUSE SUCH STATEMENTS  INCLUDE RISKS
AND UNCERTAINTIES,  ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY SUCH  FORWARD-LOOKING  STATEMENTS.  FACTORS  THAT COULD CAUSE  ACTUAL
RESULTS  TO  DIFFER   MATERIALLY   FROM  THOSE  EXPRESSED  OR  IMPLIED  BY  SUCH
FORWARD-LOOKING  STATEMENTS  INCLUDE,  BUT ARE NOT  LIMITED  TO, THE FACTORS SET
FORTH IN "ITEM 7.  MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION
AND RESULTS OF  OPERATIONS  -- CERTAIN  FACTORS  WHICH MAY AFFECT THE  COMPANY'S
FUTURE RESULTS."


                                    PART I

ITEM 1.   BUSINESS.

GENERAL

     Viatel,  Inc. (together with its subsidiaries and predecessor the "Company"
or "Viatel") is a growing provider of  international  and national long distance
telecommunications  services  principally  in Western Europe, Latin America, the
United  States and  the  Pacific  Rim  and  offers its   services  primarily  to
small and medium-sized  businesses,  carriers and other  resellers.  The Company
operates a digital,  switch-based  telecommunications  network in Western Europe
including a central  switching center in London and nine additional  switches in
Amsterdam,  Antwerp, Barcelona,  Brussels,  Frankfurt,  Madrid, Milan, Paris and
Rome  connected by digital fiber optic  transmission  facilities  (the "European
Network").  In  addition,  the  Company  operates a  switching  center in Omaha,
Nebraska which is connected to the central switching center in London by digital
fiber optic  transmission  facilities  (together with the European Network,  the
"Viatel Network").  The Company has achieved rapid growth since its inception in
1991 with  telecommunications  revenue  reaching $50.4 million in 1996.  Viatel,
Inc. is a Delaware  corporation with its principal  headquarters  located at 800
Third Avenue, New York, New York.

     The  Company   derives   revenue   primarily   through  the   provision  of
competitively  priced long distance services with value-added features that have
not been  typically  provided  by the  respective  incumbent  telecommunications
operator  ("ITO") in many of the  countries in which the Company  operates.  The
Company's  services include virtual private networks,  dedicated access for high
volume users,  calling cards,  fax service and the provision of switched minutes
to  wholesale   customers.   The  value-added   features  include  itemized  and
multicurrency billing,  abbreviated dialing and multiple payment methods. Access
to the  Company's  services  is  obtained  through  paid  access,  international
toll-free ("ITF"), national toll-free ("NTF"), dedicated line or callback.

     The Company conducts its business on a global basis, with a principal focus
on  Western  Europe.  Of the  Company's  telecommunications  revenue  for  1996,
approximately  41.9% was generated in Western  Europe,  approximately  28.4% was
generated in Latin America,  approximately 17.0% was generated in North America,
primarily from the Company's  wholesale  business of selling switched minutes to
other  carriers and  approximately  12.4% was  generated in the Pacific Rim. The
remaining  0.3% was  generated  in Africa  and the  Middle  East.

BUSINESS STRATEGY

     The Company's  objective is to be a significant  provider of  international
and national long distance telecommunications services within Western Europe and
other deregulating markets. The Company believes it is strategically  positioned
to take advantage of  fundamental  changes  occurring in the  telecommunications
industry as a result of global deregulation and rapid advances in technology. In
particular,  the Company believes that its early entry into the Western European
market as an alternative network operator has positioned it to take advantage of
the  anticipated  implementation  in 1998 of European Union ("EU") directives to
eliminate the ITOs' existing monopolies on


<PAGE>

     Voice Telephony, defined as the commercial  provision for the public of the
     direct  transport  and  switching  of  speech  in real-time  between public
     switched  network  termination  points,  enabling any user to use equipment
     connected to such a network  termination point in order to communicate with
     another  termination  point.  The  Company  is  currently  prohibited  from
     supplying Voice Telephony in most EU member states until 1998. Accordingly,
     the  Company  instead  provides   competitively  priced  international  and
     national long distance services with value-added features, thus positioning
     itself  to   capitalize  on   anticipated  deregulation.   See   "Item   7.
     Management's  Discussion and Analysis of Financial Condition and Results of
     Operations -- Certain Factors Which May Affect the Company's Future Results
     -- Substantial Government Regulation."

     Key  elements  of the  Company's business strategy include:

-    CAPITALIZE ON ANTICIPATED SETTLEMENT AGREEMENT OBSOLESCENCE. In contrast to
     many other  companies  engaged in the sale of  international  long distance
     services,  the Company is not dependent on settlement  agreements with ITOs
     for  traffic  origination  and  termination.   The  Company  believes  that
     deregulation  of the  dominant  geographic  telecommunications  markets  as
     evidenced by the World Trade Organization ("WTO") Basic  Telecommunications
     Agreement (the "WTO Agreement") could hasten the obsolescence of settlement
     agreements  anticipated  by  the  Company,  thus  encouraging  carriers  to
     consider  alternatives to the ITOs for long distance  traffic  termination.
     Currently,   the   European   Network  is   primarily   used  to  originate
     international  long distance  traffic from and within Western  Europe.  The
     Company plans to further leverage the European Network to take advantage of
     settlement  agreement  obsolescence  anticipated by the Company by offering
     other  carriers  an  alternative  to the  ITOs for  long  distance  traffic
     origination and termination  within Western Europe.  While the trend toward
     settlement agreement  obsolescence  anticipated by the Company is likely to
     reduce  prices  for long  distance  services,  the  Company  believes  that
     increased  utilization  of the European  Network for both  origination  and
     termination  of traffic and reduced  transmission  costs should  offset any
     such price reductions. See "-- Market Opportunity."

-    FOCUS ON THE EUROPEAN MARKET;  LEVERAGE EUROPEAN NETWORK.  To capitalize on
     opportunities presented by the changing regulatory environment and the size
     of the Western European market,  the Company intends to further utilize and
     expand  the  European  Network.  During  1996,  approximately  41.9% of the
     Company's  telecommunications revenue was generated in Western Europe, with
     approximately 33.1% of its revenue  attributable to calls originated on the
     European  Network.  The Company  intends to expand the European  Network by
     installing  points of  presence  ("POP")  in cities  with both  significant
     calling  activity  directed  to  the  Company's   switch-based  cities  and
     significant  potential for originating and  terminating  international  and
     national long distance traffic. The Company anticipates installing switches
     in Vienna and Zurich and POPs in up to 17 Western  European cities in 1997,
     including Berlin,  Lyon,  Rotterdam,  Turin and Valencia.  During the first
     quarter of 1997, the Company installed a switch in Antwerp.  The Company is
     currently  upgrading  its  switch  in  London  and its  POP in New  York to
     international gateway switches and anticipates that these improvements will
     be completed  during the second and third  quarters of 1997,  respectively.
     See  "Item 7.  Management's  Discussion and Analysis of Financial Condition
     and Results of Operations -- Certain Factors Which May Affect the Company's
     Future   Results."

-    FOCUS ON SMALL AND MEDIUM-SIZED BUSINESSES.  The Company's principal target
     market consists of small and medium-sized  businesses for which the cost of
     long distance telecommunications services represents a significant business
     expense.   The  Company   believes  that  these  customers  tend  to  focus
     principally on price and customer service.  The Company also believes that,
     within any particular EU member state,  the Company's  services and pricing
     will be more  attractive to such  customers  when, in addition to providing
     international  long distance  services,  the Company provides national long
     distance  services within such state. The Company believes that its ability
     to offer national and international  long distance services to its targeted
     customers,  and to bundle such  services  where  desirable,  will result in
     increased  traffic volume on the European  Network due to (i) existing high
     demand  for  national  long  distance  service  by the  Company's  targeted
     customers,  (ii)  potential  savings  which the customer  would  receive by
     purchasing both services from the Company and (iii) convenience  associated
     with  purchasing  such  services  from a single  vendor.  See "-- Sales and
     Marketing; Customers."

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<PAGE>

-    EXPAND WHOLESALE  SWITCHED SERVICE.  To increase  utilization of the Viatel
     Network,  the Company  sells  switched  minutes to wholesale  customers and
     other resellers in the United States and the United Kingdom.  Sales to such
     customers    accounted   for   approximately   16.5%   of   the   Company's
     telecommunications  revenue for 1996 as compared to approximately  6.2% for
     1995. The Company intends to continue to expand its wholesale service, thus
     providing  the  Company  with a source of  additional  revenue  and minutes
     originating and terminating on the Viatel Network.

-    CONTINUE  DEVELOPMENT OF LOCAL SALES DISTRIBUTION  CHANNELS.  The Company's
     sales and marketing strategy is to leverage its locally based sales forces,
     which include direct and indirect sales  representatives  and telemarketing
     agents,  to establish  direct  sales  forces in other key Western  European
     cities and to augment the efforts of its direct local sales,  marketing and
     customer   service   functions  by  utilizing   non-exclusive   independent
     representatives.  The Company  believes  that the  knowledge  of its sales,
     marketing  and customer  service  personnel of local  systems,  customs and
     languages  increases  the  Company's  ability  to  develop  and  serve  its
     principal target customer base.

-    PURSUE  ACQUISITIONS,  INVESTMENTS  AND  STRATEGIC  ALLIANCES.  The Company
     expects to pursue  selective  acquisitions of customer bases or businesses,
     make  investments  in  companies  that  complement  the  Company's  current
     operations  or expand its  services or network  capabilities  and engage in
     strategic   alliances.   The  Company  believes  that  such   acquisitions,
     investments  and strategic  alliances are an important  means of increasing
     network traffic volume and achieving economies of scale. In particular, the
     Company  believes  that,  in certain  instances,  it is more  efficient  to
     acquire rather than develop  customer  bases.  See  "Item  7.  Management's
     Discussion and Analysis of Financial Condition and Results of Operations --
     Certain  Factors  Which May Affect the  Company's  Future  Results -- Risks
     Associated With Acquisitions, Investments and Strategic Alliances."

MARKET OPPORTUNITY

     According  to  the  International  Telecommunications  Union  ("ITU"),  the
international   telephone  service  industry  had  total  worldwide  revenue  of
approximately  $55.0  billion in 1995.  While revenue data is not available on a
per country basis for Europe,  Europe accounted for approximately  45.0% or 24.0
billion of worldwide international outgoing voice and voice band data minutes of
use. The Company believes that,  during 1996, the Western European  countries in
which the Company operated  represented  approximately 22.6% or $13.6 billion of
worldwide   international  outgoing  voice  and  voice  band  data  revenue  and
approximately  35.2% or 22.3 billion of related minutes of use. The Company also
believes  that,  during 1996,  the market for national long  distance  voice and
voice band data revenue in the Western  European  countries in which the Company
operated  represented  approximately  $41.7 billion or 196.9 billion  minutes of
use.

     In the Company's target markets,  deregulation  and new  technologies  have
resulted in increased competition between  telecommunications  service providers
and  increased  demand  for the  transmission  of  information  across  national
borders.  Such deregulation and technological  innovation has: (i) decreased the
cost of providing  toll  service;  (ii) enabled the  provision of  sophisticated
value-added  features;  and (iii)  allowed  other  companies to compete with the
ITOs.

     Historically, the respective ITO in each country had the exclusive right to
provide telephone  services within that country and, as a result,  long distance
callers have paid relatively high prices for limited service. Since 1990, the EU
telecommunications market has become increasingly liberalized, but the provision
of Voice  Telephony is reserved to the local ITO in most EU member  states until
scheduled  deregulation in 1998. See "-- Government  Regulation." In response to
the  liberalization  of  telecommunications  services within the EU, a number of
different  competitors  have  emerged to compete  with the ITOs,  including  the
Company,  alliances  between  large  United  States  telecommunications  service
providers and ITOs and other  competitors  that primarily  provide long distance
service  through  callback  access  or  through  developing  networks  servicing
specific  geographic  markets.  See  "--Competition" and  "Item 7.  Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Certain Factors Which Affect the Company's Future Results -- Competition."

     In  the  telecommunications  industry,   deregulation  has  coincided  with
technological  advances,  which  include  utilization  of fiber  optic cable and
improved computer software and processing  technology.  Fiber optic cable, which
has  widely   replaced   traditional   copper  wire  lines  for  long   distance
transmission,  has dramatically increased the

                                       3
<PAGE>

capacity,  speed  and  flexibility  of  transmission  lines  and  has  virtually
eliminated   limited   capacity  as  a  technical   barrier  to  entry  for  new
international  telephone  companies.   Improvements  in  computer  software  and
processing technology have allowed the provision of value-added features such as
itemized and multicurrency billing,  international debit and charge networks and
ITF numbers.

     The Company believes, along with many industry observers,  that the current
deregulation in many EU member states,  coupled with  technological  innovation,
will  lead  to  market   developments   similar  to  those  that  occurred  upon
deregulation of long distance  telecommunications  services in the United States
and the  United  Kingdom,  including  an  increase  in  traffic  volume  and the
continued  introduction  of new  providers  of  telecommunications  services  of
varying  sizes.  While  significant  reductions  in prices and  improvements  in
telecommunications  and  customer  services  have  occurred  and are expected to
continue,  the  Company  expects  that  market  prices  will  continue to permit
services to be profitably rendered by industry participants  generally.  See "--
Government Regulation," " -- Competition" and  "Item 7.  Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Certain Factors
Which  May  Affect  the  Company's  Future  Results  --  Substantial  Government
Regulation."

     The Company further believes that its operating  experience in deregulating
markets in the United States and the United  Kingdom,  and its  experience as an
early  entrant  into the  Western  European  market  as an  alternative  network
operator,  will assist it in identifying  opportunities and expanding the Viatel
Network  as  other  geographic  regions  with  high  density  telecommunications
markets,  such as Latin America and the Pacific Rim,  start to  deregulate.  The
Company   also   believes   that   its   position   in  the   Western   European
telecommunications   market   and   its   experience   providing   international
telecommunications  services  will  assist  it in  establishing  a  presence  in
national  long  distance  markets in Western  Europe.  During 1996,  the Company
commenced offering national long distance  telecommunications  service in Spain,
Germany  and Italy  and,  based upon  favorable  results  in such  markets,  has
determined to enter the national long distance  business in all EU member states
in which it currently operates.

     On February 15, 1997, representatives of 70 countries, including the United
States,  finalized   the   WTO  Agreement,  which   addresses   market   access,
foreign  investment  and  procompetitive  regulatory  principles  for  countries
generating over 95% of world-wide  telecommunications revenue. The WTO Agreement
becomes  effective  January 1, 1998.  Although  certain  countries took specific
exceptions to the  agreement,  the WTO Agreement  generally  provides (a) market
access to U.S.  companies  for local,  long distance and  international  service
through any means of network  technology on either a resale or facilities basis,
(b)  the  opportunity  for  U.S.  companies  to  acquire,  establish  or  hold a
significant stake in  telecommunications  companies in the countries which are a
party to the WTO  Agreement,  and (c) the  ability  to take  advantage  of these
opportunities within a framework of procompetitive  regulatory  principles.  The
Company  expects to benefit from the  anticipated  effects of the WTO Agreement,
including the expansion of legally  permissible  uses of the Company's  European
Network,  but it cannot  predict  the  extent of the  opportunities  that may be
presented.

SERVICES

     The Company  provides  competitively  priced long  distance  services  with
value-added  features that are not typically  provided by the  respective ITO in
many of the  countries in which the Company  operates.  The  Company's  services
include  virtual  private  networks,  dedicated  access for high  volume  users,
calling  cards,  fax service and the provision of switched  minutes to wholesale
customers.  The value-added features include itemized and multicurrency billing,
abbreviated dialing and multiple payment methods. See "-- The Viatel Network."

     Access to the  Company's  services  is  obtained  either  through  "dial up
access" or "direct access." Dial up access requires the use of: (i) paid access,
which  requires  the  customer  to pay the ITO for  the  cost of  accessing  the
Company's  services;  (ii)  callback,  which  enables the  customer to receive a
return call providing a dial tone originated from the Company's Omaha,  Nebraska
switching center; (iii) ITF, which accesses the Omaha, Nebraska switching center
by direct  dial;  or (iv) NTF,  which  accesses a local  switch in the  European
Network.  Customers  using direct access are connected to a Company  switch by a
dedicated leased line.

     Paid access  accounted for  approximately  75.1% of the  Company's  Western
European  revenue during 1996. To reduce the Company's  costs and improve usage,
the Company has evolved  from  callback and ITF access to access by NTF numbers,
paid access and,  ultimately,  in the case of VIACALL  Plus,  by direct  access.
Until regulatory  considerations permit, all customers outside of Europe, except
for  wholesale  customers,  are  expected to  continue  to access the  Company's
services through callback or ITF numbers.

                                       4
<PAGE>

The Company's principal services include:

     VIACALL - enables virtual private network calling to a pre-defined group of
locations  within a closed user group that can be modified as required,  subject
only to regulatory limitations.

     VIACALL  PLUS -  provides  dedicated  access  via a  leased  line  from the
customer to the Viatel  Network,  permitting  calling  without dialing access or
location codes.

     VIACALL  EXPRESS -  provides  a paid  (local)  access  or toll free  number
programmed  to dial an existing  phone  number or system,  generally  in another
country, without the need for special circuits or modifications.

     VIAWORLDFAX  - permits  calling  for  facsimile  and other  voice band data
services and is marketed exclusively in Western Europe. In the fourth quarter of
1996, the Company simplified access to this service through the use of automatic
number identification, where feasible.

     VIAISDNFAX - permits companies with ISDN lines and high-volume national and
international  long-distance  fax  communications  to  send  fax  communications
directly to a destination using abbreviated codes, if preferred.

     VIACONNECT - provides "anywhere to anywhere"  international callback access
through manual,  automatic,  X.25 or Internet initiated callback. These services
are also offered with ITF access, subject to pricing considerations.

     VIAGLOBE - provides calling card access from over 45 countries. In addition
to  offering   savings  over  the  calling  cards  of  AT&T   Corporation,   MCI
Telecommunications Corporation and other providers of credit-based international
calling cards, VIAGLOBE provides 24-hour operator assistance and speed dialing.

     VIACARD -  introduced  in the first  quarter of 1997,  VIACARD is a prepaid
international debit card which provides many of the same features as VIAGLOBE in
a  prepaid  environment.   The  numerous  benefits  and  opportunities  afforded
customers  with a prepaid card include  better  internal  cost  controls and the
ability to offer small denomination cards as promotional items.

     The Company  markets its services  under a number of registered  and common
law  service  marks and uses  various  registered  logos  including  "Viatel," a
federally registered service mark in the United States.

     In certain of the Company's  existing and target  markets there are laws or
regulations  that  either  prohibit  or limit,  or could be used to  prohibit or
limit,  certain of the transmission  methods by which the Company's services are
provided  and  the  provision  of  certain  of  the  Company's   services.   See
"--Government Regulation" and "Item 7.  Management's  Discussion and Analysis of
Financial  Condition and Results of  Operations  -- Certain  Factors Which Could
Affect the Company's Future Results -- Substantial Government Regulation."

THE VIATEL NETWORK

     The Viatel Network consists of central switching centers in London, England
and Omaha,  Nebraska and  switches,  each  connected to London by digital  fiber
optic  transmission  facilities,  in Amsterdam,  Antwerp,  Barcelona,  Brussels,
Frankfurt,  Madrid,  Milan, Paris and Rome. The Company's  ownership of switches
reduces its reliance on other carriers,  enables  routing of  telecommunications
traffic over multiple leased  transmission  lines, aids in controlling costs and
permits the compilation of call record data and other customer information.  The
Company is using the net proceeds from its initial public offering  completed in
October 1996 (the  "Offering")  for the purpose of upgrading  and  expanding the
Viatel Network. The Company has also used and intends to continue to use certain
of the  proceeds  from its  Offering to purchase  interests in fiber optic cable
systems in strategically  positioned  submarine cables. See "-- Expansion Plans"
and "Item 7.  Management's  Discussion and  Analysis of Financial  Condition and
Results of Operations  --Liquidity and Capital Resources -- Capital Expenditures
and Working Capital."

     To originate and  terminate  calls on the European  Network,  the Company's
switches must have access and egress into and from the public switched telephone
network ("PSTN")  through local  connectivity.  Each of the Company's  services,
other than  VIACALL  Plus,  requires  use of the PSTN to connect  with a Company
switch,  using  either a NTF number or paid  access.  For  VIACALL  Plus,  local
connectivity  is provided by  dedicated  leased  lines that connect a customer's
premises  directly to a Company switch. In each country in which ViaCALL Plus is
offered,  local

                                       5
<PAGE>

connectivity is currently  provided under tariffed  services offered by the ITO.
See "Item 7.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations -- Certain  Factors Which May Affect the Company's  Future
Results  --  Potential   Difficulties   Associated  With  Implementing  European
Expansion Strategy."

     THE EUROPEAN NETWORK.  The European Network currently consists of a central
switching  center in London and  switches in the nine  Western  European  cities
mentioned  above.  These  cities  were  chosen  as switch  locations  due to the
substantial  number of international  calls  originating  from such cities.  The
European Network has been primarily used to originate traffic in Western Europe.
The Company  anticipates  increasing  use of the  European  Network to terminate
traffic  in  Western  Europe,   particularly  if  settlement  agreements  become
obsolete.  See " -- Business  Strategy -- Capitalize on  Anticipated  Settlement
Agreement  Obsolescence" and "Item 7.  Management's  Discussion  and Analysis of
Financial  Condition  and Results of  Operations  -- Certain  Factors  Which May
Affect the Company's  Future Results -- Potential  Difficulties  Associated With
Implementing European Expansion Strategy."

     INTERNATIONAL PRIVATE LINE CIRCUITS. The Company's nine switches in Western
Europe are connected to the central  switching center in London by international
private line circuit ("IPLC").  IPLCs are permanent  point-to-point  connections
for voice and voice band data transmissions and are a less expensive alternative
to  PSTNs,  which  are  typically  controlled  by the local  ITOs.  The  Company
transmits call traffic to Omaha,  Nebraska from London and to London from Omaha,
Nebraska by an IPLC. The IPLCs connecting the Company's  switches to the central
switching  center in London are leased  directly,  or  indirectly  through third
parties, from the ITOs in the countries in which such calls originate.

     To reduce transmission costs and to provide additional capacity between the
United States and London,  the Company acquired an interest in fiber optic cable
systems in the portion of a transatlantic  digital fiber optic cable originating
in the United States for  transmission  of traffic between the United States and
Europe.  The Company has received  approval in principle  from the Department of
Trade and Industry in England in connection  with its  International  Facilities
License,  which would  allow the  ownership  of an  interest in a  transatlantic
digital  fiber  optic  cable  originating  in the United  Kingdom.  The  Company
anticipates  that this  license  will be  granted in April  1997  following  the
completion of a 28-day public comment period.  Once the Company has obtained its
International  Facilities   License,  it  intends  to  acquire  an  interest  in
transatlantic  digital  fiber  optic  cable  originating  in the United Kingdom.
The Company is also considering  acquiring an interest in cross-channel  digital
fiber optic cable originating in the United Kingdom. The Company has also become
a signatory to the  FIBEROPTIC  Link Around the Globe ("FLAG")  agreement.  FLAG
will provide the Company with added  bandwidth  capacity on a new  transoceanic,
intercontinental fiber system, currently under construction.

     INTELLIGENT SWITCHES.  The Viatel Network utilizes  "intelligent  switches"
which  incorporate  proprietary  software to achieve least cost routing ("LCR"),
the process by which the Company  optimizes the routing of calls over the Viatel
Network for more than 230 countries and  territories.  LCR allows calls that are
not routed  over the Viatel  Network to be routed  directly  from the  Company's
switches  through  the PSTN to their  destinations  at the lowest  rates.  These
switches also enable the Company to efficiently  perform  billing  functions and
account  activation  and to  render  value-added  services.  See  "--Information
Systems."

     The Viatel Network uses high  capacity,  programmable  switching  platforms
designed  to  deploy   network-based   intelligent  services  quickly  and  cost
effectively.  The switches are modular and  scaleable and  incorporate  advanced
technologies such as Integrated Services Digital Network ("ISDN"),  hierarchical
call control and  simplified  network  management  protocol  network  management
software.  These  switches can also provide a bridge  between older and emerging
standards.  As the Viatel  Network  continues to evolve,  the installed  base of
switches can be upgraded  easily to create a cost effective,  scaleable  service
switching  point  in an SS7 (an  industry  standard  signaling  protocol)  based
network.

     The Company is in the process of installing  international gateway switches
in  London  and New  York  and  anticipates  that  these  switches  will  become
operational during the second and third quarters of 1997, respectively.

     REDUNDANCY.  In  general,  the  Company  relies  upon the  PSTN to  provide
redundancy  in the event of  technical  difficulties  with the  Viatel  Network.
However, the Company maintains two facilities in Omaha, Nebraska to provide some
degree of  redundancy  in its back  office  operations,  billing  and  switching
systems. The Company believes that the strategy of using the PSTN for redundancy
is more cost-effective than building its own redundant capacity,  although there
can be no assurance that this will be the case in the future. To the extent that
customer  demand over the European  Network  exceeds the Company's  transmission
capacity,  the Company may elect or be required to route  overflow  traffic over
the PSTN, and the Company may experience  reduced  margins and/or losses on such
calls. The Company's strategy is to monitor its anticipated  traffic volume on a
regular basis and to increase IPLC and in-country  private line circuit capacity
before the  capacity  limitations  of such  circuits  are reached.  See "Item 7.

                                       6
<PAGE>




Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations -- Certain  Factors Which May Affect the Company's  Future Results --
Potential   Difficulties   Associated  With  Implementing   European   Expansion
Strategy."

     ECONOMIC BENEFITS OF THE NETWORK. The economic benefits to Viatel of owning
and operating its own network arise principally from reduced transmission costs.
Calls that are not routed  through the  network  generate  significantly  higher
variable costs because they are connected using relatively expensive ITF numbers
or callback. In contrast, because the Viatel Network has significant fixed costs
associated  with its  operations,  consisting  primarily  of leased  line rental
charges, local connectivity and facility/network  management costs, calls routed
through the Viatel Network have lower variable costs than  off-network  traffic.
Although  the  current  traffic  volume  through  the  European  portion  of the
Company's network is too low to achieve desired economies of scale, transmission
costs are expected to decline as a percentage of revenue as call traffic through
the European Network  increases.  This economic benefit,  however,  is primarily
limited to traffic  which either  originates  or  terminates in a city where the
Company has a switch or POP. If a switch or POP does not exist in an origination
or destination  city,  the Company  transports the call over the PSTN, at higher
transmission costs and reduced margins.  Accordingly, as the European Network is
expanded,  the  Company  anticipates  being  able to serve a  greater  number of
customers on a more cost effective  basis.  In the future,  the Company  expects
that most of its European  calling  traffic will originate or terminate  through
the European Network both for international and national long distance calls. In
addition,  as traffic  patterns  warrant,  the Company expects to further reduce
transmission  costs by connecting  switches directly to one another with private
lines, bypassing the Company's switching centers in London and Omaha.

     EXPANSION  PLANS.  The Company intends to use a significant  portion of the
net proceeds from the  Company's  initial  public  offering in October 1996 (the
"Offering")  to expand and  upgrade  the Viatel  Network.  The Company is in the
process  of  upgrading  its  switch  in  London  and  its  POP  in New  York  to
international gateway switches. When a switch is replaced, it will be redeployed
to upgrade POPs in other strategic locations.  In the first quarter of 1997, the
Company  installed  a  switch  in  Antwerp.  The  Company  has also purchased an
interest in fiber optic cable systems in the portion of a transatlantic  digital
fiber optic cable  originating in the United States for  transmission of traffic
between  the  United  States and  Europe.  Once the  Company  has  obtained  its
International   Facilities  License,  it  intends  to  acquire  an  interest  in
transatlantic  digital fiber optic cable originating in the United Kingdom.  The
Company is also considering acquiring an interest in cross-channel digital fiber
optic cable  originating in the United  Kingdom.  To further extend the European
Network,  the Company also anticipates  installing switches in Vienna and Zurich
and POPs in up to 17 Western European cities in 1997,  including  Berlin,  Lyon,
Rotterdam  and  Valencia.   Expanding  the  European  Network  to  include  such
additional major European business centers should ultimately reduce transmission
costs and increase the addressable  market of the European Network. See "Item 7.
Management's  Discussion and Analysis of  Financial  Condition  and  Results  of
Operations  --Certain  Factors Which May Affect the Company's  Future Results --
Potential   Difficulties   Associated  With  Implementing   European   Expansion
Strategy."

INFORMATION SYSTEMS

     The Company  believes that integrated and reliable  billing and information
systems  are key  elements  for  growth and  success  in the  telecommunications
industry.  Accordingly,  the Company has made significant investments to acquire
and implement sophisticated information systems which enable the Company to: (i)
monitor and respond to customer needs by developing new and customized services;
(ii) manage LCR; (iii) provide customized billing information; (iv) provide high
quality customer service; (v) detect and minimize fraud; (vi) verify payables to
suppliers;  and (vii) rapidly integrate new customers. The Company believes that
its network  intelligence,  billing and financial  reporting systems enhance its
ability  to   competitively   meet  the   increasingly   complex  and  demanding
requirements of the international and national long distance markets.  While the
Company believes that such systems are currently  sufficient for its operations,
such network intelligence,  selling and financial reporting systems will require
enhancements and ongoing investments. See "Item 7.  Management's  Discussion and
Analysis of Financial  Condition and Results of  Operations  -- Certain  Factors
Which May  Affect  the  Company's  Future  Results --  Dependence  on  Effective
Information Systems."

     The Company  currently has a turnaround time of  approximately 24 hours for
new  account  entry, subject  to  credit  approval. The Company's billing system
provides  multicurrency  billing,  itemized  call detail,  city level detail for
destination  reporting and electronic output for select accounts.  Customers are
provided  with  several  payment  options,   including   automated  credit  card
processing and automated direct debiting.

                                       7
<PAGE>

     The   Company    has    developed    proprietary    software   to   provide
telecommunications  services and render  customer  support.  In contrast to most
traditional  telecommunications  companies,  the  software  used to support  the
European  Network  resides  outside of the  switches  and,  therefore,  does not
currently  rely on third party switch  manufacturers  for upgrades.  The Company
believes  its  software  configuration  facilitates  the rapid  development  and
deployment  of  new  services  and  provides  the  Company  with  a  competitive
advantage.  Each switch has a call detail  recording  function which enables the
Company to: (i) achieve  accelerated  collection  of call  records;  (ii) detect
fraud and  unauthorized  usage;  and  (iii)  permit  rapid  call  detail  record
analysis. See "-- The Viatel Network --Intelligent Switches."

     The Company  also uses its  proprietary  software to assist it in analyzing
traffic  patterns  and  determining  network  usage  and busy  hour  percentage,
originating  traffic by switching  center,  terminating  traffic by supplier and
originating  traffic by customer.  This data is utilized to optimize LCR,  which
may result in call traffic being  transmitted  over the  Company's  transmission
facilities,  other  carriers'  transmission  facilities or a combination of such
facilities.  If  traffic  cannot be  handled  over the least  cost  route due to
overflow, the LCR system is designed to transmit the traffic over the next least
cost route. The LCR system chooses among the following variables to minimize the
cost of a long distance call: (i) over 15 different suppliers; (ii) 24 different
time zones; and (iii) multiple choices of terminating  carrier per country.  The
performance  of the LCR  system is  verified  based on a daily  overflow  report
generated by the  Company's  network  traffic  management  and a  weekly/monthly
average  termination cost report generated by the Company's billing system.  See
"Item 7.  Management's   Discussion  and  Analysis of  Financial  Condition  and
Results of Operations -- Certain  Factors Which May Affect the Company's  Future
Results -- Dependence on Effective Information Systems."

SALES AND MARKETING; CUSTOMERS

     From 1991 to 1994, the Company's sales and marketing efforts were conducted
by independent sales  representatives in each of its markets.  In late 1994, the
Company  began  establishing  its own direct  sales  forces in  certain  Western
European and Latin American countries to take greater control over the sales and
marketing  functions  and  to  provide  a  higher  level  of  customer  service.
Currently,  the  Company has direct  sales  forces in the nine cities in Western
Europe in which it has switches.  The Company intends to establish  direct sales
forces  in other  key  Western  European  cities  and to  utilize  non-exclusive
independent  representatives  to augment the efforts of its direct sales forces.
This strategy is expected to provide the Company with the benefits  derived from
a direct sales  organization while minimizing the organizational and other fixed
costs associated with such an undertaking. See "Item 2.  Legal Proceedings."

     The initial phase of development of the Company's direct sales organization
in a given  country  involves  setting up a team of  salespeople  led by a sales
manager and supported by a centralized  telemarketing and customer service team.
Over time, the Company expects each country in which it provides  services to be
served by multiple sales teams and independent sales agents under the leadership
of a country manager and a central telemarketing team responsible for generating
new sales leads. The Company does not engage in general advertising, but instead
uses local advertising directed to its target customer base.

     The Company's  principal  target market consists of small and  medium-sized
businesses. This market includes trading companies, financial institutions, call
centers and import-export companies, for which long distance  telecommunications
service  represents a  significant  business  expense.  The Company also targets
carriers and other resellers. The Company has four sales professionals dedicated
to marketing  and  maintaining  the Company's  relationships  with its wholesale
customers in the United States and in the United Kingdom. Currently, no customer
of the Company individually accounts for more than 10% of the Company's revenue.

     In  addition  to  providing  long  distance  services  to third  party call
centers,  the Company  believes  that it can  profitably  establish its own call
centers within certain  Western  European  cities which will provide the VIACALL
Plus service.  Call centers are primarily used by students,  travelers and other
expatriates as an alternative to coin telephone,  callback or third party billed
calls. The Company believes that the  establishment of its own call centers will
enable  it to  earn  high  margin  revenue  while  controlling  credit  problems
associated with third party call centers.

     The Company prices its retail services generally at a discount to the ITOs'
prices in the various geographic markets.  For its retail services,  the Company
offers discounts to the prices charged by the ITO in each market which typically
range from approximately  10.0% to approximately  20.0% for international  calls
and from approximately

                                       8
<PAGE>




10.0% to approximately 40.0% for intercontinental  calls. In those markets where
the Company currently  provides national long distance  services,  the discounts
typically range from approximately 8.0% to approximately 28.0%.

     The Company generally sets its wholesale rates on a case by case basis with
an overall margin  objective based upon a customer  traffic  profile.  The rates
charged are generally  priced at or below the market price of the leading United
States international facilities-based carriers, but the Company does not offer a
standard discount relative to any major carrier.

CARRIER CONTRACTS

     The Company has entered into contracts to purchase switched minute capacity
from various  domestic and foreign  carriers and depends on such  contracts  for
origination  and  termination  of traffic  on the Viatel  Network as well as for
resale of such  capacity  to others.  Carrier  costs  constitute  a  significant
portion of the  Company's  variable  costs.  Pursuant  to these  contracts,  the
Company  obtains  guaranteed  rates,  which are generally  more  favorable  than
otherwise would be available, by committing to purchase switched minute minimums
from such  carriers.  If the Company fails to meet its switched  minute  minimum
requirements  under a carrier  contract,  it could  still be required to pay its
minimum monthly commitment as a penalty. The Company's aggregate minimum monthly
commitments are approximately $1.0 million,  which represents  approximately 32%
of the Company's  monthly variable  transmission  expense.  The Company does not
believe  that the loss of any one  supplier  or  contract  would have a material
adverse  impact on the  Company's  business,  financial  condition or results of
operations. See "-- Competition."

COMPETITION

     The international  telecommunications  industry is highly competitive.  The
Company's  success  depends  upon its ability to compete with a variety of other
telecommunications  providers in each of its markets,  including the  respective
ITO in each  country in which the Company  operates and global  alliances  among
some  of  the  world's  largest  telecommunications  carriers.  Other  potential
competitors include cable television  companies,  wireless telephone  companies,
electric and other utilities with rights of way,  railways,  microwave  carriers
and  large  end  users  which  have  private  networks.  The  intensity  of such
competition  has  recently   increased  and  the  Company   believes  that  such
competition will continue to intensify as the number of new entrants  increases.
Many of the  Company's  current  or  potential  competitors  have  substantially
greater  financial,  marketing  and other  resources  than the  Company.  If the
Company's  competitors devote significant  additional resources to the provision
of  international or national long distance  telecommunications  services to the
Company's target customer base of small and medium-sized businesses, such action
could  have a  material  adverse  effect on the  Company's  business,  financial
condition  and results of  operations,  and there can be no  assurance  that the
Company  will be able to  compete  successfully  against  such  new or  existing
competitors.  See "Item 7.  Management's   Discussion  and Analysis of Financial
Condition  and Results of  Operations  -- Certain  Factors  Which May Affect the
Company's Future Results -- Competition."

     Competition for customers in the  telecommunications  industry is primarily
based on price and,  to a lesser  extent,  on the type and  quality of  services
offered.  The Company prices its services primarily by offering discounts to the
prices  charged by its  competitors.  The Company has no control over the prices
set by its competitors, and some of the Company's competitors may be able to use
their financial  resources to cause severe price competition in the countries in
which the Company operates.  Although the Company does not believe that there is
an economic  incentive for its competitors to pursue such a pricing  strategy or
that its competitors are likely to engage in such a course of action,  there can
be no assurance  that severe price  competition  will not occur.  Any such price
competition  would have a material  adverse  effect on the  Company's  business,
financial  condition  and  results  of  operations.  Additionally,   intensified
competition  in  certain of the  Company's  markets  will  cause the  Company to
continue to reduce its prices. For example, the Company recently reduced certain
rates which it charges to retail  customers  in  response to pricing  reductions
enacted by certain ITOs. Such price reductions may reduce the Company's  revenue
and margins. The Company has experienced, and expects to continue to experience,
declining revenue per billable minute in all of its markets, in part as a result
of increasing worldwide competition within the telecommunications industry.

     In response to  deregulation,  additional  competitors of various sizes are
beginning to emerge in Western  Europe.  The  Company's  services are  currently
marketed to small and  medium-sized  businesses,  however,  and thus the Company
generally does not directly compete with mega-carrier  alliances which generally
target  larger  customers.  The  Company's  VIACALL  Plus service is targeted at
medium-sized businesses and may in the future compete with

                                       9
<PAGE>



some services offered by the mega-carrier  alliances.  In addition, many smaller
carriers have  emerged,  most of which  specialize in offering  intercontinental
telephone  services  utilizing  dial up access  methods,  and some of which have
begun  to  build  networks  similar  to the  European  Network.  Although  these
competitors  have  focused  primarily  on  London,  several  have  expressed  an
intention to build networks across Europe in the future.

     The Company  believes  that the ITOs  generally  have  certain  competitive
advantages due to their control over local  connectivity and apparent close ties
with national regulatory authorities. The Company also believes that, in certain
instances,  some  regulators have shown a reluctance to adopt policies and grant
regulatory  approvals that would result in increased  competition  for the local
ITO. The Company  believes that, at least in the  short-term,  the ITOs will not
concentrate on marketing their services to the Company's small and  medium-sized
business customer base. As a result,  the Company does not believe that the ITOs
will seek to  pressure  national  regulators  to prevent it from  providing  its
services;  however,  there can be no assurance that the ITOs will not apply such
pressure  in  the  future.  If the  ITOs  were  to  successfully  pressure  such
regulators,   the  Company  could  be  denied  regulatory  approval  in  certain
jurisdictions  in which its  services  would  otherwise  be  permitted,  thereby
requiring the Company to seek judicial or other legal  enforcement  of its right
to  provide  services.  Any delay in  obtaining  approval,  or failure to obtain
approval,  could  have a  material  adverse  effect on the  Company's  business,
financial condition and results of operations.

     The Company believes that it has encountered  anti-competitive  behavior on
the part of certain ITOs. If the Company encounters anti-competitive behavior in
countries in which it operates or if the ITO in any country in which the Company
operates uses its competitive  advantages to the fullest  extent,  the Company's
business,  financial  condition  and results of  operations  could be materially
adversely  affected.  See  "Item 7.  Management's   Discussion  and  Analysis of
Financial  Condition  and Results of  Operations  -- Certain  Factors  Which May
Affect the Company's Future Results -- Competition."

GOVERNMENT REGULATION

     OVERVIEW.  The  Company's  provision of  international  and  national  long
distance telecommunications services is heavily regulated. Many of the countries
in which the Company provides, or intends to provide, services prohibit or limit
the services which the Company can provide and the transmission methods by which
it can provide such services.  For example,  in the United States, the Company's
authority  to  engage  in the  resale  of  international  private  lines for the
provision of switched  services between the United States and the United Kingdom
and between the United States and Canada is pursuant to the  authorization  (the
"Section  214 Private  Line  Authorization")  granted  under  Section 214 of the
Communications Act of 1934, as amended (the  "Communications  Act"). The Company
is additionally authorized to provide these services,  among others, pursuant to
the Section 214 Global Authorization (as hereinafter defined).  Certain rules of
the Federal  Communications  Commission  ("FCC")  prohibit  the Company from (i)
transmitting  calls  routed over the  Company's  leased line  between the United
States and the United  Kingdom  onward over the European  Network (other than to
countries which the FCC deems to be "equivalent,"  currently the United Kingdom,
Canada,  Sweden  and New  Zealand)  or (ii)  transmitting  calls  from  European
countries  (other than those deemed to be equivalent)  over the European Network
and then onward over its leased  line  between the United  States and the United
Kingdom. If a violation of FCC rules concerning resale of international  private
line service were found to exist and to be  sufficiently  severe,  the FCC could
impose sanctions and penalties,  including revocation of the Section 214 Private
Line Authorization or the Section 214 Global Authorization.

     In addition,  the Company  provides its customers  located  outside the EU,
and, to a lesser degree, within the EU, with access to its services  through the
use of callback. A substantial number of countries have prohibited certain forms
of callback as a mechanism to access the Company's services. This has caused the
Company to cease providing  services in some jurisdictions and may require it to
do so in other  countries in the future.  There can be no assurance that certain
of the Company's  services and  transmission  methods will not continue to be or
will not become  prohibited  in certain  jurisdictions,  and,  depending  on the
jurisdictions,  services and  transmission  methods  affected,  there could be a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.  See "Item 7.  Management's  Discussion  and  Analysis of
Financial  Condition  and Results of  Operations  -- Certain  Factors  Which May
Affect the Company's Future Results -- Substantial Government Regulation."

     Local laws and regulations differ  significantly among the jurisdictions in
which the Company operates,  and, within such jurisdictions,  the interpretation
and enforcement of such laws and regulations can be unpredictable.  For example,
EU  member  states  have  inconsistently  and,  in  some  instances,   unclearly
implemented  the 1990 EU directive  (the "Services  Directive")  under which the
Company  provides  voice  services  for closed user  groups  ("CUGs") in Western
Europe.  As a result,  some EU member  states may limit,  constrain or otherwise
adversely

                                       10
<PAGE>

affect  the  Company's  ability  to provide  certain  services.  There can be no
assurance  that  certain EU member  states  will  implement,  or will  implement
consistently,  the Services Directive or the Full Competition  Directive adopted
by the EU in March  1996 (the  "Full  Competition  Directive"),  and  either the
failure to implement or inconsistent  implementation  of such  directives  could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

     UNSETTLED  NATURE OF  REGULATORY  ENVIRONMENT.  The Company has pursued and
expects to  continue  to pursue a strategy  of  providing  its  services  to the
maximum extent it believes permissible under applicable laws and regulations. An
example is the Company's aggressive  interpretation of indefinite or unfavorable
laws regarding its provision of services utilizing the callback access method in
Colombia,  where the  Colombian  Ministry  of  Communications  has  stated  that
callback access is not permitted and has so notified the FCC, and in other Latin
American countries where services utilizing such access method may not currently
be permitted.  The Company  believes that it is not providing any  impermissible
service and continues to offer services which utilize callback access.

     The Company's aggressive strategy may result in the Company's (i) providing
services or using transmission methods that violate local laws or regulations or
(ii) failing to obtain formal approvals required under such laws or regulations.
Where the Company is found to be in violation of local laws and regulations,  it
usually  seeks to  modify  its  operations  so as to  comply  with such laws and
regulations.  There can be no assurance,  however,  that the Company will not be
subject to fines,  penalties or other  sanctions as a result of past  violations
even  though  such  violations  were  corrected.  In  addition,  if the  Company
determines,  following  consultation with regulatory  counsel in a jurisdiction,
that it has a legal  basis  for  doing  so, it may  persist  in  providing  such
services,  using such transmission methods or otherwise continuing such actions.
If the  Company's  interpretation  of  applicable  laws and  regulations  proves
incorrect,  it  could  lose,  or be  unable  to  obtain,  regulatory  approvals,
including the Section 214 Private Line  Authorization,  the Section 214 Switched
Authorization,  the  Section  214 Global  Authorization  or the  Section  214 UK
Facilities  Authorization  (each as  hereinafter  defined)  necessary to provide
certain of its  services  or to use  certain of its  transmission  methods.  The
Company also could have substantial monetary fines and penalties imposed against
it. To date,  the Company has not been subject to any fines,  penalties or other
sanctions  nor has it been the  subject  of any  legal or  regulatory  action or
inquiry.  In addition,  the Section 214  Switched  Authorization  requires  that
services be provided "in a manner  consistent  with the laws and  regulations of
the countries in which [the Company]  operates."  There can be no assurance that
the Company has accurately  interpreted or will accurately  interpret applicable
laws and regulations in particular jurisdictions.

     Moreover, the Company may be incorrect in its assumption that (i) EU member
states will abolish on a timely basis the  respective  ITO's monopoly to provide
Voice  Telephony  within and  between  such  member  states,  as required by the
Services  Directive and the Full Competition  Directive,  (ii) deregulation will
continue  to occur or (iii) it will be allowed  to  continue  to provide  and to
expand its services.  The Company's  provision of services in Europe may also be
affected  if  any  EU  member  state  imposes  greater  restrictions  on  non-EU
international  service  than on such  service  within  the EU.  There  can be no
assurance that the United States or foreign jurisdictions will not adopt laws or
regulatory  requirements  that will adversely affect the Company.  Additionally,
there can be no  assurance  that  future  United  States or foreign  regulatory,
judicial or legislative  changes will not have a material  adverse effect on the
Company or that  regulators or third parties will not raise material issues with
regard to the Company's  compliance with applicable laws or regulations.  If the
Company is unable to provide the services it is  presently  providing or intends
to provide or to use its existing or  contemplated  transmission  methods due to
its  inability  to  receive  or retain  formal or  informal  approvals  for such
services or transmission  methods, or for any other reason related to regulatory
compliance or the lack thereof, such events could have a material adverse effect
on the Company's business,  financial  condition and results of operations.  The
Company  does not  believe,  however,  that an adverse  determination  as to the
permissibility  of  any  individual  service  offered  by  the  Company  in  any
particular  jurisdiction  would have a material adverse  long-term effect on its
business.  See "Item 7.  Management's  Discussion   and  Analysis  of  Financial
Condition  and Results of  Operations  -- Certain  Factors  Which May Affect the
Company's Future Results -- Substantial Government Regulation."

     REGULATORY FRAMEWORK.  A summary discussion of the regulatory frameworks in
certain  geographic  regions in which the Company  operates or has  targeted for
penetration is set forth below. This discussion is intended to provide a general
outline of the more relevant  regulations and current  regulatory posture of the
various jurisdictions and is not intended as a comprehensive  discussion of such
regulations or regulatory posture.

     EUROPE.  In Europe,  the regulation of the  telecommunications  industry is
governed at a supra-national level by the EU (consisting of the following member
states: Austria,  Belgium,  Denmark,  Finland, France, Germany, Greece,

                                       11
<PAGE>

Ireland, Italy,  Luxembourg,  the Netherlands,  Portugal,  Spain, Sweden and the
United  Kingdom) which is responsible  for creating  pan-European  policies and,
through  legislation,  a  regulatory  framework  to ensure an open,  competitive
telecommunications  market.  The EU was  established  by the  Treaty of Rome and
subsequent   conventions  and  is  authorized  by  such  treaties  to  issue  EU
"directives."  EU member  states are  required  to  implement  these  directives
through  national  legislation.  If an EU  member  state  fails  to  adopt  such
directives,  the European Commission may take action,  including referral to the
European Court of Justice, to enforce the EU directives.

     In 1990,  the EU issued the  Services  Directive  requiring  each EU member
state to abolish existing monopolies in  telecommunications  services,  with the
exception of Voice Telephony. The effect of the Services Directive was to permit
the competitive provision of all services other than Voice Telephony,  including
value-added  services and voice services within CUGs.  However, as a consequence
of local  implementation  of the  Services  Directive  through  the  adoption of
national legislation,  there are differing  interpretations of the definition of
prohibited  Voice Telephony and permitted  value-added  and CUG services.  Voice
services which use leased lines for customer  access,  such as VIACALL Plus, are
permissible in all EU member states in which the Company currently  conducts its
business.  The  European  Commission  has  generally  taken a narrow view of the
services  classified as Voice Telephony declaring that voice services may not be
reserved  to the ITOs if (i)  dedicated  customer  access is used to provide the
service,  (ii) the service  confers new  value-added  benefits on users (such as
alternative  billing  methods) or (iii) calling is limited by a service provider
to a group having legal, economic or professional ties.

     In March 1996, the EU adopted the Full Competition Directive containing two
key  provisions  which  required  EU  member  states to allow  the  creation  of
alternative  telecommunications  infrastructures  by July  1,  1996,  and  which
reaffirmed the obligation of EU member states to abolish the ITOs' monopolies in
Voice  Telephony by 1998. The Full  Competition  Directive  encouraged EU member
states  to  accelerate  liberalization  of Voice  Telephony.  To  date,  Sweden,
Finland,  Denmark  and the  United  Kingdom  have  liberalized  facilities-based
services  to  all  routes.  However,  Greece, Ireland, Portugual and Spain, each
of which has a less developed  network,  and Luxembourg,  which has a very small
network,  was granted the right to delay the  abolition  of the Voice  Telephony
monopoly  until 2003 and 2000,  respectively.  Ireland,  Portugal and Luxembourg
have received  deregations  with respect to Voice  Telephony  until 2000,  Spain
until December 1998 and Greece until 2003.

     Each EU member state in which the Company  currently  conducts its business
has a different  regulatory regime and such differences are expected to continue
beyond  January  1998.  The  requirements  for the  Company to obtain  necessary
approvals vary considerably from country to country.  The Company believes that,
to the extent  required,  it has either  filed  applications,  received  comfort
letters or obtained licenses from the applicable regulatory authorities.

     UNITED STATES. The Company's  provision of international  service to, from,
and through the United States is subject to  regulation by the FCC.  Section 214
of the Communications Act requires a company to make application to, and receive
authorization  from, the FCC to, among other things,  resell  telecommunications
services of other U.S. carriers with regard to international calls. In May 1994,
the FCC authorized the Company pursuant to Section 214 of the Communications Act
(the  "Section  214  Switched   Authorization")   to  resell   public   switched
telecommunications  services of other U.S.  carriers.  The Section 214  Switched
Authorization  requires that services be provided in a manner that is consistent
with the laws of countries in which the Company  operates.  As described  above,
the  Company's  aggressive  regulatory  strategy  could result in the  Company's
providing  services that ultimately may be considered to be provided in a manner
that is  inconsistent  with local law.  If the FCC finds  that the  Company  has
violated the terms of the Section 214 Switched Authorization,  it could impose a
variety of sanctions on the Company,  including fines,  additional conditions on
the Section 214 Switched Authorization, cease and desist or show cause orders or
the revocation of the Section 214 Switched Authorization, the latter of which is
usually  imposed  only  in the  case  of  serious  violations.  The  FCC has the
authority  to take the same action with  respect to the Section 214 Private Line
Authorization,  the  Section  214 Global  Authorization  and the  Section 214 UK
Facilities  Authorization.  Depending upon the sanction  imposed,  such sanction
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.  See "Item 7.  Management's  Discussion and
Analysis of Financial Condition and Results of Operation --Certain Factors Which
May Affect the Company's Future Results -- Substantial  Government  Regulation."
As  previously  noted,  the FCC has also  granted the  Section 214 Private  Line
Authorization. Additionally, in October 1996 the Company received final approval
for  another   Section  214   authorization   from  the  FCC  to  provide   both
facilities-based  services  and resale  services  (including  both

                                       12
<PAGE>

the  resale  of  switched  services  and the  resale  of  private  lines for the
provision of switched  services) to all  permissible  international  points (the
"Section 214 Global  Authorization").  Finally, in October 1996 the Company also
received final approval for another  Section 214  authorization  from the FCC to
provide  facilities-based  service  between  the  United  States  and the United
Kingdom  over the  CANUS-1 and  CANTAT-3  cable  systems  (the  "Section  214 UK
Facilities Authorization").

     In order to conduct its business  involving the origination and termination
of calls in the United  States,  the Company must use leased  lines.  In October
1996, the Company obtained the Section 214 Private Line  Authorization  from the
FCC to resell  international  private line service between the United States and
the United Kingdom,  with the private line  interconnected  to the PSTN, for the
purpose of providing switched telecommunications services. The FCC restricts the
use of the leased line between the United  States and the United  Kingdom to the
handling of traffic  that  enters or exits the United  Kingdom end of the leased
line via the PSTN. The FCC currently prohibits the Company from using the leased
line  between  the United  States and the United  Kingdom to carry to the United
States any calls that originate on the European  Network at switches  outside of
the United  Kingdom.  The FCC also  prohibits  the Company from using the leased
line  between  the  United  States  and  the  United  Kingdom  to  carry  United
States-originated  calls that will be handed  off to the  European  Network  for
delivery to  countries  on the  European  continent.  The FCC has  imposed  this
prohibition    because   no    continental   EU   member   state   offers   U.S.
telecommunications   service  providers   competitive   opportunities  that  are
"equivalent" to those available in the United States. To date, the FCC has found
that only Canada, the United Kingdom, Sweden and New Zealand are "equivalent."

     LATIN AMERICA.  The Company is subject to a different  regulatory regime in
each country in Latin America in which it conducts  business.  Local regulations
determine issues significant to the Company's business, including whether it can
obtain authorization to offer transmission of voice and voice band data directly
or through callback.  In general,  competition is restricted in the region, with
the  result  that the  Company's  ability  to offer  such  service  is  limited.
Regulations  governing  enhanced  services  (such as facsimile and voicemail and
data  transmission)  tend  to be  more  permissive  than  those  covering  Voice
Telephony.

     Some countries in Latin America oppose the provision of callback. The Latin
American  countries in which the Company  conducts  the greatest  portion of its
business are Brazil,  Colombia and Argentina.  In Brazil,  callback is currently
permissible  but the Company  has  experienced  opposition  in the past and will
likely  experience such opposition in the future.  In Colombia,  the Ministry of
Communications has stated that callback access is prohibited and has so notified
the FCC. The Company does not believe  that the Ministry of  Communications  has
the  requisite  authority  to regulate in this area,  and this is the subject of
litigation  brought  by a third  party  in the  Colombian  courts.  At  present,
regulations  appear  to  permit  callback  access  in  Argentina.  However,  the
regulatory  agency in  Argentina  has changed its  position  regarding  callback
access on several occasions in the past.

EMPLOYEES

     As  of  December  31,  1996,  the  Company  had  238  full-time  employees,
approximately 108 of whom were engaged in sales, marketing and customer service.
None  of  the  Company's  employees  are  covered  by  a  collective  bargaining
agreement.   Management  believes  that  the  Company's  relationship  with  its
employees is good.

ITEM 2.  PROPERTIES.

     The Company currently  occupies  approximately  6,000 square feet of office
space in New York, New York, which serves as the Company's  principal  executive
office. The lease has an annual rental obligation of approximately  $174,300 and
expires  on  January  31,  2001.   The  Company  also  leases  an  aggregate  of
approximately  17,850  square  feet of  office  space  at two  sites  in  Omaha,
Nebraska,  which serve as the Company's  operations center and its United States
switching  center.  The  lease  terms of the two sites  have an annual  combined
rental  obligation  of  approximately  $108,000 and expire on March 31, 1999 and
July 31,  2000.

     The Company also leases  office space in various  cities in Europe where it
maintains  sales  offices  with annual  rents  ranging  from  $17,700 in Rome to
$173,400 in Frankfurt (based on foreign currency  exchange rates in effect as of
March 24, 1997).  The  Company's  aggregate  annual  rental  obligations for its
European offices is approximately  $709,600 (based on foreign currency  exchange
rates in effect as of March 24, 1997).

                                      13
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

     On January 23, 1996, the Company's former independent sales  representative
in Madrid (the "Spanish  Representative")  commenced an  arbitration  proceeding
before the American Arbitration Association in New York claiming a breach by the
Company  of a  contract  between  the  Spanish  Representative  and the  Company
relating to the improper  termination  of such  agreement  by the  Company.  The
Spanish  Representative is seeking $5.8 million in damages. The Company believes
that it has  meritorious  defenses  against  each of the  claims  alleged by the
Spanish  Representative.   The  Company  is  vigorously  pursuing  all  defenses
available to it.

     The  Company  is also  involved  from  time to  time  in  other  litigation
incidental  to the  conduct  of its  business.  The  Company  believes  that any
potential   adverse   determination   in  the  action  brought  by  the  Spanish
Representative  or an adverse decision in any other pending action will not have
a material  adverse  effect on the Company's  business,  financial  condition or
results of operations.


ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     None.

EXECUTIVE OFFICERS OF THE COMPANY

     The  following  table sets forth  certain  information  with respect to the
executive officers of the Company as of March 24, 1997.

NAME                      AGE             POSITION
----                      ---             --------

Martin Varsavsky........  36  Chairman of the Board, Chief Executive Officer and
                              Director
Michael J. Mahoney......  37  President, Chief Operating Officer and Director
Allan L. Shaw...........  33  Vice President, Finance; Chief Financial Officer;
                              Treasurer and Director
Lawrence G. Malone......  45  Vice President, Managing Director,
                                Intercontinental
Morten Steen-Jorgensen..  33  Vice President, Managing Director, Europe
Sheldon M. Goldman......  37  Vice President, Business & Legal Affairs,
                                Assistant Secretary
Mark St. J. Courtney....  37  European General Counsel and Secretary
Paolo Di Fraia..........  36  European Finance Director and Assistant Treasurer

     MARTIN VARSAVSKY.  Mr. Varsavsky,  a founder of the Company,  has served as
Chairman of the Board and Chief Executive Officer of the Company since September
1996 and as Chief  Executive  Officer and director of the Company since February
1991. Mr. Varsavsky was also President of the Company from February 1991 through
September 1996. In 1985, Mr. Varsavsky founded both Urban Capital Corporation, a
commercial  real  estate  development   company,   and  Medicorp   Sciences,   a
biotechnology  company which  conducts AIDS  research.  Mr.  Varsavsky  does not
currently  hold an officer  position  with either Urban Capital  Corporation  or
Medicorp  Sciences.  Mr.  Varsavsky  is related by  marriage  to Mr. Juan Manuel
Aisemberg, a principal stockholder of the Company.

     MICHAEL J. MAHONEY. Mr. Mahoney has served as President and Chief Operating
Officer of the  Company  since  September  1996 and as a director of the Company
since 1995.  Mr.  Mahoney was also  Executive  Vice  President,  Operations  and
Technology  of the  Company  from  July  1994 to  September  1996  and  Managing
Director,  Intercontinental  of the Company from January 1996 to September 1996.
From August 1990 to June 1994, Mr. Mahoney was employed by SITEL Corporation,  a
telemarketing services company, most recently as President, Information Services
Group.  From  August  1987 to August  1990,  Mr.  Mahoney  was  employed by URIX
Corporation,  a manufacturer of  telecommunications  hardware and software, in a
variety of sales and marketing positions.

     ALLAN L. SHAW.  Mr.  Shaw has served as Vice  President,  Finance and Chief
Financial  Officer of the Company  since  January  1996 and as  Treasurer of the
Company since  September  1996. Mr. Shaw has served as a director of the Company
since June 1996.  Prior to becoming the Company's  Vice  President,  Finance and
Chief Financial

                                       14
<PAGE>

Officer,  Mr. Shaw served as Corporate  Controller  of the Company from November
1994 to December 1995.  From August 1987 to November 1994, Mr. Shaw was employed
by Deloitte & Touche LLP,  most  recently as a Manager.  Mr. Shaw is a Certified
Public Accountant and a member of the American Institute, United Kingdom Society
and New York State Society of Certified Public Accountants.

     LAWRENCE G. MALONE.  Mr.  Malone has served as Vice  President and Managing
Director,  Intercontinental  of the Company since  September  1996 and served as
Vice President of Sales for  Carriers/Wholesale of the Company from January 1995
to September  1996. From December 1993 to December 1994, Mr. Malone was employed
by  Frame  Relay  Technologies,  a  communications  equipment  manufacturer,  as
Director of Sales.  From December 1987 to November 1993, Mr. Malone was employed
by Republic  Telcom  Systems,  a voice/data  networking  company,  where he most
recently served as Vice President of Sales and Marketing.

     MORTEN  STEEN-JORGENSEN.  Mr.  Jorgensen  has served as Vice  President and
Managing  Director,  Europe of the Company since  September 1996. From September
1987 to August 1996,  Mr.  Jorgensen was employed by NCR, where he most recently
served as an Assistant Vice President, Channel Sales and Marketing.

     SHELDON M. GOLDMAN. Mr. Goldman has served as Vice President,  Business and
Legal Affairs since December 1996 and served as United States General Counsel of
the Company  from April 1996 until  December  1996.  From  January 1987 to March
1996,  Mr. Goldman was  associated  with the law firm of Wien,  Malkin & Bettex.
Since  March  1996,  Mr.  Goldman  has been Of  Counsel to the law firm of Brief
Kesselman Knapp & Schulman, LLP.

     MARK ST. J. COURTNEY.  Mr. Courtney has served as European  General Counsel
of the Company  since August 1995 and as  Secretary  of the Company  since March
1996.  From  December  1992 to July 1995,  Mr.  Courtney  served as European and
International Counsel for Legent Corporation, a software company, and from April
1991 to November  1992,  Mr.  Courtney  served as Legal Counsel for ICL, Ltd., a
U.K. hardware and computer services company. Mr. Courtney was employed by Lloyds
Merchant Bank Ltd., a U.K. investment bank, from November 1985 to March 1991.

     PAOLO DI FRAIA. Mr. Di Fraia has served as European Finance Director of the
Company  since  January  1996 and as Assistant  Treasurer  of the Company  since
September  1996.  From  November 1994 to December  1995,  Mr. Di Fraia served as
European Controller of the Company. From April 1989 to August 1994, Mr. Di Fraia
was employed by Philip Crosby Associates, S.A. as European Controller.


SENIOR MANAGEMENT

     ALFREDO CANDAL. Mr. Candal has served as the Company's Regional Manager for
Latin America since January 1996 and as the Company's  Latin  American  Business
Development  Manager  from May 1995 to December  1995.  Prior to such date,  Mr.
Candal served as the Company's  Acting  Country  Manager for Italy from December
1994 to May 1995 and as the Company's  Latin  American  specialist  from October
1993 to December 1994.

     FRED HUGHES. Mr. Hughes has served as Vice President,  Operations -- Europe
of the Company since July 1994. From August 1993 to July 1994, Mr. Hughes served
as Director of Telephony of the Company.  From January 1991 to August 1993,  Mr.
Hughes was President of Communications Services Group, a Connecticut-based voice
and data communications  consulting  company.  From August 1988 to January 1991,
Mr. Hughes was Director of Engineering at Millicom Telecommunications  Services,
Inc.

     GEORGE A. PIERACCINI.  Mr. Pieraccini has served as the Company's Corporate
Controller since January 1996. Mr. Pieraccini served as Assistant  Controller of
the Company  from  November  1994 until  December  1995.  From  October  1991 to
November  1994,  Mr.  Pieraccini  was  employed by Edward  Isaacs & Company LLP,
independent Certified Public Accountants,  most recently as an Audit Senior. Mr.
Pieraccini  is a  Certified  Public  Accountant  and a  member  of the  American
Institute and the New York State Society of Certified Public Accountants.

     PHIL WILKEN.  Mr. Wilken has served as Vice  President of Operations of the
Company since  joining the Company in March 1996.  From October 1995 to February
1996, Mr. Wilken was a private  consultant in the  telecommunications  industry.
Mr. Wilken was employed by CNA Insurance Co. in various  capacities from January
1983 to September 1995,  beginning as a Manager in Network  Management and, most
recently, as an Assistant Vice President of Teleservices.

                                       15
<PAGE>

                                     PART II

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

     The Company's common stock,  $0.01 per value per share (the "Common Stock")
commenced  trading on October 18, 1996, on the Nasdaq  National  Market  ("NNM")
under the symbol "VYTL".  The high and low sales prices for the Common Stock, as
reported by the NNM from  October 18, 1996 to December  31, 1996 were $12.25 and
$8.50, respectively.

     On March 24, 1997,  there were  approximately  80 stockholders of record of
the Common Stock.  The Company  believes that it has in excess of 300 beneficial
owners.

     The Company has never  declared  or paid any cash  dividends  on its Common
Stock  and does not  expect  to do so in the  foreseeable  future.  The  Company
anticipates that all future earnings,  if any, generated from operations will be
retained to finance the expansion/and continued development of its business. Any
future determination with respect to the payment of dividends will be within the
sole discretion of the Company's Board of Directors and will depend upon,  among
other things, the Company's earnings,  capital  requirements,  the terms of then
existing   indebtedness,   applicable   requirements  of  the  Delaware  General
Corporation Law, general economic  conditions and such other factors  considered
relevant by the Company's Board of Directors. In addition, the Company's ability
to pay cash dividends is restricted  under the terms of the Indenture,  dated as
of  December  15,  1994,  and  amended   October  11,  1996  (as  amended,   the
"Indenture"),  between the Company and United  States Trust Company of New York,
unless certain financial tests are met.

ITEM 6.    SELECTED FINANCIAL DATA.

     The following  selected  Consolidated  Statement of Operations  Data, Other
Financial Data and Balance Sheet Data as of and for the years ended December 31,
1996,  1995,  1994,  1993 and  1992  have  been  derived  from the  Consolidated
Financial  Statements  of the Company and the Notes  related  thereto,  included
elsewhere  in this  Report,  which  were  audited  by  KPMG  Peat  Marwick  LLP,
independent Certified Public Accountants, as of and for the years ended December
31,  1996,  1995,  1994 and 1993 and audited  by  Edward  Isaacs & Company  LLP,
independent Certified Public Accountants,  as of and for the year ended December
31,  1992.  This  information  should  be read  in  conjunction  with  "Item  7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations,"  the Company's  Consolidated  Financial  Statements,  including the
Notes thereto, and the other financial data included elsewhere in this Report.

                                       16
<PAGE>



<TABLE>
<CAPTION>


                                                                                 YEAR ENDED DECEMBER 31,
                                                               ------------------------------------------------------
                                                                 1996        1995         1994       1993      1992
                                                               --------   ---------   ----------   -------   --------
                                                                    (In thousands, except other operating data)(1)

<S>                                                            <C>        <C>         <C>          <C>       <C>
STATEMENT OF OPERATIONS DATA:
  Telecommunications  revenue....... .......................   $ 50,419   $  32,313   $   26,268   $21,393   $  6,701
  Operating expenses:
    Costs of telecommunications services....................     42,130      27,648       22,953    18,159      5,462
    Selling, general and administrative expenses............     32,857      24,328       14,318     8,458      2,505
    Depreciation and amortization...........................      4,802       2,637          789       111         15
    Equipment impairment loss...............................         --         560           --       --          --
                                                               --------    --------     --------   -------    -------
      Total operating expenses..............................     79,789      55,173       38,060    26,728      7,982
                                                               --------    --------     --------   -------    -------
  Operating loss............................................   $(29,370)   $(22,860)    $(11,792)  $(5,335)   $(1,281)
  Interest income (expense), net............................     (8,996)     (5,574)        (558)       21         (8)
  Share in loss of affiliate................................        (10)        (42)        (145)     (142)        --
                                                               --------    --------     --------   -------    -------
  Net loss..................................................   $(38,375)   $(28,476)    $(12,495)  $(5,456)   $(1,289)
                                                               ========    ========     ========   =======    =======
  Net loss per share(2).....................................     $(2.47)    $ (2.09)     $ (1.22)  $ (0.77)   $ (0.21)

OTHER FINANCIAL DATA:
  EBITDA(3).................................................   $(24,578)   $(20,265)    $(11,148)  $(5,366)   $(1,266)
  Net cash (used in) provided by operating activities.......    (26,331)    (18,489)     (11,571)   (1,442)       438
  Net cash used in investing activities.....................     (1,592)    (37,057)      (4,996)   (2,949)       (70)
  Net cash provided by (used in) financing activities.......     94,772      (2,306)      80,984     6,329        (15)
  Capital expenditures, including acquisitions of business..    $ 9,423    $ 11,378     $  4,843   $ 2,643    $    70

OTHER OPERATING DATA(4):
  Billable minutes (000's)(5)...............................     62,249      25,932       14,981    10,899      3,097
  Average revenue per billable mnute(6).....................    $   .80    $   1.23     $   1.70   $  1.87    $  2.16
  Average cost per billable minute(7).......................    $   .67    $   1.04     $   1.53   $  1.67    $  1.76
  Switches(8)(9)(10)........................................         13          10            2         2
  Customers(8)(10)..........................................     18,172       9,218        6,469     5,486

BALANCE SHEET DATA(10):
  Working capital...........................................   $ 79,665     $26,214      $58,549   $(3,628)   $(1,219)
  Property and equipment, net...............................     21,074      15,715        6,933     3,584         62
  Total assets..............................................    134,664      65,613       83,923    10,585      2,147
  Long-term debt, excluding current installments............     77,904      67,283       59,955       866         --
  Stockholders' equity (deficit)(11) .......................     38,482     (17,618)      10,985      (162)    (1,139)

</TABLE>

----------
(1)   Amounts presented may not total due to rounding.
(2)   Net loss per share is  computed  on the basis  described  in Note 1 of the
      Company's Consolidated Financial Statements.
(3)   As used  herein,  "EBITDA"  consists of earnings  before  interest  (net),
      income  taxes  and  depreciation  and  amortization.  EBITDA  is a measure
      commonly used in the  telecommunications  industry to analyze companies on
      the basis of operating  performance.  EBITDA is not a measure of financial
      performance under generally accepted accounting  principles and should not
      be considered as an  alternative to net income as a measure of performance
      nor as an alternative to cash flow as a measure of liquidity.
(4)   Information derived from operating records prepared by the Company.
(5)   Billable  minutes are those minutes  during which a call is connected at
      any Company switch and for which the Company bills a customer.
(6)   Represents  the gross call usage  revenue per billable  minute.  Amounts
      exclude  other revenue and revenue  related items such as hardware  sales,
      software licensing, credits, discounts and other non-usage charges.
(7)   Represents   the  cost   associated   with  the  Company's   provision  of
      telecommunications   services  per  billable   minute.   Amounts   exclude
      nontransmission costs such as hardware and software purchased for resale.

                                       17
<PAGE>

(8)   Blanks indicate that data is not available for such period.
(9)   At December 31, 1996,  includes  three  switches at the Omaha,  Nebraska
      switching  center,  two  switches at the London  switching  center and one
      switch at each of the Company's  other  switching  sites.  At December 31,
      1995,  includes two switches at each of the Company's switching centers in
      Omaha,  Nebraska and London and one switch at each of the Company's  other
      switching sites.
(10)  Information presented as of the end of the period indicated.
(11)  The  Company  has never paid cash  dividends  on its Common  Stock.  See
      "Item  5.  Market  For   Registrant's   Common   Equity  and  Related
      Stockholder Matters."

                                       18
<PAGE>



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

SUMMARY

     The  following is a discussion  of the  financial  condition and results of
operations of the Company for the years ended December 31, 1996,  1995 and 1994.
This discussion  should be read in conjunction  with the Company's  Consolidated
Financial  Statements,  including  the  Notes  related  thereto,  and the  other
financial data included elsewhere in this Report.

     Since its inception in 1991, the Company has invested heavily in developing
its ability to provide international  telecommunications services within Western
Europe and other deregulating markets and in developing and expanding its market
presence  including,  more  recently,  entering  into the national long distance
telecommunications  markets in certain EU member  states.  The  Company has made
substantial   investments   in   software   and  back  office   operations,   an
administrative infrastructure and a direct sales organization in Western Europe.
Furthermore, the Company has created an extensive commercial  telecommunications
network for voice and voice band data in Europe  which the  Company  believes is
necessary to render  effectively the services it currently offers and intends to
offer after the  liberalization  of  regulations  relating  to Voice  Telephony.
Consequently,  the  Company has  incurred a high level of expense in  connection
with its continued  expansion which has resulted in substantial net losses since
its inception.  The Company expects to incur substantial net losses and negative
cash flow until at least the years 2001 and 2000, respectively.

     During the past two years, several key trends have affected the composition
of the Company's  telecommunications  revenue, which is derived principally from
the  number of  minutes of use billed by the  Company,  or  "billable  minutes."
First, a growing proportion of the Company's customers,  particularly in Western
Europe,  now access the Viatel  Network using paid local access through the PSTN
rather than through  callback or ITF.  This change has had a negative  impact on
the Company's  revenue per minute.  Second,  the Company  expanded its wholesale
business,   which   represented   approximately   16.5%   and   35.2%  of  total
telecommunications revenue and billable minutes, respectively, for 1996 compared
to 6.2% and 21.6% of total  telecommunications  revenue  and  billable  minutes,
respectively,  for 1995.  Third,  Western  Europe is  becoming  an  increasingly
important  market  for the  Company.  During  1996,  approximately  41.9% of the
Company's telecommunications revenue was generated in Western Europe as compared
to approximately 38.2% of the Company's  telecommunications revenue during 1995.
In   contrast,   despite  an   increase  of   approximately   19.5%  over  1995,
telecommunications revenue from Latin America represented approximately 28.4% of
the   Company's   telecommunications   revenue   during   1996  as  compared  to
approximately  37.6% of the Company's  telecommunications  revenue  during 1995.
Finally, quarterly revenue growth has fluctuated based on the number of business
days and the  strength of the U.S.  dollar  relative to European  currencies  in
which the Company bills its customers.

     Both  billable  minutes  and  growth in the  number of  customers  exceeded
Viatel's  expectations for 1996.  Revenue per billable  minutes,  however,  have
declined more quickly than expected as a result of  competitive  pressures.  The
Company believes that these  competitive  market forces should ultimately have a
favorable impact on the average cost per minute as alternative infrastructure is
placed in service by third  parties.  The Company  believes that the addition of
alternative  infrastructure  should result in decreased  leased line and related
costs.

     Cost of  telecommunications  service is comprised of costs  associated with
the transmission of voice and voice band data  telecommunications  services. The
European  Network  was  developed  to reduce the  Company's  costs of  providing
telecommunications  services  and to  increase  customer  usage.  This change in
service provision has resulted in the Company's customer access methods evolving
from  callback and ITF access to NTF and paid local  access.  Calls that are not
routed through the European Network generate significantly higher variable costs
because they are connected  using ITF numbers or callback  which are  relatively
more  expensive to the  Company.  In  contrast,  because the Viatel  Network has
significant fixed costs associated with its operations,  consisting primarily of
leased line rental charges,  local connectivity and facility/network  management
costs,  calls routed  through the Viatel  Network have lower variable costs than
off-network  traffic.  Although the current  traffic volume through the European
portion of the  Company's  network is too low to achieve  desired  economies  of
scale,  transmission costs are expected to decline as a percentage of revenue as
call traffic  through the European  Network  increases.  See "--

                                       19
<PAGE>

Certain  Factors  Which May Affect the  Company's  Future  Results --  Potential
Difficulties  Associated  With  Implementing  European  Expansion  Strategy" and
"Item 1.  Business -- The Viatel Network -- The European Network."

     The  Company's  selling,   general  and  administrative   expenses  include
commissions to independent sales  representatives  and overhead costs associated
with its headquarters,  back office and network  operations and Western European
sales  offices.   The  costs   associated  with   maintaining   this  management
infrastructure,  along with the Company's  selling  expenses,  are substantially
higher than the gross margins currently being generated by the Company.

     As a consequence of the establishment of an  administrative  infrastructure
for managing the business, changes in the composition of both telecommunications
revenue and  transmission  costs,  development  of the European  Network and the
establishment of direct sales organizations since the Company's  inception,  the
Company's  results of operations for the periods  presented are not  necessarily
comparable.

     On February 15, 1997, representatives of 70 countries, including the United
States,  finalized  the WTO  Agreement,  which  addresses market access, foreign
investment and  procompetitive  regulatory  principles for countries  generating
over 95% of world-wide  telecommunications  revenue.  The WTO Agreement  becomes
effective January 1, 1998.  Although certain countries took specific  exceptions
to the agreement, the WTO Agreement generally provides (a) market access to U.S.
companies for local, long distance and  international  service through any means
of  network  technology  on  either  a  resale  or  facilities  basis,  (b)  the
opportunity for U.S. companies to acquire, establish or hold a significant stake
in  telecommunications  companies in the countries  which are a party to the WTO
Agreement, and (c) the ability to take advantage of these opportunities within a
framework  of  procompetitive  regulatory  principles.  The  Company  expects to
benefit  from  the  anticipated  effects  of the WTO  Agreement,  including  the
expansion of legally permissible uses of the Company's European Network,  but it
cannot predict the extent of the opportunities that may be presented.


RESULTS OF OPERATIONS

     The following  table  summarizes the breakdown of the Company's  results of
operations as a percentage of revenue:

                                                    YEAR ENDED  DECEMBER 31,
                                                    ------------------------
                                                    1996     1995      1994
                                                    ----     ----      ----

Telecommunications revenue.......................   100.0%   100.0%    100.0%
Cost of telecommunications services..............    83.6     85.6      87.4
Selling, general and administrative expenses.....    65.2     75.3      54.5
Depreciation and amortization....................     9.5      8.2       3.0

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     TELECOMMUNICATIONS  REVENUE.  Telecommunications revenue increased by 56.0%
to $50.4 million on 62.2 million billable minutes for 1996 from $32.3 million on
25.9 million  billable minutes for 1995.  Telecommunications  revenue growth for
1996 was generated primarily from higher traffic volume on the European Network,
from growth in the Company's  wholesale  business and, to a lesser extent,  from
growth in traffic  volume in Latin  America and the Pacific  Rim.  This  revenue
included  approximately  $0.62 million of hardware and software sales associated
with the provision of telecommunications services.

     The overall  increase of 140.0% in billable  minutes  from 1995 to 1996 was
partially offset by declining  revenue per billable minute.  Average revenue per
billable  minute  declined  35% to $.80 in 1996  from  $1.23  in 1995  primarily
because of (i) a higher percentage of lower-priced  intra-European  traffic from
the European Network,  (ii) a higher percentage of low-priced wholesale traffic,
(iii)  reductions in certain  rates  charged to retail  customers in response to
pricing  reductions  enacted by certain ITOs and (iv) changes in customer access
methods.  See "-- Cost of  Telecommunications  Services" and "-- Certain Factors
Which May Affect the Company's Future Results --Competition."

                                       20
<PAGE>

     Telecommunications revenue per billable minute from the sale of services to
retail  customers  decreased  28.8%  to  $1.04  in  1996  from  $1.46  in  1995.
Telecommunications  revenue  per  billable  minute  from the sale of services to
carriers and other  resellers  increased  8.6% to $.38 in 1996 from $.35 in 1995
primarily as a result of an overall increase in  intercontinental  call traffic.
The number of  customers  billed rose 97.1% to 18,172 at December  31, 1996 from
9,218  at  December  31,  1995.  During  the  second  half of 1996,  the Company
commenced  offering  domestic  long  distance   telecommunications  services  in
Germany, Italy and Spain.

     The Company has  significantly  increased  its wholesale  business  through
which it sells  switched  minutes to carriers and other  resellers at discounted
rates to utilize excess network capacity. While the wholesale business has lower
average gross margins than the Company's retail business, the telecommunications
revenue generated from the wholesale  business partially offsets the fixed costs
associated  with  the  Viatel  Network.   The  wholesale  business   represented
approximately 16.5% and 35.2% of total  telecommunications  revenue and billable
minutes,  respectively,  for 1996 as compared to approximately 6.2% and 21.6% of
total telecommunications revenue and billable minutes,  respectively,  for 1995.
While the increase in  telecommunications  revenue  represents an  approximately
320.0%  increase  over the  corresponding  period  for 1995,  a portion  of this
increase  represents the migration of business formerly conducted by the Company
in Africa and the Middle East through indirect sales representatives to carriers
which purchase  switched  minutes from the Company.  The Company does not expect
telecommunications  revenue  generated by its wholesale  business to continue to
grow at this  rate.

     COST OF TELECOMMUNICATIONS  SERVICES.  Cost of telecommunications  services
increased  to $42.1  million  in 1996  from  $27.6  million  in 1995  and,  as a
percentage of telecommunications  revenue, decreased to approximately 83.6% from
approximately 85.6% for 1996 and 1995, respectively.  The corresponding increase
in gross  margins  was  primarily  due to  changes in  overall  service  mix and
increased  utilization of the European Network.  The Company experienced a 35.6%
decrease  in average  cost per  billable  minute to $.67  during 1996 from $1.04
during 1995. This decrease,  which more than offset the effect of the decline in
average revenue per billable minute, was attributable primarily to (i) increased
traffic  being routed  through the European  Network  which  resulted in reduced
costs  on  a  per  minute   basis  with  respect  to  European   long   distance
telecommunications  services,  (ii) an increase in switched minutes generated by
the Company's wholesale business and (iii) changes in customer access methods.

     Gross  margins for 1996 were  negatively  impacted by  increases in certain
costs related to the expansion of the Company's overall  transmission  capacity.
The  fixed  costs per  minute  are  expected  to  decrease  as a  percentage  of
telecommunications   revenue  as  traffic  volume  over  the  European   Network
increases.  As a  result  of  obtaining  additional  IPLC  capacity,  the  costs
associated with the European Network increased to approximately $4.1 million for
1996  (approximately  8.2% of  telecommunications  revenue for such period) from
approximately $2.0 million for 1995  (approximately  6.3% of  telecommunications
revenue for such period). IPLCs represent a significant portion of the Company's
fixed costs and were not fully utilized in 1996. The Company believes its use of
IPLCs will  continue to increase and such increase  will  positively  impact the
Company's overall gross margins, as a percentage of revenue, as more minutes are
routed through the European Network. This benefit, however, is primarily limited
to calls that either  originate  or  terminate in a city where the Company has a
switch or a POP, because otherwise the Company is required to transport the call
over the PSTN at higher transmission costs and reduced margins.

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative expenses increased to $32.9 million in 1996 from $24.3 million in
1995  and,  as  a  percentage  of  telecommunications   revenue,   decreased  to
approximately  65.2% in 1996  from  approximately  75.3%  in  1995.  Much of the
increased  dollar  amount of  selling,  general and  administrative  expenses is
attributable to the costs of building a direct sales force in Western Europe and
the Company's  continued  transition from indirect to direct sales organizations
in certain other countries in which the Company does business, and overhead cost
associated with the Company's headquarters,  back office and network operations.
The  transition  to a direct  sales force  was  significantly  completed in 1995
and  1996  is  the  first  year in  which  the  costs of  such  sales  force was
incurred  throughout  the year.

     During  1996,  the Company  took a $1.3 million  charge  associated  with a
corporate  restructuring  undertaken  during the year  principally  for employee
termination  and  relocation  costs  and  the  write-down  of a  portion  of the
Company's   lease  for  its   administrative   headquarters   in   London   (the
"Reorganization")   and  an  $.85  million  expense  associated  with  a  French
arbitration  award against the Company.  Had these  expenses not been  incurred,
selling,   general  and   administrative   expenses   would  have  decreased  to
approximately  61.0%,  as a percentage  of  telecommunications  revenue.  Salary
related selling,  general and administrative expenses represented  approximately
41.0% and 42.1% of total selling,  general and administrative  expenses for 1996
and 1995, respectively.

     The Company is also the subject of an  arbitration  proceeding in which the
Company's former Spanish  Representative is seeking $5.8 million in damages. The
Company believes that any potential adverse determination

                                       21



<PAGE>








in this  arbitration  would not have a material  adverse effect on the Company's
business,  financial  condition or results of  operations.  See  "Item 3.  Legal
Proceedings" for details  regarding the arbitration  proceeding with the Spanish
Representative.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes  depreciation of the Viatel Network,  increased to  approximately  $4.8
million in 1996 from  approximately  $2.6 million in 1995.  The increase was due
primarily to the  depreciation of switches and other equipment placed in service
during 1995 and 1996.

     EQUIPMENT   IMPAIRMENT   LOSS.  In  connection   with  the  replacement  of
substantial  portions of the European  Network during 1995, the Company  entered
into  a  termination  agreement  with  TeleMedia  International,  Inc.  ("TMI").
Pursuant to the terms of such agreement, the Company prepaid the remaining lease
obligation of approximately $1.0 million, thereby acquiring all of the equipment
previously leased from TMI, most of which equipment was subsequently redeployed.
The Company  recorded a non-cash  charge of  approximately  $.6 million in 1995,
which  represented  the original  installation  costs of such  equipment and the
difference  between the  carrying  value and the expected  selling  price of the
equipment not expected to be redeployed.

     INTEREST. Interest expense increased to approximately $10.8 million in 1996
from  approximately  $8.9  million  in 1995  due to the  accretion  of  non-cash
interest on the  Company's 15% Senior  Discount  Notes due January 15, 2005 (the
"Notes"). No interest is payable on the Notes until July 15, 2000, at which time
semi-annual  interest  payments  will be  required  through the January 15, 2005
maturity date.  Interest income was approximately  $1.9 million and $3.3 million
for 1996 and 1995, respectively.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

     TELECOMMUNICATIONS   REVENUE.   Telecommunications   revenue  increased  by
approximately  23.0% to $32.3 million on 25.9 million  billable  minutes in 1995
from $26.3  million on 15.0  million  billable  minutes in 1994.  This growth in
telecommunications  revenue  resulted  primarily  from the use of  direct  sales
organizations  in Europe which the Company began to establish in late 1994,  the
creation of a wholesale business and growth experienced in the Company's revenue
derived from the Pacific Rim ($4.4 million in 1995 versus $2.0 million in 1994).
Part of this  increase  was offset by  declining  revenue per  billable  minute.
Average  revenue  per  billable  minute  declined by 27.6% to $1.23 in 1995 from
$1.70 in 1994.  The decrease was primarily due to a change in revenue mix, which
in 1995 included a higher  percentage  of  lower-priced  intra-European  traffic
associated  with  the  European  Network  becoming   operational  and  a  higher
percentage of wholesale traffic,  together with a reduction in rates as a result
of the Company's  response to price reductions by ITOs. The Company's  wholesale
business  represented  approximately  6.2%  of  telecommunications  revenue  and
approximately 21.6% of billable minutes for 1995. Telecommunications revenue per
billable minute from the sale of services to retail customers decreased to $1.46
in 1995 from $1.72 in 1994 while  revenue per  billable  minute from the sale of
services  to other  carriers  and  resellers  was $0.35 in 1995.  The  number of
customers  billed rose  approximately  42.5% to 9,218 at December  31, 1995 from
6,469 at December 31, 1994.

     COST OF TELECOMMUNICATIONS  SERVICES.  Cost of telecommunications  services
increased  to $27.6  million  in 1995  from  $23.0  million  in 1994  and,  as a
percentage of telecommunications  revenue, decreased to approximately 85.6% from
approximately   87.4%  for  the  years  ended   December   31,  1995  and  1994,
respectively.   The  corresponding   increase  in  gross  margin  was  primarily
attributable  to changes in customer  access  methods and changes in service mix
attributable to the European  Network  becoming  operational.  Accordingly,  the
Company experienced an approximately 32.0% decrease in average cost per billable
minute to $1.04 during 1995 from $1.53 during 1994.  This  decrease,  which more
than offset the effect of the decline in average  revenue per  billable  minute,
was attributable to a continued decline in U.S. international rates for outbound
switched  minutes and to  increased  traffic  volume  being  routed  through the
European Network, which was used to originate calls accounting for approximately
58.0% of the Company's  European-related call revenue during 1995. The increased
European Network  utilization helped reduce costs associated with intra-European
and intercontinental  telecommunications services due to the predominantly fixed
cost  nature  of the  European  Network.  On the  other  hand,  during  1994 the
Company's gross margin was adversely  affected by the delayed  implementation of
the European Network. The Company had priced its services to be competitive with
the ITOs in Spain and Italy in anticipation of the European  Network's  becoming
operational.  Due to  delays  in the  implementation  of the  European  Network,
however,  the Company realized significant losses on this traffic as a result of
having to route  calls  through  ITF  access  instead of  through  the  European
Network.

                                       22



<PAGE>




     Increases in certain  fixed costs  related to  expansion  of the  Company's
overall transmission capacity negatively impacted the Company's gross margin for
the year ended  December 31,  1995.  As a result of  obtaining  additional  IPLC
capacity,   the  costs  associated  with  the  European  Network   increased  to
approximately  $2.0  million  for 1995  (approximately  6.3% of revenue for such
period) from approximately $1.1 million for 1994  (approximately 4.1% of revenue
for such period).  Additionally,  the Company  incurred  costs  associated  with
obtaining  redundant  fiber  optic  capacity  at the  Omaha,  Nebraska  facility
totaling approximately $.5 million (approximately 1.7% of revenue for 1995).

     SELLING,  GENERAL  AND  ADMINISTRATIVE   EXPENSES.   Selling,  general  and
administrative expenses increased to $24.3 million in 1995 from $14.3 million in
1994  and,  as  a  percentage  of  telecommunications   revenue,   increased  to
approximately 75.3% in 1995 from approximately  54.5% in 1994.  Beginning in the
third quarter of 1994, the Company invested  significant funds in establishing a
physical  presence in its various  geographic  markets in Western  Europe and in
building  an  administrative  infrastructure  in its United  States and  Western
European offices.  Such an effort entailed significant  expenditures for salary,
rent, office and similar expenses.  Salaries as a percentage of selling, general
and  administrative  expenses  increased  to  approximately  42.1%  in 1995 from
approximately 34.4% in 1994.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes  depreciation of the Viatel Network,  increased to  approximately  $2.6
million in 1995 from  approximately  $.8 million in 1994.  The  increase in such
expense was due  primarily to the  depreciation  of the European  Network  which
became operational during October 1994 and the amortization of intangible assets
which  principally  related to acquired  employee  base and sales force in place
associated with the Company's  acquisition of independent sales organizations in
Italy and  Barcelona,  which  occurred in December  1994, as well as recognizing
depreciation  for  additional  switches and other items placed in service during
1994 and 1995.

     INTEREST. Interest expense for 1995 increased by approximately $8.1 million
from 1994 due to the accretion of non-cash  interest on the Notes.  This expense
was partially offset by interest income of  approximately  $3.3 million for 1995
derived from the  investment  of the net proceeds  from such  issuance in highly
liquid debt instruments.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has incurred  losses from operating  activities in each year of
operations since its inception and expects to continue to incur operating losses
for the next several years.  Through December 31, 1996, the Company had incurred
$86.0 million of aggregate losses from operating activities.  As of February 28,
1997, the Company had $86.1 million of cash,  cash  equivalents and other liquid
investments. The Company believes that, based on its current forecasts it should
be able to fund its  capital  requirements  at least  until  the year  1999 even
though cash flow from operations will continue to be negative until at least the
year 2000.

     CAPITAL  EXPENDITURES AND WORKING CAPITAL. The development of the Company's
business has required  substantial capital expenditures and working capital. The
Company will incur substantial capital  expenditures  significantly in excess of
historical  levels to upgrade and expand the Viatel Network  generally,  and the
European Network specifically, as well as to develop and expand new and existing
services.  During  1996,  1995 and 1994,  the Company had capital  expenditures,
including  acquisitions of businesses,  of approximately $9.4, $11.4 million and
$4.8  million,  respectively.  Historically,  the Company has funded its capital
expenditures  through  equity and debt  issuances and vendor  financings.  As of
December 31, 1996, the Company had entered into purchase commitments for network
upgrades and other items aggregating  approximately $7.4 million.  Additionally,
the  Company  anticipates  making  additional capital  expenditures  during 1997
of approximately $14.9 million.  See  "-- Certain  Factors  Which May Affect the
Company's Future Results -- Substantial Capital Requirements."

     AVERAGE  MONTHLY CASH  REQUIREMENTS.  During 1996,  the  Company's  average
current monthly cash requirements  were  approximately  $1.9 million,  including
approximately  $.5  million  relating  to  minimum   commitments  under  carrier
contracts.  This  average  excludes  approximately  (i) $9.4 million for capital
expenditures  for  the  purchase  of  equipment,   software  and  the  continued
development of the European  Network,  (ii) $3.6 million  incurred in connection
with the  settlement  of the  Company's  fee  dispute for past  services  with a
facilities-based  IPLC vendor,  and (iii) $1.1  million for other  non-recurring
items  (including $.4 million paid in connection  with employee  termination and
relocation costs).

     INTEREST REQUIREMENTS AND DEBT REPAYMENT. Until January 15, 2000, the Notes
will accrue interest on a semi-annual  basis to their  aggregate  $120.7 million
principal  amount.  No interest is payable on the Notes until July 15,

                                       23
<PAGE>

2000, at which time semi-annual  interest  payments will be required through the
January 15, 2005 maturity date. If the Company is unable to generate  sufficient
cash flow from operations to satisfy the debt service requirements on the Notes,
the Company will be required to refinance the Notes or raise additional capital.
There  can be no  assurance  that any  refinancing  could be  obtained  on terms
favorable to the Company, if at all, or that any form of additional capital will
be available.  In addition, the Indenture contains certain restrictive covenants
that,  among other  things,  limit the ability of the Company and certain of its
subsidiaries to incur indebtedness,  make pre-payments of certain  indebtedness,
use the proceeds from certain sales of assets and pay dividends. There can be no
assurance  that  the  Company  will be  able to  comply  with  such  restrictive
covenants in the future.

     FOREIGN  CURRENCY.  The Company has  exposure  to  fluctuations  in foreign
currencies  relative to the U.S.  Dollar as a result of billing  portions of its
telecommunications  revenue in the local  currency in countries  where the local
currency is  relatively  stable,  while many of its  obligations,  including the
Notes and a substantial  portion of its  transmission  costs, are denominated in
U.S.  Dollars.  In countries with less stable  currencies,  such as Brazil,  the
Company  bills  in  U.S.  Dollars.   For  the  year  ended  December  31,  1996,
approximately  41.7% of the Company's  telecommunications  revenue was billed in
currencies other than the U.S.  Dollar.  Furthermore,  substantially  all of the
costs of acquisition  and upgrade of the Company's  switches have been, and will
continue to be, U.S. Dollar denominated transactions.

     With the continued expansion of the European Network, a substantial portion
of the costs associated with the European Network,  such as local access charges
and a portion  of leased  line  costs,  as well as a majority  of local  selling
expenses,  will be charged to the Company in the same  currencies  as revenue is
billed.  These  developments  create a natural  hedge  against a portion  of the
Company's foreign exchange  exposure.  To date, much of the funding necessary to
establish   the  local  direct  sales   organizations   has  been  derived  from
telecommunications  revenue that was billed in local  currencies.  Consequently,
the  Company's  financial  position as of  December  31, 1996 and its results of
operations  for  the  year  then  ended  were  not  significantly   impacted  by
fluctuations in the U.S. Dollar in relationship to foreign  currencies.  See "--
Certain  Factors  Which  May  Affect  the  Company's  Future  Results  --  Risks
Associated with International Operations."

INFLATION

     The Company does not believe that inflation has had a significant effect on
the Company's operations to date.


CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS

LIMITED OPERATING HISTORY; SUBSTANTIAL NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS; EXPECTED FUTURE NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS; SUBSTANTIAL LEVERAGE

     The Company  commenced  operations in 1991 and has only a limited operating
history.  In  addition,  to date,  the  Company  has  incurred  substantial  net
losses,  and,  in each of the last  three  years,  has  experienced  significant
increases  in expenses  associated  with the  development  and  expansion of the
Viatel Network. The Company expects to incur substantial net losses and negative
cash flows  from  operating  activities  until at least the years 2001 and 2000,
respectively. There can be no assurance that the Company will achieve or sustain
profitability or positive cash flows from operating activities in the future. If
the Company cannot achieve  profitability  or positive cash flows from operating
activities,  it may be unable to meet its working capital or future debt service
requirements  which  would  have a  material  adverse  effect  on the  Company's
business,  financial  condition and results of  operations.  See  "--Substantial
Capital  Requirements," "-- Variability of Operating Results," "Item 6. Selected
Financial Data," and the Company's Consolidated Financial Statements,  including
the Notes thereto.

     In December  1994, the Company  issued,  for  approximately  $58.0 million,
$120.7  million  aggregate  principal  amount of the  Notes.  Cash  payments  of
interest are not  required on the Notes prior to July 15,  2000,  at which point
the Company will be required to make annual interest  payments of  approximately
$18.1  million.  At December 31, 1996,  the Company had total  long-term debt of
approximately  $77.9 million and  stockholders'  equity of  approximately  $38.5
million. The Company's leverage could (i) impair the Company's ability to obtain
additional future financing to fund working capital, capital expenditures,  debt
service  requirements or  acquisitions or for other purposes;  (ii) require that
all or a substantial  portion of the Company's  future cash flow from operations
may be dedicated to the payment of interest and principal on the Notes; or (iii)
make  the  Company  more  vulnerable  to the  effects  of a  prolonged  economic
downturn,  limit its ability  both to  withstand  competitive  pressures  and to
exploit

                                       24
<PAGE>

new business  opportunities and reduce its flexibility in responding to changing
business and economic  conditions.  See "-- Liquidity  and Capital  Resources --
Interest Requirements and Debt Repayment."

SUBSTANTIAL GOVERNMENT REGULATION

     OVERVIEW.  The  Company's  provision of  international  and  national  long
distance telecommunications services is heavily regulated. Many of the countries
in which the Company provides, or intends to provide, services prohibit or limit
the service which the Company can provide and the transmission  methods by which
such service can be provided.  For example,  the Company  provides its customers
located  outside the EU, and, to a lesser  degree  within the EU, with access to
its services through the use of callback. A substantial number of countries have
prohibited  certain  forms of callback as a  mechanism  to access the  Company's
services.  This has  caused  the  Company to cease  providing  services  in some
jurisdictions  and may  require it to do so in other  countries  in the  future.
There  can  be  no  assurance  that  certain  of  the  Company's   services  and
transmission  methods will not continue to be or will not become  prohibited  in
certain  jurisdictions,  and,  depending  on  the  jurisdictions,  services  and
transmission  methods affected,  there could be a material adverse effect on the
Company's business,  financial condition and results of operations. See "Item 1.
Business -- Government Regulation."

     Local laws and regulations differ  significantly among the jurisdictions in
which the Company operates,  and, within such jurisdictions,  the interpretation
and  enforcement  of such laws and  regulations  can be  unpredictable.  Some EU
member states may limit,  constrain or otherwise  adversely affect the Company's
ability to provide certain  services.  There can be no assurance that certain EU
member  states will  implement,  or will  implement  consistently,  the Services
Directive or the Full Competition Directive, and either the failure to implement
or inconsistent  implementation of such directives could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition,  there can be no assurance  that certain EU member  states will not
begin  charging  substantial  fees for the issuance of licenses to provide Voice
Telephony.

     UNSETTLED NATURE OF REGULATORY ENVIRONMENT. The Company expects to continue
to pursue a strategy of providing its services to the maximum extent it believes
permissible  under  applicable laws and  regulations.  The Company's  aggressive
strategy  may  result  in  the  Company's   (i)  providing   services  or  using
transmission  methods that violate local laws or  regulations or (ii) failing to
obtain  formal  approvals  required  under such laws or  regulations.  Where the
Company is found to be in  violation of local laws and  regulations,  it usually
seeks to modify its  operations so as to comply with such laws and  regulations.
There can be no  assurance,  however,  that the  Company  will not be subject to
fines,  penalties or other  sanctions as a result of past violations even though
such   violations  were  corrected.   If  the  Company   determines,   following
consultation  with  regulatory  counsel in a  jurisdiction,  that it has a legal
basis for doing so, it may persist in continuing such actions.  If the Company's
interpretation  of applicable laws and regulations  proves  incorrect,  it could
lose, or be unable to obtain,  regulatory approvals necessary to provide certain
of its services or to use certain of its transmission  methods. The Company also
could have  substantial  monetary fines and penalties  imposed against it. There
can be no  assurance  that  the  Company  has  accurately  interpreted  or  will
accurately   interpret   applicable   laws   and   regulations   in   particular
jurisdictions.

     There can be no assurance that future United States or foreign  regulatory,
judicial or legislative  changes will not have a material  adverse effect on the
Company's business, financial condition and results of operations.  See "Item 1.
Business -- Government Regulation."

POTENTIAL DIFFICULTIES ASSOCIATED WITH IMPLEMENTING EUROPEAN EXPANSION
STRATEGY

     The Company  believes that an increasing  percentage of its future  revenue
will be derived from its Western European business operations.  Execution of the
Company's  European  expansion  strategy,  however,  is  subject to a variety of
risks,  including  operating and technical problems,  regulatory  uncertainties,
possible  delays  in the  full  implementation  of the  Services  Directive  and
competition.  The successful  implementation of its European  expansion strategy
will  require  that the  Company,  among other  things,  continue to develop its
European Network, back-office capacity and direct sales organizations. There can
be no  assurance  that the Company  will  successfully  implement  its  European
expansion  strategy  or that the  Company's  Western  European  operations  will
contribute an increasing percentage of revenue in the future.

     Expansion and  development of the European  Network are necessary to enable
the  Company  to meet  customer  requirements  and to  increase  the  number  of
customers served,  thereby increasing traffic volume which is fundamental to the
achievement  of  economies  of  scale  and to the  Company's  overall  financial
success.  There can be no assurance,  however,  that the Company will be able to
expand and develop the European Network successfully.  In

                                       25
<PAGE>

addition,  the  current  traffic  volume  through  the  European  portion of the
Company's network is too low to achieve desired economies of scale, transmission
costs are expected to decline as a percentage of revenue as call traffic through
the European Network increases and there can be no assurance,  however, that the
European  Network  will ever  achieve the  economies  of scale which the Company
believes are critical to its overall financial success.

     To  originate  and  terminate  calls on the European  Network,  the Company
requires "local  connectivity,"  i.e., access and egress into and from the PSTN.
Although  the  Company  has  been   successful   to  date  in  obtaining   local
connectivity,  there  can be no  assurance  that  the  Company  will  be able to
maintain local  connectivity or that local connectivity will always be obtained.
Currently,  the Company obtains its local connectivity from the local ITOs which
are, and are expected to continue to be, the Company's competitors.

     In addition, under a prior configuration,  the Company experienced problems
affecting  the  quality  of the voice and voice band data  transmission  of some
calls transmitted over the European  Network.  These problems resulted from time
to time in poor quality  voice  transmission  over the European  Network and, in
some instances,  resulted in interruptions in service. There can be no assurance
that the  European  Network  will not  experience  quality  problems  or service
interruptions  in the future.  To provide  redundancy  in the event of technical
difficulties with the European Network, the Company relies upon the PSTN. To the
extent that calls are  transmitted  over the PSTN rather than over the  European
Network, these calls will be more costly to the Company and may result in losses
on such calls.

     Any failure to expand and develop the European Network  successfully  would
have a  material  adverse  effect on the  Company's  ability  to  implement  its
European  expansion  strategy,  which is a key component of its overall business
strategy.  Failure to implement  successfully the Company's  European  expansion
strategy,  or future  problems  with local  connectivity,  quality of service or
service  interruptions  would have a material  adverse  effect on the  Company's
business,  financial  condition and results of operations.  See "--  Substantial
Government   Regulation,"   "--   Competition,"   "--  Risks   Associated   with
International  Operations," " Item 1.  Business -- Business  Strategy," "Item 1.
Business  --  The  Viatel  Network  -- The  European   Network"   and  "Item  1.
Business -- Competition."

SUBSTANTIAL CAPITAL REQUIREMENTS

     The Company will require substantial capital expenditures  significantly in
excess of historical levels to upgrade and expand the Viatel Network  generally,
and the European Network specifically,  as well as to develop and expand new and
existing services. Although the Company believes that it has sufficient funds to
fund its current capital expenditure plans, actual capital expenditures may vary
significantly  from the  Company's  estimates  depending on a number of factors,
including the pace and extent of network upgrade and expansion, the magnitude of
potential   acquisitions,   investments  or  strategic   alliances,   levels  of
incremental sales and regulatory actions,  which,  individually or collectively,
could cause material changes in the Company's capital expenditure requirements.

     The Company  will need  additional  capital to (i) finance its  anticipated
growth,  (ii) fund working  capital  needs and future debt service  obligations,
(iii)  take  advantage  of  unanticipated  opportunities,  including  more rapid
international  expansion,  acquisitions  of  customer  bases  or  businesses  or
investments in, or strategic alliances with, companies that are complementary to
the Company's current operations, (iv) develop or expand into new services, such
as competitive  local exchange  carrier  services,  or (v) otherwise  respond to
unanticipated competitive pressures. The Company currently expects to obtain any
such  additional  capital  through debt offerings and internally  generated cash
flow. There can be no assurance, however, that the Company will be successful in
producing  sufficient  internally  generated  cash  flow or  raising  sufficient
capital on terms acceptable to the Company, if at all. Moreover,  the amount of,
and the terms and  conditions  of the  instruments  relating  to, the  Company's
current  outstanding  indebtedness may adversely affect the Company's ability to
raise additional  capital.  See "-- Limited Operating  History;  Substantial Net
Losses and Negative Cash Flow from  Operations;  Expected  Future Net Losses and
Negative Cash Flow from Operations;  Substantial Leverage" and "-- Liquidity and
Capital Resources."

RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTATION OF GROWTH
STRATEGY

     The  Company's  rapid  growth has  placed,  and is  expected to continue to
place, a significant  strain on the Company's  administrative,  operational  and
financial resources and has increased demands on its systems and controls. There
can be no assurance,  however, that the Company will be able to successfully add
services or expand its geographic markets or that existing  regulatory  barriers
to its  current  or future  operations  will be reduced  or  eliminated.  As the
Company increases its services and expands its geographic markets, there will be
additional  demands on the Company's  customer support,  sales and marketing and
administrative  resources and network infrastructure.  There can be no assurance
that the Company's  administrative,  operating and financial control systems

                                       26
<PAGE>

and infrastructure  will be adequate to maintain and effectively  monitor future
growth  or that the  Company  will be able to  successfully  attract,  train and
manage  additional  employees.  The failure to continue to upgrade the Company's
administrative,  operating and financial  control systems and  infrastructure or
the  occurrence  of  unexpected  expansion  difficulties  could  have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations. See "-- Potential Difficulties Associated With Implementing European
Expansion Strategy" and "-- Dependence on Effective Information Systems."

COMPETITION

     The international  telecommunications  industry is highly competitive.  The
Company's   success   depends   upon  its   ability   to   compete   with  other
telecommunications providers in each of its markets. These providers include the
ITO in each country in which the Company  operates  and  global  alliances among
some  of  the  world's  largest  telecommunications  carriers.  Other  potential
competitors include cable  television  companies,  wireless telephone companies,
electric and other utilities with rights of way,  railways,  microwave  carriers
and large end users which have private  networks.  The intensity of  competition
has recently increased and the Company  believes that  competition will continue
to  intensify  as  the  number of  new entrants increases. Many of the Company's
current or potential competitors have substantially greater financial, marketing
and other  resources  than the  Company.  If the  Company's  competitors  devote
significant  additional  resources to the provision of international or national
long distance  telecommunications services to the Company's target customer base
of small and medium-sized businesses,  such action could have a material adverse
effect on the Company's business, financial condition and results of operations,
and  there  can be no  assurance  that  the  Company  will be  able  to  compete
successfully against such new or existing competitors.

     Competition for customers in the  telecommunications  industry is primarily
based on price and,  to a lesser  extent,  on the type and  quality of  services
offered.  The Company prices its services primarily by offering discounts to the
prices charged by its competitors,  and some of the Company's competitors may be
able to use their financial  resources to cause severe price  competition in the
countries  in which the  Company  operates.  The Company  has  experienced,  and
expects to continue to experience,  declining revenue per billable minute in all
of its markets, in part as a result of increasing  worldwide  competition within
the telecommunications industry.

     The Company  believes  that the ITOs  generally  have  certain  competitive
advantages due to their control over local  connectivity and apparent close ties
with national regulatory authorities. The Company also believes that, in certain
instances,  some  regulators have shown a reluctance to adopt policies and grant
regulatory  approvals that would result in increased  competition  for the local
ITO.  Moreover,  the Company  believes that it has encountered  anti-competitive
behavior on the part of certain ITOs. If the Company encounters anti-competitive
behavior in countries in which it operates or if the ITO in any country in which
the Company operates uses its competitive  advantages to the fullest extent, the
Company's  business,  financial  condition  and results of  operations  could be
materially adversely affected.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

     There are  certain  risks  inherent in doing  business on an  international
level, including regulatory limitations restricting or prohibiting the provision
of the  Company's  services,  unexpected  changes  in  regulatory  requirements,
tariffs, customs, duties and other trade barriers,  difficulties in staffing and
managing  foreign  operations,  longer  payment  cycles,  problems in collecting
accounts receivable,  political risks,  fluctuations in currency exchange rates,
foreign  exchange  controls  which restrict or prohibit  repatriation  of funds,
technology export and import  restrictions or prohibitions,  delays from customs
brokers or government agencies,  seasonal reductions in business activity during
the summer months in Europe and certain other parts of the world and potentially
adverse tax consequences resulting from operating in multiple jurisdictions with
different tax laws.

     Since its inception in 1991, the Company has invested heavily in developing
its ability to provide international  telecommunications services within Western
Europe and other deregulating markets and in developing and expanding its market
presence  including,  more  recently,  entering  into the national long distance
telecommunications  markets in Spain and Italy.  If the Company's  operations in
Western  Europe  expand as  expected,  an  increasing  portion of the  Company's
revenue and expenses will be denominated in currencies other than U.S.  Dollars,
and  changes in  exchange  rates will  likely  affect the  Company's  results of
operations. Furthermore,  international rates charged to customers are likely to
decrease in the future for a variety of reasons, including increased competition
between  existing  carriers,  new entrants into geographic  markets in which the
Company  operates or intends to operate and  additional  strategic  alliances or
joint  ventures  among large  international  carriers that  facilitate  targeted

                                       27
<PAGE>





pricing and cost reductions.  Depending on the countries involved, any or all of
the  foregoing  factors  could have a material  adverse  effect on the Company's
business,  financial condition and results of operations. In addition, there can
be no  assurance  that laws or  administrative  practices  relating to taxation,
foreign exchange or other matters in countries within which the Company operates
will not change.  Any such change  could have a material  adverse  effect on the
Company's  business,  financial  condition  and results of  operations.  See "--
Substantial Government  Regulation," "-- Competition," "-- Results of Operations
-- Liquidity and Capital Resources -- Foreign Currency," and  "Item 1.  Business
-- Government Regulation."

RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

     The Company  may,  in the  future,  acquire or engage in efforts to acquire
customer bases and businesses from, make investments in, or enter into strategic
alliances with, companies which have customer bases,  switching  capabilities or
existing  networks in the Company's  current  markets or in areas into which the
Company  intends to expand  the  Viatel  Network,  generally,  and the  European
Network,  specifically.  Although  the Company is currently  evaluating  several
potential investment opportunities,  it does not have any present understanding,
commitment or agreement with respect to any acquisition,  investment,  strategic
alliance  or  related  effort (other  than  a  strategic  alliance  with  PSINet
Europe  Limited  for  the  sale  of internet services to Viatel customers).  Any
future acquisitions, investments, strategic alliances or related efforts will be
accompanied by the risks commonly  encountered in such  transactions or efforts.
There can be no assurance  that the Company  would be  successful  in overcoming
these  risks  or  any  other  problems   encountered  with  such   acquisitions,
investments,   strategic  alliances  or  related  efforts.   See  "--  Potential
Difficulties  Associated With  Implementing  European  Expansion  Strategy," "--
Risks  Associated  with  International  Operations"  and  "Item 1.  Business  --
Business Strategy -- Pursue Acquisitions, Investments and Strategic Alliances."

RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS

     The  telecommunications  industry is characterized by rapid and significant
technological   advancement  and  introduction  of  new  products  and  services
utilizing  new  technologies.  Competitive  pressures  may force the  Company to
implement new  technologies  at substantial  cost, and competitors may implement
new  technologies  before the Company is able to  implement  such  technologies,
allowing such  competitors to provide such enhanced  services before the Company
is able to. There can be no  assurance  that the Company will be able to respond
to such competitive  pressures and implement such technologies on a timely basis
or at an  acceptable  cost.  If the Company is unable to respond to  competitive
pressures,  implement new technologies on a timely basis,  penetrate new markets
in a timely  manner in  response  to  changing  market  conditions  or  customer
requirements,  or if new or  enhanced  services  offered  by the  Company do not
achieve a significant degree of market  acceptance,  any such event could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS

     To efficiently  produce customer bills in a timely manner, the Company must
record and process millions of call detail records quickly and accurately. While
the Company  believes  that its billing and  information  systems are  currently
sufficient  for its  operations,  such  systems will  require  enhancements  and
ongoing  investments,  including as volume increases.  There can be no assurance
that the Company will not  encounter  difficulties  in enhancing  its systems or
integrating  new  technology  into its systems.  The inability of the Company to
implement  any  required  system  enhancement,  to  acquire  new  systems  or to
integrate  new  technology  in a timely and cost  effective  manner could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations. See "Item 1.  Business -- Information Systems."

VARIABILITY OF OPERATING RESULTS

     The  Company's  quarterly  operating  results have  fluctuated in the past,
primarily  as a result  of the  evolution  of the  Company's  business,  and may
fluctuate  significantly  in the  future as a result of a  variety  of  factors,
including:  (i) pricing  changes;  (ii)  changes in the mix of services  sold or
channels  through which those  services are sold;  (iii) changes in user demand,
customer terminations of service,  capital expenditures and other costs relating
to the  expansion  of the  Viatel  Network;  (iv) the  timing  and  costs of any
acquisitions of customer bases and businesses, services or technologies; (v) the
timing and costs of  marketing  and  advertising  efforts;  (vi) the  effects of
government  regulation  and  regulatory  changes;  and (vii)  specific  economic
conditions in the  telecommunications  industry.  Such variability  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of  operations.  Any  significant  shortfall in demand for the Company's
services in relation to the  Company's

                                       28
<PAGE>






expectations, or the occurrence of any other factor which causes revenue to fall
significantly  short of the Company's  expectations,  would also have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  In  addition,  the  uncertainty  of  revenue  growth  coupled  with
substantial  planned increases in operating expenses and the continued evolution
in the Company's  transmission  methodology from switchless resale to use of the
Viatel Network may result in substantial quarterly fluctuations in the Company's
operating  results which could have a material  adverse  effect on the Company's
business,  financial  condition  and  results  of  operations.  See "--  Limited
Operating   History;   Substantial  Net  Losses  and  Negative  Cash  Flow  from
Operations;  Expected Future Net Losses and Negative Cash Flow from  Operations;
Substantial Leverage," and "Item 6.  Selected Financial Data."

RELIANCE ON THIRD PARTIES FOR LEASED CAPACITY

     Other than certain  interests in digital  fiber optic  cables,  the Company
does not currently own any  telecommunications  transmission lines. As a result,
the Company  depends upon  facilities-based  carriers,  some of which are or may
become  competitors  of the  Company,  to provide its  services.  The  Company's
profitability  depends,  in part,  on its ability to obtain and  utilize  leased
capacity on a  cost-effective  basis.  The Company leases  capacity  pursuant to
agreements  with  twelve-month  terms and is  vulnerable to changes in its lease
arrangements,  such as price increases and service  cancellations.  Although the
Company  believes that it has and will continue to enjoy favorable  arrangements
with the  facilities-based  carriers  from which it leases  transmission  lines,
there can be no assurance  that such  arrangements  will continue or that leased
capacity will continue to be available at  cost-effective  rates.   See "Item 1.
Business -- The Viatel  Network"  and  "Item 1.  Business -- Carrier Contracts."


                                       29
<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


     The following statements are filed as part of this Report:

                                                                       FORM 10-K
Financial Statements:                                                   PAGE NO.
                                                                       ---------

Independent Auditors' Report...........................................     31

Consolidated Balance Sheets as of December 31, 1996 and  1995..........     32

Consolidated Statements of Operations for the Years Ended
     December 31, 1996, 1995 and 1994..................................     33

Consolidated Statements of Stockholders' Equity (Deficit) for the
     Years ended December 31, 1996, 1995 and 1994......................     34

Consolidated Statements of Cash Flows for the Years ended
     December 31, 1996, 1995 and 1994..................................     35

Notes to Consolidated Financial Statements for the Years
     Ended December 31, 1996, 1995 and 1994............................     36

II. Valuation and Qualifying Accounts..................................     47




All other schedules have been omitted because the required information either is
not  applicable or is shown in the  consolidated  financial  statements or notes
thereto.


                                       30
<PAGE>


                         INDEPENDENT AUDITORS' REPORT






The Board of Directors and Stockholders
Viatel, Inc:

We have  audited the  consolidated  financial  statements  of Viatel,  Inc.  and
subsidiaries as listed in the accompanying  index. In connection with our audits
of  the  consolidated  financial  statements,  we  also  audited  the  financial
statement  schedule  as listed in the  accompanying  index.  These  consolidated
financial  statements and financial statement schedule are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
consolidated  financial statements and financial statement schedule based on our
audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Viatel,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1996 in  conformity  with  generally  accepted  accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.



                                             KPMG PEAT MARWICK LLP

      New York, New York
      March 7, 1997


                                       31
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995

                                                       1996           1995
                                                  ------------    -----------
                                ASSETS

Current Assets:
  Cash and cash equivalent .....................  $ 75,796,102    $ 8,934,914
  Marketable securities, current ...............     8,181,332     25,004,050
  Trade accounts receivable, less
    allowance for doubtful accounts
    of $602,000 and $473,000, respectively .....     8,542,305      4,723,664
Other receivable ...............................     4,633,571      2,757,675
Prepaid expenses................................       789,307        742,803
                                                  ------------     ----------
    Total current asset ........................    97,942,617     42,163,106
                                                  ------------     ----------
Marketable securities, non-current .............     9,004,075      1,127,442
Property and equipment, net ....................    21,074,417     15,715,121
Deferred financing and registration fees, less
  accumulated amortization of $742,000 and
  $364,000, respectively........................     3,046,897      3,431,540
Intangible assets, net .........................     1,973,910      2,070,055
Other assets ...................................     1,622,534      1,106,182
                                                  ------------    -----------
                                                  $134,664,450    $65,613,446
                                                  ============    ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
Accrued telecommunications costs ................ $ 11,915,671     $11,056,235
Accounts payable and other accrued expenses .....    5,916,223      4,591,628
Commissions payable .............................      349,646        300,655
Current installments of obligations under
  capital leases.................................       96,064             --
                                                   -----------     ----------
Total current liabilities .......................   18,277,604     15,948,518
                                                   -----------     ----------
Long term liabilities:
  Senior discount notes, less discount of
    $42,945,967 and $53,416,992, respectively....   77,754,033     67,283,008
Obligations under capital leases, excluding
  current installments...........................      149,983             --
                                                   -----------    -----------
    Total long term liabilities .................   77,904,016     67,283,008
                                                   ===========    ===========
Commitments and contingencies
Stockholders' equity (deficit):
  Common Stock, $.01 par value.  Authorized
    50,000,000 shares, issued and outstanding
    22,513,226 and 10,736,135 shares,
    respectively.................................      225,132        107,361
Class A Common Stock, $.01 par value.
  Authorized 10,000,000 shares, issued and
  outstanding no shares and 2,904,846 shares,
  respectively...... ............................           --         29,048
Additional paid-in capita1 ......................  125,236,410     30,099,011
Unearned compensation ...........................     (130,080)       (78,000)
Cumulative translation adjustment ...............     (862,458)      (164,676)
Accumulated deficit .............................  (85,986,174)   (47,610,824)
                                                   -----------    -----------
   Total stockholders' equity (deficit) .........   38,482,830    (17,618,080)
                                                  ------------    -----------
                                                  $134,664,450    $65,613,446
                                                  ============    ===========


          See accompanying notes to consolidated financial statements.

                                       32
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                      1996           1995           1994
                                                    --------      ---------      ----------

<S>                                               <C>            <C>            <C>
Telecommunications revenue....................... $50,418,694    $32,313,293    $26,267,741
                                                  ------------   ------------   ------------
 Operating expenses:
   Costs of telecommunications services .........   42,130,308     27,648,340     22,952,941
   Selling, general and administrative expenses..   32,856,785     24,327,537     14,317,791
   Depreciation and amortization ................    4,801,624      2,636,787        789,359
   Equipment impairment loss ....................           --        560,419             --
                                                  ------------   ------------   ------------
      Total operating expenses ..................   79,788,717     55,173,083     38,060,091
Other income (expenses):
   Interest income ..............................    1,852,323      3,281,926        213,611
   Interest expense .............................  (10,848,025)    (8,856,317)      (771,782)
   Share in loss of affiliate ...................       (9,625)       (41,530)      (144,867)
                                                  ------------   ------------   ------------
      Net loss .................................. $(38,375,350)  $(28,475,711)  $(12,495,388)
                                                  ============   ============   ============
      Net loss per common share ................. $      (2.47)  $      (2.09)  $      (1.22)
                                                  ============   ============   ============
      Weighted average common shares outstanding    15,514,479     13,640,980     10,252,416
                                                  ============   ============   ============

</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       33
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

 <TABLE>
<CAPTION>

                                        NUMBER
                                         OF
                           NUMBER OF    CLASS A
                            COMMON      COMMON                  CLASS A       ADDITIONAL
                            STOCK       STOCK        COMMON      COMMON        PAID-IN
                            SHARES      SHARES       STOCK       STOCK         CAPITAL
                           ----------   --------     -------    --------      ----------
<S>                       <C>                <C>    <C>              <C>       <C>


Balance at January         8,575, 596          --    $ 85,756          --      $ 6,427,781
1994.............
Issuance of common
  stock and warrants,
  net of $412,338 issue
  costs..........          2,140,539           --      21,405          --        7,567,527
Issuance of Class A
  common stock, net
  of $977,132 issue
  costs..........                 --     2,904,846         --      29,048       15,987,173
Recognition of
  unearned
  compensation...                 --           --          --          --               --
Foreign currency
  transalation
  adjustment.....                 --            --         --          --               --
Net loss.........                 --            --         --          --               --
                           ----------     --------     ------      ------       ----------
Balance at December
 31, 1994........         10,716,135     2,940,846    107,161      29,048       29,982,211
Issuance of restricted
  common stock...             20,000            --        200          --          116,800
Foreign currency
  translatoin
  adjustment.....                 --            --         --          --               --
Net loss.........                 --            --         --          --               --
                           ----------     --------     ------      ------       ----------
Balance at December
  31, 1995.......         10,736,135     2,904,846    107,361      29,048       30,099,011
Issuance of restricted
  common stock...             66,666            --        667          --          389,333
Issuance of common
  stock, net of
  $9,541,954 issue
  cost...........          8,667,000            --     86,670          --       94,375,376
Conversion of Class A
common stock to
common stock.....          2,904,846    (2,904,846)    29,048     (29,048)              --
Stock options
exercised........            138,579            --      1,386          --          372,690
Foreign currency
 translation
 adjustment......                 --            --         --          --               --
Net loss.........                 --            --         --          --               --
                           ---------      --------     ------    --------       ----------
Balance at December
 31, 1996........         22,513,226            --   $225,132    $     --      $125,236,410
                          ==========      ========   ========    ========      ============


                                       34
<PAGE>

                                          CUMULATIVE
                             UNEARNED    TRANSLATION    ACCUMULATED
                           COMPENSATION   ADJUSTMENT    DEFICIT          TOTAL
                           ------------  -----------    -----------      -----


Balance at January           $(36,100)           --     $(6,639,725)     $  (162,288)
1994.............
Issuance of common
  stock and warrants,
  net of $412,338 issue
  costs..........                   --           --              --        7,588,662
Issuance of Class A
  common stock, net
  of $977,132 issue
  costs..........                   --           --              --       16,016,221
Recognition of
  unearned
  compensation...               36,100           --              --           36,100
Foreign currency
  transalation
  adjustment.....                   --        1,523              --            1,523
Net loss.........                   --           --     (12,495,388)     (12,495,388)
                               -------     ---------    ------------     ------------
Balance at December
 31, 1994........                   --        1,523     (19,135,113)      10,984,830
Issuance of restricted
  common stock...              (78,000)          --              --           39,000
Foreign currency
  translatoin
  adjustment.....                   --     (166,199)              --        (166,199)
Net loss.........                   --           --      (28,475,711)    (28,475,711)
                               -------     ---------     ------------    ------------
Balance at December
  31, 1995.......              (78,000)    (164,676)     (47,610,824)    (17,618,080)
Issuance of restricted
  common stock...              (52,080)           --              --         337,920
Issuance of common
  stock, net of
  $9,541,954 issue
  cost...........                   --            --              --      94,462,046
Conversion of Class A
common stock to
common stock.....                   --            --              --              --
Stock options
exercised........                   --            --              --         374,076
Foreign currency
 translation
 adjustment......                   --      (697,782)             --        (697,782)
Net loss.........                   --            --     (38,375,350)    (38,375,350)
                               -------     ---------     ------------    ------------
Balance at December
 31, 1996........            $(130,080)   $(862,458)    $(85,986,174)    $38,482,830
                             ==========   ==========     ============    ============


</TABLE>


<PAGE>




                         VIATEL, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994



<TABLE>
<CAPTION>
                                                         1996                1995             1994
                                                     -------------       ------------     -------------
<S>                                                 <C>                 <C>               <C>


Cash flows from operating activities:

  Net loss.....................................      $ (38,375,350)      $(28,475,711)    $(12,495,388)
  Adjustments to reconcile net loss
    to net cash used in operating activities:
    Depreciation and amortization..............          4,801,624          2,636,787          789,359
    Interest expense on senior discount notes..         10,783,468          8,773,438          364,506
    Accrued interest income on
      marketable securities ...................           (369,761)          (714,468)              --
    Provision for losses on accounts receivable          2,224,953          1,229,473          900,094
    Share in loss of affiliate.................              9,625             41,530          144,867
    Earned compensation........................            337,920             39,000           36,100
    Deferred financing and registration costs..                 --           (460,032)      (3,335,015)
    Equipment impairment loss..................                 --            560,419               --
  Changes in assets and liabilities:
    Increase in accounts receivable............         (6,057,936)        (2,127,611)      (1,052,611)
    Increase in prepaid expenses and
      other receivables .........................       (1,013,989)        (2,593,863)        (540,125)
    Increase in other assets and intangible asset         (315,056)          (991,345)          (9,273)
    Increase in accrued telecommunications
      costs, accounts payable, accrued
      expenses and commissions payable ..........        1,643,858          3,592,930        3,626,126
                                                      -------------       ------------     ------------
        Net cash used in operating activities ...      (26,330,644)       (18,489,453)     (11,571,360)
                                                      -------------       ------------     ------------
  Cash flows from investing activities:
    Purchase of property, equipment and software        (9,423,191)       (11,377,850)      (3,671,811)
    Purchase of marketable securities ...........      (30,571,006)       (55,495,423)              --
    Proceeds from maturity of marketable
      securities ................................       38,807,045         30,078,399               --
    Investment in affiliate .....................         (101,904)          (262,214)        (152,439)
    Issuance of notes receivable ................         (303,227)                --               --
    Purchase of sales organizations .............               --                 --       (1,171,320)
                                                        ----------           --------       -----------
       Net cash used in investing activities ....       (1,592,283)       (37,057,088)      (4,995,570)
                                                        -----------       -------------     -----------
  Cash flows from financing activities:
    Proceeds from issuance of Common Stock
      and warrants ..............................       94,836,122                 --        7,588,662
    Payments under capital leases ...............          (63,885)        (1,306,453)        (620,979)
    Repyament of notes payable ..................               --           (999,463)      (3,000,000)
    Proceeds from issuance of senior
      discount notes ............................               --                 --       57,999,971
    Proceeds from issuance of Class A Common Stock              --                 --       16,016,221
    Borrowings on notes payable .................               --                 --        3,000,000
                                                       ------------        -----------     ------------
       Net cash provided by (used in) financing
         activities .............................       94,772,237         (2,305,916)      80,983,875
                                                       -----------         -----------     -----------
    Effects of exchange rate changes on cash ....           11,878             25,757           17,212
                                                       -----------        ------------     ------------
    Net increase (decrease) in cash and
      cash equivalents ..........................       66,861,188        (57,826,700)      64,434,157
    Cash and cash equivalent at beginning of year        8,934,914         66,761,614        2,327,457
                                                       -----------        ------------     -----------
    Cash and cash equivalent at end of year .....      $75,796,102         $8,934,914      $66,761,614
                                                       ===========         ==========      ===========
    Supplemental disclosures of cash flow
      information:
     Interest paid ...............................        $64,557           $  58,040     $   425,608
                                                       ==========           =========     ===========
     Equipment acquired under capital lease
       obligations ...............................       $309,933           $      --     $   595,000
                                                       ==========           =========     ===========

</TABLE>





                  See accompanying notes to consolidated financial statements.

                                       35
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) DESCRIPTION OF BUSINESS

     Viatel,  Inc.  (the  "Company")  provides  value-added   telecommunications
services  primarily  to  businesses  operating  internationally.   In  order  to
effectuate  a  reincorporation  in the  State  of  Delaware,  VIA USA,  Ltd.  (a
predecessor  Colorado  corporation)  merged  with  and  into  its  wholly  owned
subsidiary,  Viatel,  Inc., on October 11, 1994. The surviving  entity,  Viatel,
Inc., has reflected all assets and liabilities at historical cost.

(B) PRINCIPLES OF CONSOLIDATION

     The consolidated  financial  statements include the accounts of the Company
and its wholly owned subsidiaries.  All significant  inter-company  balances and
transactions have been eliminated in consolidation. Investments in affiliates in
which the Company has  significant  influence but does not exercise  control are
accounted for under the equity method.

(C) CASH AND CASH EQUIVALENTS

     The Company's  policy is to maintain its uninvested cash at minimum levels.
Cash equivalents,  which include highly liquid debt instruments purchased with a
maturity of three months or less,  were  $71,765,458  and $3,116,218 at December
31, 1996 and 1995, respectively.

(D) REVENUE

     The  Company  records  telecommunications  revenue as  earned,  at the time
services are provided.

 (E) PROPERTY AND EQUIPMENT

     Property and equipment consist  principally of  telecommunications  related
equipment such as switches,  fiber optic cable systems, remote nodes and related
computer software and is stated at cost. Equipment acquired under capital leases
is stated at the present value of the future minimum lease payments. Maintenance
and repairs are expensed as incurred.

     Depreciation is provided using the straight-line  method over the estimated
useful lives of the related assets.  Leasehold  improvements  are amortized over
the life of the lease or useful life of the  improvement,  whichever is shorter.
The estimated useful lives are as follows:

     Communications system................................ 5 to 7 years
     Fiber optic cable systems............................ 15 years
     Leasehold improvements............................... 2 to 5 years
     Furniture, equipment and other....................... 5 years


                                       36
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(F) INTANGIBLE ASSETS

     Goodwill,  which represents the excess of purchase price over fair value of
net assets  acquired,  is amortized on a  straight-line  basis over the expected
periods to be benefited, seven years.

     Acquired  employee base and sales force in place  represents the intangible
assets associated with the acquisition of independent sales organizations and is
being amortized over three years.

     Deferred  financing and  registration  fees represent debt financing  costs
incurred to issue and register debt and which are being  amortized over the term
of the related debt.

     The costs of all other  intangible  assets are being  amortized  over their
useful lives, ranging from one to five years.

     The Company's  intangible  assets are assessed for  recoverability at least
quarterly.  The Company assesses the  recoverability of its intangible assets by
determining  whether the  amortization of the related  intangible  asset balance
over its remaining life can be recovered  through  projections  of  undiscounted
future  operating  cash flows of the related  intangible  assets.  The amount of
intangible asset impairment,  if any, is measured based on projected  discounted
future  operating  cash flows using a discount  rate  reflecting  the  Company's
average cost of funds. The assessment of the recoverability of intangible assets
will be impacted if estimated future operating cash flows are not achieved.

(G) INCOME TAXES

     Deferred  tax  assets and  liabilities  are  recognized  for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is recognized in income or expense in the period it occurs.

(H) FOREIGN CURRENCY TRANSLATION

     Foreign  currency assets and liabilities are translated  using the exchange
rates in effect at the balance sheet date.  Results of operations are translated
using the average exchange rates prevailing  throughout the year. The effects of
exchange  rate   fluctuations  on  translating   foreign   currency  assets  and
liabilities  into U.S.  dollars are accumulated as part of the foreign  currency
translation  adjustment in stockholders'  equity.  Gains and losses from foreign
currency  transactions  are  included  in selling,  general  and  administrative
expenses in the period in which they occur.  For the years  ending  December 31,
1996,  1995 and 1994,  the  Company  experienced  $10,637  in  foreign  exchange
transaction  losses and  $107,846  and $15,234 in foreign  exchange  transaction
gains, respectively.

(I) NET LOSS PER SHARE

     Net loss per common and common  equivalent  share is based on the  weighted
average  number of common  shares  outstanding  during  each  period.  Per share
amounts have been retroactively restated to give effect to a reverse stock split
at a ratio of 3-to-2. (See Note 7).



                                       37
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994


(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


 (J) CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to concentration
of credit  risk  consist  primarily  of  temporary  cash  investments  and trade
receivables.  The Company restricts  investment of temporary cash investments to
financial  institutions  with  high  credit  standing.   Credit  risk  on  trade
receivables  is  minimized  as a result of the large and  diverse  nature of the
Company's worldwide customer base.

(K) RECLASSIFICATIONS

     Certain  reclassifications  have been made to the  prior  year's  financial
statements to conform to the current year's presentation.

(L) USE OF ESTIMATES

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

(M) ADDITIONAL ACCOUNTING POLICIES

     Additional accounting policies are incorporated into the notes herein.

(N) STOCK OPTION PLAN

     Prior to January 1, 1996,  the Company  accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such,  compensation  expense  was  recorded  on the date of grant only if the
current market price of the underlying  stock  exceeded the exercise  price.  On
January 1, 1996, the Company  adopted SFAS No. 123,  "Accounting for Stock-Based
Compensation,"  which permits  entities to recognize as expense over the vesting
period  the  fair  value  of all  stock-based  awards  on  the  date  of  grant.
Alternatively,  SFAS No.  123 also  allows  entities  to  continue  to apply the
provisions  of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based  method, as defined in SFAS No. 123, had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide  the pro forma  disclosure  required by SFAS No. 123.
See Note 10.

(O) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

     The Company  adopted the  provisions of SFAS No. 121,  "Accounting  for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of" on
January  1,  1996.  SFAS  121  requires  that  long-lived   assets  and  certain
identifiable  intangibles be reviewed for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceed the fair value of the assets.  Assets to be disposed
of are reported at the lower of the carrying  amount or fair value less costs to
sell.  Adoption  of SFAS 121 did not have a  material  impact  on the  Company's
financial  position,  results of  operations,  or  liquidity.

                                       38
<PAGE>

                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994


 (2) ACQUISITIONS

During  December  1994, the Company  acquired all of the issued and  outstanding
stock of two of its independent  sales  organizations.  These  acquisitions have
been accounted for under the purchase method of accounting and, accordingly, the
aggregate purchase price of $1,171,320 has been allocated to the assets acquired
and  liabilities  assumed,  based upon  their  estimated  fair  values as of the
acquisition date. Additionally, the results of operations of these organizations
are  included  in the  consolidated  statements  of  operations  from  dates  of
acquisition.  Included  among the assets  acquired are  intangible  assets which
principally related to the acquired employee base and sales force in place which
will be amortized over three years, which corresponds to the estimated remaining
service  lives of the  employee  base and sales  force.  The  allocation  of the
aggregate purchase price is summarized as follows:


  Current assets................................   $  161,486
  Current liabilities...........................     (232,865)
  Property and equipment........................      102,922
  Intangible and other assets acquired .........    1,139,777
                                                   ----------
       Total purchase price ....................   $1,171,320
                                                   ==========

     Due to the nature of the  organizations  acquired,  pro forma revenue would
equal reported  revenue and the pro forma net loss would be $194,007 higher than
the reported net loss for the year ended December 31, 1994.

(3) INVESTMENTS IN DEBT SECURITIES

     Management determines the appropriate  classification of its investments in
debt  securities at the time of purchase and classifies them as held to maturity
or available for sale. The Company does not invest in securities for the purpose
of trading  and as such does not  classify  any  securities  as  trading.  These
investments are diversified  among high credit quality  securities in accordance
with the Company's  investment policy. Debt securities that the Company has both
the intent and ability to hold to maturity are carried at amortized  cost.  Debt
securities  for which the Company does not have the intent or ability to hold to
maturity are classified as available for sale. Securities available for sale are
carried  at fair  value,  with the  unrealized  gains  and  losses,  net of tax,
reported in a separate component of stockholders' equity.

     The amortized  cost of debt  securities  classified as held to maturity are
adjusted for  amortization  of premiums  and  accretion of discounts to maturity
over the estimated  life of the  security.  Such  amortization  and interest are
included in interest  income.  There were no  securities  classified  as held to
maturity as of December 31, 1996.


                                       39
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

(3) INVESTMENTS IN DEBT SECURITIES (CONTINUED)

     The following is a summary of the fair value of securities held to maturity
and securities available for sale at December 31, 1996 and 1995:

<TABLE>
<CAPTION>

                                     1996                       1995
                                   ----------  --------------------------------------
                                   SECURITIES  SECURITIES   SECURITIES
                                   AVAILABLE    HELD TO      AVAILABLE
                                   FOR SALE     MATURITY      FOR SALE       TOTAL
                                  -----------  ----------   -----------   -----------

<S>                               <C>          <C>          <C>           <C>
U.S. Treasury obligations........ $ 6,932,280  $       --   $        --   $        --
Money Market Instruments.........          --   1,402,562            --     1,402,562
Federal agencies obligations.....   1,121,401          --     5,786,796     5,786,796
Corporate debt securities........   9,131,726          --    18,942,134    18,942,134
                                  -----------  ----------    ----------   -----------
          Total.................. $17,185,407  $1,402,562   $24,728,930   $26,131,492
                                  ===========  ==========   ===========   ===========

</TABLE>

   Unrealized gains or losses on securities classified as available for sale are
not material at December 31, 1996 and 1995.

     Securities  available for sale at December 31, 1996 by contractual maturity
are shown below:

     Due within one year.............................    $ 8,181,332
     Due after one year through two years............      9,004,075
                                                         -----------
         Total.......................................    $17,185,407
                                                         ===========

     Expected  maturities  will  differ  from  contractual   maturities  because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.

     There were no  changes  in the  classification  of any  securities  held to
maturity or securities  available for sale from the time of purchase to the time
of maturity or sale.

(4) PROPERTY AND EQUIPMENT

     Property and equipment consists of the following as of December 31:

                                                      1996              1995
                                                   -----------      -----------
Communications system ..........................   $20,514,213      $13,997,966
Fiber optic cable systems ......................       309,933              --
Leasehold improvements .........................     2,122,911        1,062,742
Furniture, equipment and other .................     4,750,137        2,755,600
Construction in progress .......................       100,962          679,935
                                                   -----------      -----------
                                                    27,798,156       18,496,243
Less accumulated depreciation and amortization .     6,723,739        2,781,122
                                                   -----------      -----------
                                                   $21,074,417      $15,715,121
                                                   ===========      ===========

     At  December  31, 1996 and 1995,  construction  in  progress  represents  a
portion of the current  expansion  of the European  Network.  As of December 31,
1996 and  1995,  $575,100  and  $508,600,  respectively,  of  interest  has been
capitalized with respect to this project.

                                       40
<PAGE>

                         VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

(5) INTANGIBLE ASSETS

     Intangible assets consist of the following as of December 31:

                                                 1996           1995
                                              ----------    ----------
     Acquired employee base and sales
       force in place .....................   $1,607,225    $1,607,225
     Goodwill .............................      474,065       474,065
     Purchased software ...................    1,157,467       661,999
     Other ................................      374,539       133,834
                                              ----------    ----------
                                               3,613,296     2,877,123
     Less accumulated amortization ........    1,639,386       807,068
                                              ----------    ----------
                                              $1,973,910    $2,070,055
                                              ==========    ==========

(6) LONG TERM LIABILITIES

  (A) SENIOR DISCOUNT NOTES

     On December 21, 1994, the Company  issued  $120,700,000,  representing  the
aggregate  principal amount, of 15% senior unsecured  discount notes due January
15,  2005 for  approximately  $58,000,000.  The notes  will  fully  accrete on a
semiannual  compounding  basis to face value on January 15, 2000 with semiannual
interest payments commencing July 15, 2000 until maturity.

     The notes are redeemable at the Company's  option,  in whole or in part, at
any time on or after January 15, 2000 until  maturity at redemption  prices that
range from 110% to 100% of the  notes'  face value  plus  accrued  interest.  In
addition,  at any time prior to January 15,  1998,  the Company may redeem up to
$42,245,000  of the face  value of the notes  with the  proceeds  of one or more
public equity  offerings at 115% of the then accreted  value of the notes,  plus
accrued interest,  if any, to the redemption date. Upon a change of control, the
Company is required to make an offer to purchase  the notes at a purchase  price
equal to 101% of their accreted value, plus accrued interest,  if any. The notes
contain  certain  covenants that,  among other things,  limit the ability of the
Company and certain of its subsidiaries to incur indebtedness, make pre-payments
of certain indebtedness and pay dividends.

     On December 31, 1996,  the Company  estimated the fair value of these notes
to be $77,800,000  which  approximates its accreted value. The estimate is based
on quoted market prices for the notes.

  (B) NOTE PAYABLE -- MCI

     On January 28, 1994, the Company  converted  $2,666,755 of its  outstanding
balance to MCI  Telecommunications  Corporation  as of December 31, 1993 to a 7%
note  secured by the  Company's  accounts  receivable.  At  December  31,  1994,
$966,755  was  outstanding  under this note and was  included in notes  payable,
current. At December 31, 1995, the note was no longer outstanding.

(7) STOCKHOLDERS' EQUITY

     On April 5, 1994, the Company issued  2,140,538  shares of its Common Stock
for $8,000,000 and warrants to purchase additional shares of Common Stock. As of
December 31,  1995,  the  warrants  have expired and are no longer  exercisable.
Additionally,  certain  rights of the  Company  to  repurchase  a portion of the
shares have expired.  Certain of such shares are subject to certain registration
rights in the event of public offerings by the Company.


                                       41
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

(7) STOCKHOLDERS' EQUITY (CONTINUED)

     On December 16, 1994,  the Company  authorized  the creation of  10,000,000
shares of non-voting,  $.01 par value, Class A Common Stock (the "Class A Common
Stock").  On December  21, 1994,  2,904,846  shares of Class A Common Stock were
issued for net proceeds of $16,016,221.

     On October 23,  1996,  the Company  completed  an initial  public  offering
("IPO") of its common  stock,  $.01 par value per share  (the  "Common  Stock"),
through which it sold 8,667,000 shares of Common Stock at $12 a share and raised
approximately $104 million of gross proceeds ($94.5 million of net proceeds).

     In connection with the IPO, all outstanding  shares of Class A Common Stock
were converted into shares of Common Stock at a ratio of one-to-one and all then
outstanding shares of Common Stock were then subject to a reverse stock split at
a ratio of 3-to-2. In addition, the Company's stockholders approved an amendment
to the Company's  Certificate of Incorporation which (i) authorized the Board of
Directors to issue up to 1 million shares of Preferred Stock, $.01 par value per
share,  of which no shares were issued and  outstanding at December 31, 1996, in
one or more  series  and to fix the  powers,  voting  rights,  designations  and
preferences of each series and (ii) eliminated the Class A Common Stock.

     All earnings per share and share data  presented  herein have been restated
retroactively  to reflect the conversion of the Class A Common Stock into Common
Stock  and the  reverse  stock  split of all then  outstanding  shares of Common
Stock.

(8) INCOME TAXES

     The statutory Federal tax rates for the years ended December 31, 1996, 1995
and 1994 were  35%.  The  effective  tax  rates  were  zero for the years  ended
December  31, 1996,  1995 and 1994 due to the Company  incurring  net  operating
losses for which no tax benefit was recorded.

     For Federal income tax purposes,  the Company has unused net operating loss
carryforwards  of approximately  $64,783,000  expiring in 2007 through 2011. The
availability of the net operating loss  carryforwards to offset income in future
years is restricted  as a result of the  Company's  issuance of its Common Stock
and as a result of future sales of Company stock and other events.

     The tax  effect of  temporary  differences  that  give rise to  significant
portions of the deferred tax assets are as follows:

                                                            DECEMBER 31,
                                                    --------------------------
                                                         1996          1995
                                                    ------------  ------------
Accounts receivable principally
  due to allowance for doubtful accounts.........   $    352,000  $    166,000
OID Interest not deductible in current period....      6,914,000     2,933,000
Net operating loss carryforwards                      22,674,000    13,231,000
                                                    ------------  ------------
      Total gross deferred tax assets............     29,940,000    16,330,000
Less valuation allowance                             (29,940,000)  (16,330,000)
                                                    ------------  ------------
      Net deferred tax assets....................   $         --  $         --
                                                    ============  ============

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation of future  taxable  income during the periods in
which those temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax  planning  in  making  these  assessments.  During  1996 and  1995,  the
valuation allowance increased by $13,610,000 and $9,703,000, respectively.

                                       42
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

 (9) SEGMENT DATA

     The information below summarizes export sales by geographic area.

                                       1996          1995           1994
                                   -----------    -----------    -----------
Latin America ..................   $14,401,901    $12,093,771    $12,914,289
Europe .........................            --             --      7,720,166
Africa .........................        78,833      1,207,225      1,832,547
Asia/Pacific Rim ...............     6,159,507      4,375,412      2,061,246
Middle East ....................        77,832        554,139      1,449,093
Other ..........................       267,446        369,425        290,400
                                   -----------    -----------    -----------
                                   $20,985,519    $18,599,972    $26,267,741
                                   ===========    ===========    ===========

     In late 1994, the European Network became operational and the Company began
to  establish  direct  sales  organizations  within  Europe.  For the year ended
December  31,  1996,   revenue,   operating  loss,   capital   expenditures  and
depreciation   expense  from  this   geographic   segment   were   approximately
$19,917,000,  $14,753,000, $6,475,000 and $2,258,000, respectively. For the year
ended December 31, 1995,  revenue,  operating  loss,  capital  expenditures  and
depreciation   expense  from  this   geographic   segment   were   approximately
$11,601,000,  $11,076,000,  $9,959,000 and $243,000, respectively.  Identifiable
assets  as of  December  31,  1996 and 1995 for  this  geographic  segment  were
approximately $15,103,000 and $10,216,000,  respectively.  For December 31, 1994
and for the year then ended,  results  from  operations,  capital  expenditures,
depreciation  expense and identifiable  assets for this geographic  segment were
not significant.

(10) STOCK OPTION PLAN

     During  1993,  the Board of  Directors  approved  the 1993  Flexible  Stock
Incentive Plan (the "Stock  Incentive Plan") under which  "non-qualified"  stock
options ("NQSOs") to acquire shares of Common Stock may be granted to employees,
directors and consultants of the Company and "incentive"  stock options ("ISOs")
to  acquire  shares  of Common  Stock may be  granted  to  employees,  including
non-employee directors.  The Stock Incentive Plan also provides for the grant of
stock  appreciation  rights  ("SARs")  and  shares  of  restricted  stock to the
Company's employees, directors and consultants.

     The Stock  Incentive  Plan  provides for the issuance of up to a maximum of
1,833,333  shares  of  Common  Stock  and  is  currently   administered  by  the
Compensation  Committee  of the Board of  Directors.  Under the Stock  Incentive
Plan,  the option price of any ISO may not be less than the fair market value of
a share of Common  Stock on the date on which the option is granted.  The option
price of an NQSO may be less than the fair market  value on the date the NQSO is
granted if the Board of Directors so determines.  An ISO may not be granted to a
"ten  percent  stockholder"  (as such term is  defined  in  Section  422A of the
Internal  Revenue  Code) unless the exercise  price is at least 110% of the fair
market  value of the Common Stock and the term of the option may not exceed five
years  from the date of  grant.  Common  Stock  subject  to a  restricted  stock
purchase or bonus agreement is transferable  only as provided in such agreement.
The maximum term of each stock option  granted to persons other than ten percent
stockholders is ten years from the date of grant.

     The per share weighted  average fair value of stock options  granted during
1996 and 1995 was $2.29 and $2.83, respectively,  on the date of grant using the
Black-Scholes  option pricing model with the following  assumptions:  (1) a risk
free interest rate of 5.5% in 1996 and 7.9% in 1995,  (2) an expected life of 10
years for both 1996 and 1995,  (3)  volatility of  approximately  35.9% for both
1996 and 1995 and (4) an annual dividend yield of 0% for both 1996 and 1995.


                                       43
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

(10) STOCK OPTION PLAN (CONTINUED)

   The Company  applies APB Opinion No. 25 in accounting for its Stock Incentive
Plan and,  accordingly,  no compensation  cost has been recognized for its stock
options in the financial  statements.  Had the Company  determined  compensation
cost based on the fair value at the grant date for its stock  options under SFAS
No.  123,  the  Company's  net loss would have been  increased  to the pro forma
amounts indicated below:

                                                        1996             1995
                                                     -----------     -----------
         As reported net loss (in 000s)              $  (38,375)     $  (28,476)

         Pro forma net loss (in 000s)                   (38,986)        (28,642)

         As reported net loss per share                   (2.47)          (2.09)

         Pro forma net loss per share                     (2.51)          (2.10)

     Pro forma net loss  reflects  only  options  granted  during 1996 and 1995.
Therefore,  the full impact of calculating  compensation  cost for stock options
under SFAS No. 123 is not  reflected in the pro forma net loss  amounts  because
compensation  cost is reflected over the options'  vesting period of three years
and  compensation  cost for  options  granted  prior to  January  1, 1995 is not
considered.

     Stock option activity under the Stock Incentive Plan is shown below:

                                             WEIGHTED
                                             AVERAGE
                                             EXERCISE        NUMBER OF
                                             PRICES           SHARES
                                             --------       ----------

Outstanding at January 1, 1994 ...........    $0.75            80,662
Granted ..................................     3.74           316,992
Forfeited ................................     3.74            (5,000)
                                              -----         ---------
Outstanding at December 31, 1994 .........     3.13           392,654
Granted ..................................     5.85           177,654
Forfeited ................................     3.80           (96,171)
                                              -----         ---------
Outstanding at December 31, 1995 .........     4.01           474,137
Granted ..................................     5.85           822,265
Forfeited ................................     5.77          (187,987)
Exercised ................................     2.70          (138,579)
                                              -----         ---------
Outstanding at December 31, 1996 .........     5.42           969,836
                                              =====         =========
Exercisable at December 31, 1996 .........    $4.52           504,370
                                              =====         =========


     The range of exercise prices for stock options  outstanding and exercisable
at December 31, 1996 is $0.75 to $5.85.

     Prior to the  adoption of the Stock  Incentive  Plan,  5,913  options  were
granted.  These options were  exercised at $0.75 per share during the year ended
December 31, 1996.

     The exercise price of all options approximates the fair market value of the
Common Stock on the date of grant.


                                       44
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994

(10) STOCK OPTION PLAN (CONTINUED)

     In addition,  prior to the adoption of the Stock  Incentive Plan, the Board
of Directors  authorized the issuance of up to 233,333 shares of Common Stock as
compensation  to employees and  consultants  of the Company of which 219,639 are
available for issuance at December 31, 1996.

(11) EQUIPMENT IMPAIRMENT LOSS

     On August 4, 1995, the Company entered into an agreement (the  "Termination
Agreement") with TMI USA (Delaware),  Inc. ("TMI") which terminated its existing
agreements.  Pursuant  to the terms of the  Termination  Agreement,  the Company
prepaid the existing capital lease obligation of $1,025,000,  thereby  acquiring
all of the equipment  previously  leased from TMI. The capital lease  obligation
was payable over a three year term  expiring on December 31, 1996.  In addition,
on August 4, 1995, the Company entered into a short-term  facilities  management
agreement  with TMI  effective  through  August 31, 1996,  pursuant to which TMI
performed  maintenance,  equipment housing, site preparation,  network extension
and  other  similar   services  for  the  European  Network  under  its  present
configuration.  Thereafter,  the Company managed the European  Network using its
own personnel rather than a third party provider.

     As a result of the Termination  Agreement,  the Company has written off the
costs relating to the original installation of such equipment.  Accordingly, the
Company  has  recognized  non-cash  charges  of  approximately   $560,000  which
represent the original  installation  costs of such equipment and the difference
between the carrying  value and the expected  selling price of the equipment not
redeployed.

(12) COMMITMENTS AND CONTINGENCIES

  (A) LEASES

     At  December  31,  1996,  the Company was  committed  under  non-cancelable
operating and capital  leases for the rental of office space and for fiber optic
cable systems.

     The Company's  future minimum  capital and operating  lease payments are as
follows:

                                         CAPITAL   OPERATING
                                        --------   ----------

1997................................... $117,638   $1,199,192
1998 ..................................  111,934    1,102,739
1999 ..................................   51,991      959,363
2000 ..................................       --      883,796
2001 ..................................       --      485,603
Thereafter ............................       --    1,741,324
                                        --------   ----------
                                         281,563   $6,372,017
Less interest costs ...................   35,516   ==========
                                        --------
                                        $246,047
                                        ========

     Total rent expense  amounted to  $1,530,889,  $948,826 and $935,267 for the
years ended December 31, 1996, 1995 and 1994, respectively.


                                       45
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1996, 1995 AND 1994


(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)


  (B) CARRIER CONTRACTS

     The Company has entered into  contracts to purchase  transmission  capacity
from various  domestic and foreign  carriers.  By committing to purchase minimum
volumes of  transmission  capacity from carriers,  the Company is able to obtain
guaranteed  rates which are more favorable than those  generally  offered in the
marketplace.  The minimum volume commitments are $12,552,000 for the year ending
December 31, 1997.

   (C) PURCHASE COMMITMENTS

     The Company is continually upgrading and expanding the European Network and
the Omaha, Nebraska switching facility. In connection therewith, the Company has
entered into purchase commitments to expend approximately $7,415,000.

  (D) EMPLOYMENT CONTRACTS

     The Company  has  employment  contracts  with  certain  officers at amounts
generally equal to such officers' current levels of compensation.  The Company's
remaining  commitments  at December 31, 1996 for the next three years under such
contracts aggregates approximately $1,558,000.

  (E) LITIGATION

     As a result of the Company's  transition to direct sales  organizations  in
Europe,  the Company's  independent  sales  representative in Spain has asserted
breach of contract and certain other claims.  An arbitration  proceeding  before
the American Arbitration  Association in New York is pending. The representative
in Spain is seeking $5.8 million in damages.  The Company  believes  that it has
meritorious  defenses  against  each of the  claims  alleged  and is  vigorously
pursuing all defenses  available to it. The Company  believes that any potential
adverse determination will not have a material adverse  effect  on the Company's
business, financial condition or results of operations.

(13) REGULATORY MATTERS

     The  Company  is  subject  to  regulation  in  countries  in  which it does
business.  The  Company  believes  that  an  adverse  determination  as  to  the
permissibility  of the Company's  services under the laws and regulations of any
such country would not have a material adverse long-term effect on its business.

                                       46
<PAGE>


                              VIATEL, INC. AND SUBSIDIARIES
                    SCHEDULE VII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>


                                                     ADDITIONS
                                         BALANCE AT  CHARGED TO                            BALANCE
                                         BEGINNING   COSTS AND                    OTHER     AT END
      DESCRIPTION                        OF PERIOD   EXPENSES    RETIREMENTS     CHANGES   OF PERIOD
      -----------                        ----------  ----------  -----------     -------   ---------

<S>                                        <C>       <C>         <C>                <C>     <C>
Reserves and allowances deducted
     from asset accounts:

        Allowances for uncollectible
          accounts receivable


     Year ended December 31, 1994          336,000     912,000     773,000          -       475,000

     Year ended December 31, 1995          475,000   1,230,000   1,232,000          -       473,000

     Year ended December 31, 1996          473,000   2,225,000   2,096,000          -       602,000

   Allowance for asset impairment

     Year ended December 31, 1995                -     560,000           -          -       560,000

     Year ended December 31, 1996          560,000           -           -          -       560,000



</TABLE>

                                       47
<PAGE>



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.

     Information with respect to executive  officers of the Company is presented
in Item 4 of this Report under the caption "Executive Officers of the Company."

     The  information  appearing  under the  captions  "Proposal 1 - Election of
Directors,"  "Certain  Transactions"  and "Section  16(a)  Beneficial  Ownership
Reporting  Compliance"  in the  Company's  Proxy  Statement  for its 1997 Annual
Meeting of Stockholders (the "1997 Proxy  Statement") is incorporated  herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION.

     Information  appearing under the caption  "Executive  Compensation"  in the
1997 Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     Information  appearing under the caption "Security  Ownership of Beneficial
Owners and  Management" in the 1997 Proxy  Statement is  incorporated  herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Information appearing under the caption "Certain  Transactions" in the 1997
Proxy Statement is incorporated herein by reference.


                                         PART IV

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

   (A)   1.    FINANCIAL STATEMENTS.

          The  financial  statements  are  included  in Part II,  Item 8 of this
          Report.

          2.   FINANCIAL  STATEMENT  SCHEDULES  AND  SUPPLEMENTARY   INFORMATION
               REQUIRED TO BE SUBMITTED.

         Any required  financial  statement  schedules  are included in Part II,
         Item 8 of this Report.

   (B)   Report on Form 8-K.

         The  Company  did not file any  Current  Reports on Form 8-K during the
         fourth quarter of 1996.


                                       48
<PAGE>


   (C)   Index to Exhibits.

         The following is a list of all Exhibits filed as part of this Report:

  EXHIBIT NO.                     DESCRIPTION OF DOCUMENTS
--------------                    ------------------------

  3.1(i)(a)       - Amended and Restated  Certificate  of  Incorporation  of the
                    Company   (incorporated   herein  by  reference  to  Exhibit
                    3.1(i)(a) to the  Company's  Registration  Statement on Form
                    S-1,  filed on August 7, 1996,  Registration  No.  333-09699
                    (the "Company's S-1")).*

  3.1(ii)         - Amended and  Restated  Bylaws of the  Company  (incorporated
                    herein by reference to Exhibit  3.1(ii)(b)  of the Company's
                    S-1).*

  4.1             - Indenture,  dated  as of  December  15,  1994,  between  the
                    Company  and United  States  Trust  Company of New York,  as
                    Trustee  (incorporated herein by reference to Exhibit 4.2 to
                    the Company's  Registration  Statement on Form S-4, filed on
                    May 24, 1995,  Registration  No.  33-92696  (the  "Company's
                    S-4").*

  4.2             - Notes  Registration  Rights Agreement,  dated as of December
                    15,  1994,  between  the  Company  and Morgan  Stanley & Co.
                    Incorporated  in  connection  with the  Company's 15% Senior
                    Discount  Notes due 2005  (incorporated  herein by reference
                    to Exhibit 4.3 to the Company's S-4).*

  4.3             - Company  Common Stock  Certificate  (incorporated  herein by
                    reference to Exhibit 4.4 to the Company's S-1).*

  4.4             - Amendment No. 1 to the  Indenture,  dated as of December 15,
                    1994,  between the Company and United  States Trust  Company
                    of New York,  as Trustee  (incorporated  herein by reference
                    to Exhibit 4.5 to the Company's S-1).*

 10.1             - Placement Agreement,  dated as of December 15, 1994, between
                    the   Company   and  Morgan   Stanley  &  Co.   Incorporated
                    (incorporated  herein by  reference  to Exhibit  10.3 to the
                    Company's S-4).*

 10.2             - Common  Stock  Registration  Rights  Agreement,  dated as of
                    December 15,  1994,  among the  Company,  Martin  Varsavsky,
                    Juan Manuel Aisemberg and Morgan Stanley & Co.  Incorporated
                    in connection with the Company's  shares of non-voting Class
                    A Common Stock (incorporated  herein by reference to Exhibit
                    10.4 to the Company's S-4).*

 10.3             - The  Company's   Amended   Flexible  Stock   Incentive  Plan
                    (incorporated  herein by reference  to Exhibit  10.33 to the
                    Company's S-1).*+

 10.4             - Carrier  Contract,  dated  as of May 3,  1993,  between  the
                    Company  and AT&T Corp.  (incorporated  herein by  reference
                    to Exhibit 10.6 to the Company's S-4).*

 10.5             - MCI Carrier Agreement,  dated as of January 1, 1995, between
                    the   Company   and   MCI   Telecommunications   Corporation
                    (incorporated  herein by  reference  to Exhibit  10.7 to the
                    Company's S-4).*

 10.6             - Mercury  Carrier  Services  Agreement,  dated as of March 1,
                    1994,   between  the  Company  and  Mercury   Communications
                    Limited  (incorporated  herein by  reference to Exhibit 10.8
                    to the Company's S-4).*

 10.7             - Provision and Management Facilities  Agreement,  dated as of
                    October   17,   1994,   between   the  Company  and  Mercury
                    Communications  Limited (incorporated herein by reference to
                    Exhibit 10.9 to the Company's S-4).*

                                       49
<PAGE>

 10.8             - Managed  Telecommunications  Network Agreement,  dated as of
                    February 5, 1993,  between  the  Company  and TMI USA,  Inc.
                    (Delaware)  (incorporated  herein by  reference  to  Exhibit
                    10.10 to the Company's S-4).*

 10.9             - Representative  Agreement,  dated as of June 1, 1993, and as
                    amended  as of April  19,  1995,  between  the  Company  and
                    Maximiliano  Fernandez  (incorporated herein by reference to
                    Exhibit 10.11 to the Company's S-4).*

 10.10            - Representative  Agreement,  dated  as  of  April  23,  1993,
                    between the  Company  and Viatel de Colombia  Comunicaciones
                    S.A.  (incorporated  herein by reference to Exhibit 10.12 to
                    the Company's S-4).*

 10.11            - Stock  Purchase  Agreement,  dated as of September 30, 1993,
                    as amended as of April 5,  1994,  and as further  amended as
                    of  December  21,  1994,  between  the Company and S-C V-Tel
                    Investments,  L.P.  (incorporated  herein  by  reference  to
                    Exhibit 10.13 to the Company's S-4).*

 10.12            - Stock  Purchase  Agreement,  dated  as  of  April  5,  1994,
                    between   the   Company   and   COMSAT   Investments,   Inc.
                    (incorporated  herein by reference  to Exhibit  10.14 to the
                    Company's S-4).*

 10.13            - Stock  Purchase  Agreement,  dated as of  December  3, 1993,
                    between  the  Company  and  Herald  L.  Ritch  (incorporated
                    herein by reference to Exhibit 10.15 to the Company's S-1).

 10.14            - Stock  Purchase  Agreement,  dated as of  October  1,  1993,
                    between the Company and Robert Conrads  (incorporated herein
                    by reference to Exhibit 10.16 to the Company's S-4).*

 10.15            - Stock  Purchase  Agreement,  dated as of  December  9, 1993,
                    between the Company and Robert Conrads  (incorporated herein
                    by reference to Exhibit 10.17 to the Company's S-4).*

 10.16            - Shareholders'  Agreement,  dated as of April 5, 1994, and as
                    amended as of November 22,  1994,  by and among the Company,
                    Martin   Varsavsky,   Juan  Manuel   Aisemberg   and  COMSAT
                    Investments,  Inc.  (incorporated  herein  by  reference  to
                    Exhibit 10.19 to the Company's S-4).*

 10.17            - Shareholders' Agreement,  dated as of September 30, 1993, as
                    amended as of December 9, 1993 and as further  amended as of
                    April 5, 1994,  November 22, 1994 and December 21, 1994,  by
                    and  among  the  Company,  Martin  Varsavsky  and S-C  V-Tel
                    Investments,  L.P.  (incorporated  herein  by  reference  to
                    Exhibit 10.21 to the Company's S-4).*

 10.18            - Purchase  Agreement,  dated as of December 8, 1994,  between
                    the Company and ECI Telecom,  Inc.  (incorporated  herein by
                    reference to Exhibit 10.22 to the Company's S-4).*

 10.19            - Carrier  Digital  Services  Agreement,  dated as of November
                    29,  1994,  between the Company and Norline  Communications,
                    Inc.  (incorporated  herein by reference to Exhibit 10.23 to
                    the Company's Form S-4).*

 10.20            - Commercial  Lease  Agreement,  dated as of November 1, 1993,
                    and  Addendum,  dated as of  December  8, 1994,  between the
                    Company and 123rd Street  Partnership in connection with the
                    Company's premises located in Omaha, Nebraska  (incorporated
                    herein by reference to Exhibit 10.24 to the  Company's  Form
                    S-4).*

 10.21            - Asset  Purchase  Agreement,  dated as of  August  27,  1993,
                    between  the  Company  and Sitel  Corporation  (incorporated
                    herein by reference to Exhibit 10.26 to the Company's S-4).*

                                       50
<PAGE>

 10.22            - Memorandum  of  Understanding,  dated as of August 4,  1994,
                    between the Company and TMI USA, Inc.  (incorporated  herein
                    by reference to Exhibit 10.27 to the Company's S-4).*

 10.23            - Settlement  Agreement,  dated as of August 4, 1994,  between
                    the  Company  and TMI  USA,  Inc.  (incorporated  herein  by
                    reference to Exhibit 10.28 to the Company's S-4).*

 10.24            - Release  and  Settlement  Agreement,  dated as of  August 1,
                    1994,  between  the  Company  and AT&T  Corp.  (incorporated
                    herein by reference to Exhibit 10.29 to the Company's S-4).*

 10.25            - Termination  Agreement,  dated  August 4, 1995,  between the
                    Company  and  Telemedia  International,  Inc.  (incorporated
                    herein by reference to Exhibit 10.31 to the Company's S-4).*

 10.26            - Facilities  Management and Services  Agreement,  dated as of
                    August 4, 1995,  between  Viatel U.K.  Limited and Telemedia
                    International  Ltd.  (incorporated  herein by  reference  to
                    Exhibit 10.32 to the Company's S-4).*

 10.27            - Agreement  of Lease,  dated  August  7,  1995,  between  the
                    Company and Joseph P. Day Realty Corp.  (incorporated herein
                    by reference to Exhibit 10.33 to the Company's S-4).*

 10.28            - Severance  Agreement,  dated  July  30,  1996,  between  the
                    Company and Alan Levy  (incorporated  herein by reference to
                    Exhibit 10.30 to the Company's S-1).*+

 10.29            - Employment   Agreement   between   the  Company  and  Martin
                    Varsavsky  (incorporated  herein  by  reference  to  Exhibit
                    10.31 to the Company's S-1).*+

 10.30            - Employment  Agreement  between  the  Company  and Michael J.
                    Mahoney  (incorporated  herein by reference to Exhibit 10.32
                    to the Company's S-1).*

 10.31            - Amended Flexible Stock Incentive Plan  (incorporated  herein
                    by reference to Exhibit 10.33 to the Company's S-1).*+

 21.1             - Subsidiaries of the Company.

 23.1             - Consent of KPMG Peat Marwick LLP.

 23.2             - Consent of Edward Isaacs & Company LLP.

 24.1             - Power of Attorney (Appears on signature page).

 27.1             - Financial Data Schedule.

----------

   *  Incorporated herein by reference.

   +  Management contract or compensatory plan or arrangement.


                                       51
<PAGE>


                                       SIGNATURES

   Pursuant  to the  requirements  of  Section  13 or  15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned,  thereunto duly authorized, in the City and State
of New York, on the 28th day of March, 1997.

                                    VIATEL, INC.

                                    By: /S/ MARTIN VARSAVSKY
                                       -----------------------------------
                                       Martin Varsavsky
                                       Chairman of the Board and Chief
                                       Executive Officer


      KNOWN BY ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes and appoints Allan S. Shaw and Sheldon M. Goldman his
true and lawful  attorney-in-fact and agent, 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 to this Annual Report on Form 10-K,
and to file  the  same,  with  all  exhibits  thereto  and  other  documents  in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every  act and thing  requisite  and  necessary  to be done in and about the
premises,  as fully as he might or  could do in  person,  hereby  ratifying  and
confirming all that said  attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.

      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 28th day of March, 1997.

            SIGNATURE                                 TITLE(S)
            ---------                                 --------

      /s/ MARTIN VARSAVSKY
-----------------------------------        Chairman of the Board and
        Martin Varsavsky                   Chief Executive Officer
                                           (Principal Executive Officer)

      /s/ MICHAEL J. MAHONEY
-----------------------------------        President, Chief Operating Officer
       Michael J. Mahoney                  and Director (Principal
                                           Executive Officer)

     /s/ ALLAN S. SHAW
-----------------------------------        Vice President, Finance;
          Allan S. Shaw                    Chief Financial Officer;
                                           Treasurer (Principal
                                           Financial and Accounting
                                           Officer) and Director

     /S/ PAUL G. PIZZANI
-----------------------------------        Director
         Paul G. Pizzani


      /S/ W. JAMES PEET
-----------------------------------        Director
          W. James Peet


      /S/ ANTONIO CARRO
-----------------------------------        Director
          Antonio Carro


                                       52
<PAGE>

<TABLE>
<CAPTION>
                                                                                       SEQUENTIALLY
  EXHIBIT NO.                     DESCRIPTION OF DOCUMENTS                             NUMBERED PAGE
--------------                    ------------------------                             -------------

<S>               <C>                                                                  <C>
  3.1(i)(a)       - Amended and Restated  Certificate  of  Incorporation  of the
                    Company   (incorporated   herein  by  reference  to  Exhibit
                    3.1(i)(a) to the  Company's  Registration  Statement on Form
                    S-1,  filed on August 7, 1996,  Registration  No.  333-09699
                    (the "Company's S-1")).*

  3.1(ii)         - Amended and  Restated  Bylaws of the  Company  (incorporated
                    herein by reference to Exhibit  3.1(ii)(b)  of the Company's
                    S-1).*

  4.1             - Indenture,  dated  as of  December  15,  1994,  between  the
                    Company  and United  States  Trust  Company of New York,  as
                    Trustee  (incorporated herein by reference to Exhibit 4.2 to
                    the Company's  Registration  Statement on Form S-4, filed on
                    May 24, 1995,  Registration  No.  33-92696  (the  "Company's
                    S-4").*

  4.2             - Notes  Registration  Rights Agreement,  dated as of December
                    15,  1994,  between  the  Company  and Morgan  Stanley & Co.
                    Incorporated  in  connection  with the  Company's 15% Senior
                    Discount  Notes due 2005  (incorporated  herein by reference
                    to Exhibit 4.3 to the Company's S-4).*

  4.3             - Company  Common Stock  Certificate  (incorporated  herein by
                    reference to Exhibit 4.4 to the Company's S-1).*

  4.4             - Amendment No. 1 to the  Indenture,  dated as of December 15,
                    1994,  between the Company and United  States Trust  Company
                    of New York,  as Trustee  (incorporated  herein by reference
                    to Exhibit 4.5 to the Company's S-1).*

 10.1             - Placement Agreement,  dated as of December 15, 1994, between
                    the   Company   and  Morgan   Stanley  &  Co.   Incorporated
                    (incorporated  herein by  reference  to Exhibit  10.3 to the
                    Company's S-4).*

 10.2             - Common  Stock  Registration  Rights  Agreement,  dated as of
                    December 15,  1994,  among the  Company,  Martin  Varsavsky,
                    Juan Manuel Aisemberg and Morgan Stanley & Co.  Incorporated
                    in connection with the Company's  shares of non-voting Class
                    A Common Stock (incorporated  herein by reference to Exhibit
                    10.4 to the Company's S-4).*

 10.3             - The  Company's   Amended   Flexible  Stock   Incentive  Plan
                    (incorporated  herein by reference  to Exhibit  10.33 to the
                    Company's S-1).*+

 10.4             - Carrier  Contract,  dated  as of May 3,  1993,  between  the
                    Company  and AT&T Corp.  (incorporated  herein by  reference
                    to Exhibit 10.6 to the Company's S-4).*

 10.5             - MCI Carrier Agreement,  dated as of January 1, 1995, between
                    the   Company   and   MCI   Telecommunications   Corporation
                    (incorporated  herein by  reference  to Exhibit  10.7 to the
                    Company's S-4).*

 10.6             - Mercury  Carrier  Services  Agreement,  dated as of March 1,
                    1994,   between  the  Company  and  Mercury   Communications
                    Limited  (incorporated  herein by  reference to Exhibit 10.8
                    to the Company's S-4).*

 10.7             - Provision and Management Facilities  Agreement,  dated as of
                    October   17,   1994,   between   the  Company  and  Mercury
                    Communications  Limited (incorporated herein by reference to
                    Exhibit 10.9 to the Company's S-4).*

                                       53
<PAGE>


 10.8             - Managed  Telecommunications  Network Agreement,  dated as of
                    February 5, 1993,  between  the  Company  and TMI USA,  Inc.
                    (Delaware)  (incorporated  herein by  reference  to  Exhibit
                    10.10 to the Company's S-4).*

 10.9             - Representative  Agreement,  dated as of June 1, 1993, and as
                    amended  as of April  19,  1995,  between  the  Company  and
                    Maximiliano  Fernandez  (incorporated herein by reference to
                    Exhibit 10.11 to the Company's S-4).*

 10.10            - Representative  Agreement,  dated  as  of  April  23,  1993,
                    between the  Company  and Viatel de Colombia  Comunicaciones
                    S.A.  (incorporated  herein by reference to Exhibit 10.12 to
                    the Company's S-4).*

 10.11            - Stock  Purchase  Agreement,  dated as of September 30, 1993,
                    as amended as of April 5,  1994,  and as further  amended as
                    of  December  21,  1994,  between  the Company and S-C V-Tel
                    Investments,  L.P.  (incorporated  herein  by  reference  to
                    Exhibit 10.13 to the Company's S-4).*

 10.12            - Stock  Purchase  Agreement,  dated  as  of  April  5,  1994,
                    between   the   Company   and   COMSAT   Investments,   Inc.
                    (incorporated  herein by reference  to Exhibit  10.14 to the
                    Company's S-4).*

 10.13            - Stock  Purchase  Agreement,  dated as of  December  3, 1993,
                    between  the  Company  and  Herald  L.  Ritch  (incorporated
                    herein by reference to Exhibit 10.15 to the Company's S-1).

 10.14            - Stock  Purchase  Agreement,  dated as of  October  1,  1993,
                    between the Company and Robert Conrads  (incorporated herein
                    by reference to Exhibit 10.16 to the Company's S-4).*

 10.15            - Stock  Purchase  Agreement,  dated as of  December  9, 1993,
                    between the Company and Robert Conrads  (incorporated herein
                    by reference to Exhibit 10.17 to the Company's S-4).*

 10.16            - Shareholders'  Agreement,  dated as of April 5, 1994, and as
                    amended as of November 22,  1994,  by and among the Company,
                    Martin   Varsavsky,   Juan  Manuel   Aisemberg   and  COMSAT
                    Investments,  Inc.  (incorporated  herein  by  reference  to
                    Exhibit 10.19 to the Company's S-4).*

 10.17            - Shareholders' Agreement,  dated as of September 30, 1993, as
                    amended as of December 9, 1993 and as further  amended as of
                    April 5, 1994,  November 22, 1994 and December 21, 1994,  by
                    and  among  the  Company,  Martin  Varsavsky  and S-C  V-Tel
                    Investments,  L.P.  (incorporated  herein  by  reference  to
                    Exhibit 10.21 to the Company's S-4).*

 10.18            - Purchase  Agreement,  dated as of December 8, 1994,  between
                    the Company and ECI Telecom,  Inc.  (incorporated  herein by
                    reference to Exhibit 10.22 to the Company's S-4).*

 10.19            - Carrier  Digital  Services  Agreement,  dated as of November
                    29,  1994,  between the Company and Norline  Communications,
                    Inc.  (incorporated  herein by reference to Exhibit 10.23 to
                    the Company's Form S-4).*

 10.20            - Commercial  Lease  Agreement,  dated as of November 1, 1993,
                    and  Addendum,  dated as of  December  8, 1994,  between the
                    Company and 123rd Street  Partnership in connection with the
                    Company's premises located in Omaha, Nebraska  (incorporated
                    herein by reference to Exhibit 10.24 to the  Company's  Form
                    S-4).*

 10.21            - Asset  Purchase  Agreement,  dated as of  August  27,  1993,
                    between  the  Company  and Sitel  Corporation  (incorporated
                    herein by reference to Exhibit 10.26 to the Company's S-4).*

                                       54
<PAGE>


 10.22            - Memorandum  of  Understanding,  dated as of August 4,  1994,
                    between the Company and TMI USA, Inc.  (incorporated  herein
                    by reference to Exhibit 10.27 to the Company's S-4).*

 10.23            - Settlement  Agreement,  dated as of August 4, 1994,  between
                    the  Company  and TMI  USA,  Inc.  (incorporated  herein  by
                    reference to Exhibit 10.28 to the Company's S-4).*

 10.24            - Release  and  Settlement  Agreement,  dated as of  August 1,
                    1994,  between  the  Company  and AT&T  Corp.  (incorporated
                    herein by reference to Exhibit 10.29 to the Company's S-4).*

 10.25            - Termination  Agreement,  dated  August 4, 1995,  between the
                    Company  and  Telemedia  International,  Inc.  (incorporated
                    herein by reference to Exhibit 10.31 to the Company's S-4).*

 10.26            - Facilities  Management and Services  Agreement,  dated as of
                    August 4, 1995,  between  Viatel U.K.  Limited and Telemedia
                    International  Ltd.  (incorporated  herein by  reference  to
                    Exhibit 10.32 to the Company's S-4).*

 10.27            - Agreement  of Lease,  dated  August  7,  1995,  between  the
                    Company and Joseph P. Day Realty Corp.  (incorporated herein
                    by reference to Exhibit 10.33 to the Company's S-4).*

 10.28            - Severance  Agreement,  dated  July  30,  1996,  between  the
                    Company and Alan Levy  (incorporated  herein by reference to
                    Exhibit 10.30 to the Company's S-1).*+

 10.29            - Employment   Agreement   between   the  Company  and  Martin
                    Varsavsky  (incorporated  herein  by  reference  to  Exhibit
                    10.31 to the Company's S-1).*+

 10.30            - Employment  Agreement  between  the  Company  and Michael J.
                    Mahoney  (incorporated  herein by reference to Exhibit 10.32
                    to the Company's S-1).**

 10.31            - Amended Flexible Stock Incentive Plan (incorporated herein
                    by reference to Exhibit 10.33 to the Company's S-1).*+

 21.1             - Subsidiaries of the Company.

 23.1             - Consent of KPMG Peat Marwick LLP.

 23.2             - Consent of Edward Isaacs & Company LLP.

 24.1             - Power of Attorney (Appears on signature page).

 27.1             - Financial Data Schedule.

----------

   *  Incorporated herein by reference.

   +  Management contract or compensatory plan or arrangement.

</TABLE>

                                       56