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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, 1998

|_| 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                             13-3787366
(STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)

  685 THIRD AVENUE, NEW YORK, NEW YORK                 10017
(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 [X].

     THE AGGREGATE  MARKET VALUE OF THE VOTING STOCK HELD BY  NON-AFFILIATES  OF
THE REGISTRANT AS OF MARCH 12, 1999 WAS APPROXIMATELY $441,580,321.  AS OF MARCH
12, 1999,  23,185,765 SHARES OF THE REGISTRANT'S  COMMON STOCK, $0.01 PAR VALUE,
WERE OUTSTANDING.

     DOCUMENTS INCORPORATED BY REFERENCE.  NONE.
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<PAGE>

                                TABLE OF CONTENTS

                                                                          PAGE

PART I....................................................................  1
                                                                             
  ITEM 1.     BUSINESS....................................................  1
              Overview....................................................  1
              Market Opportunities........................................  2
              Business Strategy...........................................  3
              Services Currently Offered..................................  5
              The Viatel Network..........................................  6
              Circe Network...............................................  8
              Sales and Marketing; Customers..............................  9
              Information Systems........................................  10
              Carrier Contracts..........................................  11
              Competition................................................  11
              Government Regulation......................................  12
              Employees..................................................  19
                                                                             
  ITEM 2.     PROPERTIES.................................................  19
                                                                             
  ITEM 3.     LEGAL PROCEEDINGS..........................................  19
                                                                             
  ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........  19
                                                                             
PART II..................................................................  20
                                                                             
  ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED              
              STOCKHOLDER MATTERS........................................  20
                                                                             
  ITEM 6.     SELECTED FINANCIAL DATA....................................  20
                                                                             
  ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL              
              CONDITION AND RESULTS OF OPERATIONS........................  23
                                                                             
  ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT                 
              MARKET RISKS...............................................  44
                                                                             
  ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................  45
                                                                             
  ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON               
              ACCOUNTING AND FINANCIAL DISCLOSURE........................  65
                                                                             
PART III.................................................................  65
                                                                             
  ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........  65
                                                                             
  ITEM 11.   EXECUTIVE COMPENSATION......................................  69
                                                                             
  ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL                        
             OWNERS AND MANAGEMENT. .....................................  73
                                                                             
  ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............  75
                                                                             
PART IV..................................................................  75
                                                                             
  ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND                   
              REPORTS ON FORM 8-K........................................  75

                                       i

<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 OUR NETWORK AND
RELATED SERVICES,  THE DEVELOPMENT AND EXPANSION OF OUR BUSINESS, THE MARKETS IN
WHICH OUR 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 OUR FUTURE RESULTS."


                                     PART I

ITEM 1.   BUSINESS.

OVERVIEW

         We are a rapidly growing international communications company providing
high  quality,  competitively  priced,  long  distance  communication  and  data
services, to end users, carriers and resellers. Our revenue has grown from $32.3
million in 1995 to $135.2 million in 1998, and today we have direct sales forces
in twelve Western  European  cities and an indirect sales force in more than 180
locations in Western Europe.

          To capitalize on the  opportunities  presented by full deregulation of
the  telecommunications  industry in Western  Europe,  we  established  an early
presence and sought  aggressively to acquire (1) licenses,  (2)  interconnection
and (3)  infrastructure.  Today,  we have  licenses in each of Belgium,  France,
Germany,  The Netherlands and the United Kingdom and  interconnection  with each
incumbent  telecommunications operator in these countries. We also have licenses
in  each  of   Italy,   Spain  and   Switzerland   where  we  expect  to  obtain
interconnection during the fourth quarter of 1999.

          We  recently  completed  construction  of the first  ring of our fiber
optic  network which  connects,  among other cities,  London,  Paris,  Brussels,
Antwerp, Rotterdam and Amsterdam.  Construction activity has also commenced on a
second  ring which will  connect  Paris,  Nancy,  Strasbourg,  Frankfurt,  Koln,
Dusseldorf,  Essen and  Amsterdam,  and a third ring which will  connect  Essen,
Hamburg, Berlin, Dresden,  Leipzig,  Nurnberg,  Munich, Stuttgart and Frankfurt.
The proceeds from the sale of our recent debt offering will be used to construct
two  additional  fiber optic rings,  our fourth and fifth rings.  Ring four will
connect  cities in southern  France to portions of rings one and two.  Ring five
will connect ring four with our network being  constructed  in Germany by way of
Switzerland.  These five  rings,  which  will  encompass  more than 7,500  route
kilometers, will comprise the "Circe Network."

          We currently  operate one of Europe's largest  pan-European  networks,
with points of presence in approximately  37 cities.  We believe that control of
network infrastructure is critical to becoming a high quality, low-cost provider
of  communications  services  because it will enable us to better manage service
offerings,   quality  of  transmission  and  costs.  Accordingly,  we  commenced
construction of the first ring of the Circe Network in 1998 and are currently in
the process of migrating from a network composed of  international  and domestic
leased circuits to a network composed primarily of owned fiber.

          We believe, and our experience to date has indicated, that demand from
end  users,  carriers  and  other  communications  companies  for  high  quality
transmission capacity in Europe will increase over the next several years due to
fundamental  changes in the communications  industry brought about by regulatory
and technical  improvements.  We also believe that cost  effective  transmission
capacity in Europe will allow new capacity intensive  applications to be created
which will fuel the need for additional capacity. The Circe Network should allow


<PAGE>
us to meet this increased  demand by providing  abundant  transmission  capacity
for:

          o    continued  growth in our existing  long  distance  voice  service
               business,

          o    additional  provision of wholesale  services to the large base of
               resellers  that  are  developing  as  deregulation  continues  in
               Western Europe,

          o    Internet, electronic-commerce, multi-media and video services and
               other new technologies and applications, and

          o    asynchronous  transfer mode, frame relay,  Internet  protocol and
               other high speed data transmission services.

         As part of our strategy to capture a share of the rapidly  growing data
market,  we  recently  entered  into an  arrangement  with  Lucent  Technologies
pursuant to which Lucent Technologies is installing  asynchronous  transfer mode
backbone network  equipment.  This backbone  equipment will enable us to provide
Internet  protocol,  frame relay and asynchronous  transfer mode services to our
customers.  Lucent  Technologies  has agreed to cooperate  with us in developing
marketing strategies to promote our data services, to train our personnel and to
assist us in achieving  network-to-network  interfaces  with  certain  specified
carriers.  In exchange,  we have agreed to allow Lucent  Technologies to use the
Circe Network to beta test newly developed products intended for Europe.

         We believe that our data network, which is scheduled to be commercially
operable in the third quarter of 1999,  will allow us to provide packet switched
voice,  video  conferencing,  private intranets and dedicated  Internet protocol
transport over an integrated  platform and offer end users high capacity,  speed
and reliability.  By engineering the Circe Network to integrate voice,  data and
multimedia  services  over a  variety  of  protocols,  we  expect  to  obtain  a
relatively low cost basis for provisioning our services.

MARKET OPPORTUNITIES

         International telecommunications is one of the fastest growing segments
of the long distance  industry,  having experienced a compounded growth in total
minutes of 15.5% per annum from 1988 to 1997.  In 1997,  according  to  industry
sources, the European  international long distance market for voice services was
the largest in the world,  with  approximately  29.6  billion  minutes or 43% of
international calling volume originating in Europe. A substantial portion of the
traffic originating in Europe terminates in Europe or the United States where we
have international gateway switches.

                         INTERNATIONAL TRAFFIC PATTERNS


                                    1997                   DESTINATION
                              OUTGOING MINUTES   EUROPE*       USA        OTHER
                              ----------------   ------        ---        ------
                                (in millions)
  United Kingdom.............       5,800           52%         13%         35%
  Germany....................       5,333           52           6          42
  France.....................       3,545           64           6          30
  Italy......................       2,352           57          11          32
  Switzerland................       2,164           70           4          26
  Netherlands................       1,535           75           6          19
  Belgium....................       1,228           85           4          11
  Spain......................       1,025           70           5          25

------------------
*  Europe-EU member states and Switzerland.
Source:  TeleGeography 1999.

         In 1997, the market for total domestic and international  long distance
in the Western European countries in which we operate represented  approximately
$104.3  billion,  with $87.4  billion  representing  national  long distance and
approximately  $16.9 billion  representing  international long distance (Source:
"The European Telecommunications Fact File 1998"). In many European Union member


                                       2
<PAGE>

states,  the ability to provide  telecommunications  services was liberalized on
January 1, 1998. We believe that regulatory liberalization in Western Europe and
technological  advancements  eventually will lead to market developments similar
to those  that  have  occurred  in the  United  States  and the  United  Kingdom
following deregulation, including an increase in both international and national
traffic volume, reduced prices, increased service offerings and the emergence of
new  entrants.  By 1997,  new  entrants had amassed  approximately  56.4% of the
United States  international  long distance market,  from  approximately 2.7% in
1985. (Source:  FCC Common Carrier Bureau). In addition,  from 1991 to July 1998
the number of licensed long distance competitors in the United Kingdom grew from
2 to 144 (Source: TeleGeography 1999).

         We believe there continues to be a shortage of cross-border capacity in
Europe.  Most  infrastructure  in Europe is owned and operated by the  incumbent
telecommunications   operator.   Under  the   traditional   system  of  carrying
cross-border    telecommunications    traffic   in   Europe,    the    incumbent
telecommunications  operators did not develop end-to-end  cross-border circuits,
but rather  connected their national  networks with other carriers at the border
pursuant to bilateral agreements. We believe the system of bilateralism resulted
in a serious shortage of cross-border  capacity in Europe.  We also believe that
cost effective transmission capacity in Europe will allow new capacity intensive
applications to be created which will fuel the need for additional capacity.

         There are currently three private systems carrying cross-border traffic
in  operation,  the Ulysses cable  system,  which is owned by MCI WorldCom,  the
Hermes Europe Railtel cable system and the KPN/Qwest  cable system.  The Ulysses
and KPN/Quest networks connect London, Amsterdam, Brussels, Paris and Frankfurt.
Hermes  connects  London,  Rotterdam,   Amsterdam,   Antwerp,  Brussels,  Paris,
Dusseldorf and Frankfurt. In addition, Level 3 Communications,  British Telecom,
Global  Crossing and Colt Telecom Group have announced  their plans to construct
fiber  optic  networks  in  Europe.  Cable &  Wireless  has also  announced  its
intention  to  invest  significant  resources  in  European   telecommunications
facilities  and  other  companies,  such as Global  One,  have  announced  their
intention to continue to focus on the  European  telecommunications  market.  We
believe that the Circe  Network will  provide a valuable  opportunity  to market
capacity to other  carriers  and new  entrants on an  attractive  cost-efficient
indefeasible right-of-use or long-term lease basis.

         We believe that a substantial  part of the capacity on existing  routes
has a number of  deficiencies  including (1) high costs,  (2) lack of end-to-end
quality control, (3) limited  availability of capacity,  (4) long lead times for
provisioning,  (5) lack of redundancy and (6) long delays for restoration. While
there  have been  significant  reductions  in leased  line  costs as a result of
deregulation,  these  deficiencies are exacerbated by the increase in demand for
capacity from new entrants,  thereby resulting in artificially and significantly
higher  costs.  We believe there is a  significant  opportunity  to provide high
quality, cost-effective capacity to new entrants.

BUSINESS STRATEGY

         Our  strategy is to become a fully  integrated  communications  company
that is well  positioned  to  take  advantage  of  growth  opportunities  in the
European communications industry. We believe that we can accomplish this goal by
becoming a low-cost  provider of services  through the  ownership of key network
infrastructure. The key elements of our strategy include:

          o    CAPITALIZE ON LARGE DEREGULATING EUROPEAN MARKETS

         Our principal  focus is on exploiting both  international  and national
long distance opportunities  presented by rapidly deregulating European markets.
In 1997, according to industry sources, the European international long distance
market for voice services was the largest in the world,  with  approximately  35
billion  minutes of use.  According  to  industry  sources,  Europe's  volume of
international minutes grew approximately 12% from 1996 to 1997. Industry sources
estimate the European  wholesale and retail market for all Internet services was
$1.9 billion in revenue for 1997.

          o    LEVERAGE  ESTABLISHED  MARKET  PRESENCE  AND  LOCAL  DISTRIBUTION
               NETWORK

         We established an early presence in Western Europe to capitalize on the
opportunities presented by deregulation of the telecommunications industry. As a
result,  we  gained  substantial  experience  in  the  operational,   technical,


                                       3
<PAGE>

financial and logistical  issues  involved in building a network and sales force
in Western Europe.  To date, we have established sales offices in twelve Western
European   cities  and  have   established   indirect  sales  offices,   through
arrangements with independent sales representatives and telemarketing agents, in
more  than  180  locations  in  Western  Europe.  We  believe  that we are  well
positioned to further  capitalize  on market  opportunities  in Western  Europe,
enhance  our  sales  force and  operations  and add  products  and  services  as
telecommunications markets continue to deregulate.

          o    LEVERAGE CIRCE NETWORK THROUGH RESELLERS AND CARRIERS

         To efficiently use capacity on our network, we sell switched minutes to
wholesale  customers  and other  resellers  in the United  States and the United
Kingdom. In addition,  we intend to sell switched minutes as well as capacity on
each ring of the Circe Network to resellers  and carriers.  The sale of switched
minutes allows us to more fully utilize our network and generate revenue.  While
we are constructing the Circe Network  primarily for our own use, we also intend
to  opportunistically  sell excess  capacity on the network  thus  reducing  our
construction costs associated with the Circe Network.

          o    FOCUS ON END USERS

         We  have   established  a  customer  base  of  small  and  medium-sized
businesses to which we currently  sell long  distance  voice  services.  Carrier
preselection,  scheduled  for the year 2000 for most  countries  in the European
Union, will further facilitate our ability to offer our services to end users at
economical  prices.  The Circe Network (1) allows us to reduce our transport and
interconnection  costs and (2) enhances our ability to sell competitively priced
services to end users,  particularly  businesses  requiring  multiple  points of
presence and significant capacity.

          o    OFFER A COMPREHENSIVE RANGE OF COMMUNICATION SERVICES

         Historically,  we only offered voice and  value-added  services such as
facsimile transmission.  The Circe Network will significantly expand our ability
to meet the growing demand for data services and to offer a comprehensive  range
of such  services  including  Internet  access and  transmission,  frame  relay,
asynchronous  transfer mode and Internet protocol  services,  as well as private
line,  managed  capacity  and data  center  co-location  services.  All of these
services are extremely  capacity  intensive and until  recently the high cost of
leased  transmission  capacity  made it  uneconomical  to offer  such  services.
Network  infrastructure  ownership will  facilitate our ability to provide these
services  and new  applications  which may be  developed  in the future that are
expected to drive  growth for  additional  high quality  capacity.  We expect to
begin offering data services by the end of 1999.

          o    BECOME A LOW COST PROVIDER OF COMMUNICATIONS SERVICES

         We believe  that it is critical to control key  elements of our network
in order to be a low-cost  provider  of  bundled  communications  services.  The
ownership  of these key  elements  will enable us to manage  service  offerings,
quality of  transmission  and costs. As part of our decision to own key portions
of our network, we (1) have invested in points of presence and switches, (2) are
in the  process  of  constructing  the  Circe  Network,  and (3) have  purchased
capacity or minimum investment units in digital fiber optic cable systems in and
between Western Europe and the U.S. The Circe Network's technologically advanced
fiber and transmission  electronics are expected to provide lower  installation,
operating  and  maintenance  costs than older fiber optic  systems  generally in
commercial use today and are also significantly more scalable.

          o    PURSUE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

         To date,  our  growth  primarily  has  been  internally  generated  and
managed.  In addition to  systematically  expanding  through internal growth, we
intend to expand our services  and network  capabilities  through  acquisitions,
investments and strategic alliances.  We believe that acquisitions,  investments
and strategic  alliances are an important  means of increasing  network  traffic
volume and achieving lower termination costs and desired economies of scale.


                                       4
<PAGE>

SERVICES CURRENTLY OFFERED

         We currently provide  competitively  priced long distance services with
value-added  features that  typically  have not been provided by the  respective
incumbent  telecommunications  operator  in many of the  countries  in  which we
operate. The products and services include switched and dedicated long distance,
800 services,  calling cards,  domestic and  international  private line,  debit
cards,  conference  calling,  advanced  billing  systems,  enhanced fax and data
connections and facilities  management.  We are actively exploring the provision
of new services including Internet access,  web hosting,  asynchronous  transfer
mode and frame relay  services,  the provision  and  management of intranets and
virtual private  networks and video  conferencing.  We recently  entered into an
arrangement  with Lucent  Technologies  to  facilitate  the  provision  of these
services in the future. See "-- The Viatel Network."

         Viatel's principal services include:

         VIADIRECT - a service permitting domestic and international  calling to
more than 230 countries and territories  through  interconnect  switched access.
This service is currently marketed exclusively in Belgium,  France, Germany, The
Netherlands  and the United  Kingdom  where we have full  interconnection  and a
national operator's license. In addition, preselection, limiting the requirement
to dial carrier selection codes, is available in Germany.

         VIADIRECT PLUS - provides  dedicated  access via a leased line from the
customer to our 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.

         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.

         VIAISDNFAX - permits domestic and international  facsimile transmission
to  more  than  230  countries  and  territories  through  switched  access  via
integrated  services digital network lines. In Spain, this service is restricted
to fax and voice band data pending the liberalization of the Spanish market.

         VIAWORLDFAX - permits domestic and international facsimile transmission
to more than 230 countries and territories  through  switched  access  utilizing
assigned pin codes.

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

         VIAGLOBE - provides calling card access from more than 50 countries. In
addition  to offering  savings  over the  calling  cards of AT&T,  MCI and other
providers of credit-based international calling cards, VIAGLOBE provides 24-hour
operator assistance and speed dialing.

         VIACARD - is a prepaid  international debit card which provides many of
the same features as VIAGLOBE on a prepaid basis.

         VIALINK  - is the new audio  conference  service,  allowing  automatic,
manual or operator  assisted  establishment  of conference calls 24 hours a day,
seven days a week.

         VIA0800 - a personal 0800 number  permitting  users to call the sponsor
at no cost.

DATA SERVICES

         The communications industry is expecting unparalleled growth in data in
the near term. To efficiently handle this growth, the industry has been evolving
away from circuit switching,  where a route is maintained for the duration of an
entire call, to packet  switching,  where  digital  packets of  information  for


                                       5
<PAGE>

various destinations are routed over a frame relay,  asynchronous  transfer mode
or Internet protocol network in an efficient and cost effective manner.

         As part of our strategy to capture a share of the rapidly  growing data
business   market,   we  recently   entered  into  an  arrangement  with  Lucent
Technologies  pursuant to which Lucent  Technologies is installing  asynchronous
transfer  mode  backbone  network  equipment.  This  backbone  will enable us to
provide Internet protocol,  frame relay and asynchronous  transfer mode services
to our  customers.  Asynchronous  transfer mode is a switching and  transmission
technology based on encapsulation of information in short (53-byte) fixed-length
packets or  "cells."  Asynchronous  transfer  mode  switching  was  specifically
developed to allow  switching and  transmission  of mixed voice,  data and video
(sometimes  referred to as "multimedia"  information).  Lucent  Technologies has
agreed to cooperate  with us in developing  marketing  strategies to promote our
data   services,   to  train  our  personnel  and  to  assist  us  in  achieving
network-to-network  interfaces, with certain specified carriers. In exchange, we
are allowing  Lucent  Technologies  to use the Circe  Network to beta test newly
developed products intended for Europe.

         We believe that our data network, which is scheduled to be commercially
operable in the third quarter of 1999, will allow us to provide packet  switched
voice,  video  conferencing,  private intranets and dedicated  Internet protocol
transport over an integrated  platform and offer end users high capacity,  speed
and reliability.  By engineering the Circe Network to integrate voice,  data and
multimedia  services,  over a  variety  of  protocols,  we  expect  to  obtain a
relatively low cost basis for provisioning our services.

THE VIATEL NETWORK

         We currently  operate one of the largest  pan-European  networks,  with
international  gateway  switching centers in New York, New York,  Somerset,  New
Jersey and London,  England which are connected by  company-owned  digital fiber
optic transmission facilities. Our network is an integrated digital, switch-
based telecommunications network with more than 37 points of presence in Western
Europe including switches in Amsterdam (The  Netherlands),  Barcelona and Madrid
(Spain),  Brussels (Belgium),  Frankfurt  (Germany),  Milan and Rome (Italy) and
Paris (France).  Additional points of presence are placed to enhance network use
as required by the various  interconnection  agreements to which we are a party.
We  intend  to  install  additional  points  of  presence  in  cities  with both
significant   calling  activity  directed  to  our  switched-based   cities  and
significant potential for originating and terminating international and domestic
long distance traffic as required for interconnection with other carriers.

         Access to our services is obtained either through  "indirect access" or
"dedicated  access."  Indirect  access  requires the end user to use (1) carrier
selection codes (e.g., "1623" in The Netherlands, Belgium and France, "01079" in
Germany),  which  requires us to pay a regulated  tariff for using the incumbent
telecommunications  operator's network to originate the calls; (2) paid access,
which requires the end user to pay another carrier to access our services; (3)
national or  international  toll-free,  which  accesses  one of our  switches by
direct dial or (4) call reorigination,  which enables the end user to receive a
return call  providing  a dial tone  originated  from one of our U.S.  switching
centers.  End users using dedicated  access are connected to one of our switches
or points of  presence  by a private  leased  line  connected  to the end user's
premises.  Carrier  selection  and  dedicated  access are our access  methods of
choice  in  countries  where  we have  achieved  full  interconnection  with the
incumbent   telecommunications   operator.  We  currently  have  interconnection
agreements with Belgacom (Belgium),  British Telecom (United Kingdom),  Deutsche
Telekom (Germany),  France Telecom (France) and KPN (The  Netherlands).  We also
have  interconnection  agreements  with Cable & Wireless  (United  Kingdom)  and
Infostrada (Italy).  Currently,  substantially all of our business customers use
one  or  more  forms  of  indirect   access.   We  are   currently   negotiating
interconnection  agreements with Telefonica de Espana and Telecom Italia.  There
can be no assurance that we will be successful in securing such  interconnection
agreements in a satisfactory or timely manner.

         Our ownership of  transmission  infrastructure  and switches reduce our
reliance on other carriers,  enables routing of telecommunications  traffic over
multiple   transmission  paths,  aids  in  controlling  costs  and  permits  the
compilation of call record data and other customer  information.  See "Item 7 --
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Liquidity and Capital Resources."

         THE EUROPEAN  PORTION OF OUR NETWORK.  Our network in Europe  currently
consists of an international  gateway switching center in London and switches in
the Western European cities mentioned  above. These cities were chosen as switch


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<PAGE>

locations due to the substantial number of international  calls originating from
such  cities.  Our  network has been  primarily  used for call  origination.  We
anticipate  increasing use of our network to transport  calls in Western Europe.
See "-Carrier Contracts."

         PRIVATE  LINE  CIRCUITS.  While  some of our nine  switches  in Western
Europe are currently connected to our international  gateway switching center in
London by private line  circuits,  these switches will be connected by the Circe
Network  as the  various  rings  are  constructed  and  placed  into  commercial
operation.  Private line circuits are permanent  point-to-point  connections for
voice and data transmissions and, when certain levels of volume are reached, are
a less  expensive  alternative to the public  switched  telephone  network.  The
private  line  circuits  connecting  our switches to the  international  gateway
switching  center in London are leased  directly,  or  indirectly  through third
parties,  from the  incumbent  telecommunications  operator in the  countries in
which such calls originate.

         As part of our  concerted  effort to convert  leased  capacity to owned
capacity for the purpose of improving  operating  margins,  we have continued to
purchase  capacity  or minimum  investment  units in digital  fiber  optic cable
systems, including capacity in (1) CANUS-1/CANTAT-3 (8.192 megabits per second),
a transatlantic  cable  originating in the United States,  Canada and the United
Kingdom,  (2)  TAT-12/13  (8.192  megabits per second),  a  transatlantic  cable
originating  in the United States,  the United Kingdom and France,  (3) Atlantic
Crossing-1 (466.5 megabits per second), a transatlantic cable originating in the
United  States  and the United  Kingdom,  and (4) Gemini  (44.736  megabits  per
second),  a transatlantic  cable originating in the United States and the United
Kingdom,  and minimum investment units in (1) FLAG (18.440 megabits per second),
a cable connecting  Europe with multiple  locations in the Middle East and South
and Eastern  Asia,  (2) TAT-14 (311  megabits  per second) and (3) JUS-1  (155.5
megabits per second). We also intend to acquire additional  interests in digital
fiber optic cable  originating  from our owned  infrastructure  and connected to
other European Union member states in which we have a physical  presence.  These
cables will be used for  transmission  of traffic  between the United States and
Europe and within Europe,  resulting in improved  service quality at lower cost.
By combining our international  gateway switching centers in New York and London
with our  transatlantic  fiber optic cable capacity,  we believe that we will be
able to provide  customers with improved  quality,  while lowering  transmission
costs.

         SWITCHING PLATFORMS.  Our network utilizes "intelligent switches" which
incorporate  software  designed to achieve  least cost  routing,  the process by
which we  enhance  the  routing  of calls  over our  network  for more  than 230
countries  and  territories.  Least cost routing is designed to allow calls that
are not routed over our network to be routed directly from our switches to those
public switch telecommunications network operators that offer call completion at
the lowest rates for each particular route at any given time.

         Our network uses high capacity digital switching  platforms designed to
provide  services  quickly and  cost-effectively.  The  switches are modular and
scalable  and  incorporate   among  the  most  advanced   technologies  such  as
self-diagnosis integrated services digital network hierarchical call control and
dynamic network management software.  The backbone switches generally consist of
Nortel Telecom DMS switches.  As our network continues to evolve,  the installed
base of switches can be augmented or upgraded easily to create a cost effective,
scalable network.

         INTERNATIONAL  NETWORK  OPERATIONS  CENTERS.  We currently  monitor the
activity of our network from international  network operations centers in Egham,
England and Somerset, New Jersey. These international network operations centers
have been fully fitted with sophisticated  surveillance and control  capability,
fraud  detection and real time  transmission  quality  enhancements.  Our Omaha,
Nebraska site houses back office systems  supporting the  international  network
operations centers and our network. Each international network operations center
is  capable  of  acting as a full  backup  to the  others  and will  allow  full
monitoring  capability and remote diagnostics and testing on key elements of our
network.

         The international  network  operations centers will utilize a portfolio
of telecommunications  network management operations support systems from Lucent
Technologies.  The Lucent Technologies systems are functionally  integrated into
one  platform  supporting  multi-vendor  network  elements.  Service  activation
provides workflow  management from order entry through network  provisioning and
into billing. Service assurance includes trouble receipt, trouble management and
switch  surveillance  to include both traffic  management and fault  monitoring.
Network   management   includes   inventory   management,   design  and  network
performance.  The Lucent Technologies operations support systems provide us with

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<PAGE>

state-of-the-art  service  activation,  service assurance and network management
capabilities.

CIRCE NETWORK

         We are developing the Circe Network which will link major cities in six
European  countries.  The Circe  Network is a series of  state-of-the-art,  high
quality,  high capacity,  self-healing  rings,  utilizing  advanced  synchronous
digital hierarchy,  the current international standard for digital transmission,
and dense wave division multiplexing technologies.

         As  currently  planned,  the Circe  Network  will be  comprised of five
interlocking,  bi-directional  rings,  encompassing  approximately  7,500  route
kilometers of fiber optic cable.  The first ring of this network,  consisting of
approximately 1,850 route kilometers (including 320 route kilometers of undersea
fiber optic cable) was placed into  commercial  operation on March 15, 1999. The
second ring, which will extend through northern France, The Netherlands and into
western Germany, is scheduled to be placed into service during the third quarter
of 1999. The third ring, which will extend through eastern Germany, is scheduled
to be placed  into  service  during  the first  quarter  of 2000.  We  currently
anticipate that our proposed extension of the Circe Network into southern France
and Switzerland will be placed into service during the second quarter of 2000.

         The Circe Network will offer incumbent telecommunications operators and
new  entrants  an   attractive   alternative   for  the  transport  of  European
cross-border   telecommunications  traffic.  Under  the  traditional  system  of
carrying  cross-border  telecommunications  traffic  in  Europe,  the  incumbent
telecommunications  operator did not develop end-to-end  cross-border  circuits,
but rather  connected its national  networks with other  carriers at the border.
The Circe  Network's  cross-border  transport will offer its  consistently  high
transmission  quality  at a reduced  cost.  The Circe  Network  will  offer such
cost-effective,   high  quality,   cross-border  connectivity  as  a  compelling
alternative to the incumbent telecommunications operators' leased lines.

         Key characteristics of the Circe Network include:

         STATE-OF-THE-ART-TECHNOLOGY.   We  are   installing   state-of-the-art,
technologically  advanced  equipment.  The first ring of the Circe Network uses,
and each of the  additional  four rings will use, a  laser-generated  light to
transmit  bi-directionally  over  fiber  optic  glass  strands  with an  initial
capacity of 20 gigabits  per second.  The first ring of the Circe  Network  also
employs,  and each of the additional four rings will employ, dense wave division
multiplexing  technology,  which is among the latest commercial  advancements in
optical physics. This technology allows more discrete wavelengths of light to be
transmitted through fiber, thereby permitting the transfer of greater amounts of
information at lower cost than was achievable with prior fiber optic technology.

         UNIFORM NETWORK ARCHITECTURE.  We are developing a pan-European network
designed to utilize packet switching  technology where  appropriate,  as well as
traditional circuit switching  technology to cost effectively handle voice, data
and  multimedia  services.  The entire  Circe  Network  will consist of a single
uniform  configuration  of Nortel Telecom's  optronics and Lucent  Technologies'
fiber optic cable thereby enhancing  service quality while improving  efficiency
and lowering costs.

          SECURE AND RELIABLE.  The Circe  Network is being  designed to provide
high security and reliability, using:

          o    two  international   network  operating  centers  monitoring  the
               network 24 hours a day, seven days a week,

          o    a   self-healing   system  that  will  allow  for   instantaneous
               restoration,  virtually  eliminating  down time in the event of a
               fiber cut,

          o    fiber cable  generally  installed  in  high-density  polyethylene
               conduits on terrestrial portions of the system, and

          o    advanced cable armoring  techniques on the submarine  portions of
               the system.

                                       8
<PAGE>

         SCALABLE  AND  FLEXIBLE.  The  Circe  Network's  high  density  network
architecture  may be upgraded,  without service  interruptions,  to at least 320
gigabits per second per fiber pair (equivalent to 2,048 STM-l's) through the use
of dense wave  division  multiplexing  technology  and   bi-directional   multi-
wavelength  optical amplifiers,  to support  demand for capacity  intensive data
applications.  We anticipate  that  each ring of  the Circe Network will contain
multiple conduits  containing  at least 48 fibers along substantially all of the
routes.  These  conduits  will have excess space through which additional fibers
may be run without the necessity for any further material civil works.

SALES AND MARKETING; CUSTOMERS

         The  Circe  Network  is  designed  to allow  end  users,  carriers  and
resellers to integrate high quality,  cross-border  capacity into their end user
offerings.  Prior to bringing the Circe Network into service, we were limited in
our ability to provide high  capacity  services to other  carriers so we focused
our  business on selling to end users and selling  switched  minutes to carriers
and resellers in order to help use the fixed capacity of leased lines.  With the
high  quality,  low cost  transmission  capacity  to be  provided  by the  Circe
Network,  we will be well  positioned  to offer large  capacity  services to the
additional  market  segments  listed below. We are targeting the following seven
major market segments:

          o    RESELLERS.  Resellers are carriers  that do not own  transmission
               facilities  but  obtain  communications   services  from  another
               carrier for resale to the public. Resellers are a growing segment
               of the market and are  expected to increase in  conjunction  with
               the liberalization of the European telecommunications market.

          o    INCUMBENT  TELECOMMUNICATIONS  OPERATORS.  This customer  segment
               consists of the incumbent  telecommunications operators that have
               historically  employed bilateral agreements with other incumbents
               for  cross-border  connectivity  but are now  selling  their  own
               transborder  connectivity  by  leasing  capacity  on  alternative
               networks.

          o    INTERNATIONAL   CARRIERS.   This  customer  segment  consists  of
               non-European  carriers  with traffic  between  European and other
               international   gateways.   We  can  provide  these  customers  a
               pan-European  distribution  network to gather and deliver traffic
               to and from their own networks and other hubs.

          o    END USERS.  Small to  large-sized  enterprises  need  inexpensive
               voice and data  services.  The Circe  Network  should allow us to
               satisfy this need and provide  bundled  services.  We expect that
               additional  demand for  alternative  service  providers will come
               from increased usage of dedicated  circuits for Internet  access,
               private lines for the  deployment of wide-area  networks by large
               enterprises,  "single source" local and long distance services by
               small and  medium-sized  enterprises  and emerging  high capacity
               applications  such as cable TV  programming  distribution  (other
               than broadcast) to the end user.

          o    ALTERNATIVE  CARRIERS.  This  segment  consists  of  new  entrant
               carriers,  cable TV and mobile  carriers and  competitive  access
               providers.  These new  carriers  have chosen to compete  with the
               incumbent   telecommunications   operators  in  their  respective
               countries.

          o    INTERNET BACKBONE NETWORKS. Internet backbone networks are a fast
               emerging  segment  and  are  expected  to  generate   significant
               requirements for the services which we offer. As capacity becomes
               available  in Europe,  Internet  usage also is  expected to grow.
               These networks require large capacity international  connectivity
               services between Internet nodes (point of interconnection between
               local Internet service providers) in all local European markets. 

          o    VALUE ADDED  NETWORKS AND OTHER  SERVICE  PROVIDERS.  Value added
               networks are data communications systems in which special service
               features enhance the basic data transmission  facilities  offered
               to  customers.  Many of these  networks  are targeted to the data
               transfer   requirements   of  specific   international   customer
               segments,  such  as  financial  institutions.  Many  value  added
               networks' providers basic network transmission  requirement is to
               connect  data  switches  or  processors.  Value  added  networks'
               currently  purchase  their own  international  circuits and build
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<PAGE>
               additional resiliency into their network infrastructure.  We will
               allow them to meet these  needs  cost-effectively,  and to extend
               their  services to new markets or customers  without  substantial
               capital investment. This market segment is expected to experience
               substantial growth over the next several years.

During 1998,  one  customer,  LD  Exchange.com,  accounted for 10.6% of Viatel's
revenues.

         From 1991 to 1994,  our sales and marketing  efforts were  conducted by
independent sales representatives in each of our markets. In late 1994, we began
establishing  our own direct sales forces in certain Western European markets to
take greater  control over the sales and  marketing  functions  and to provide a
higher  level of customer  service.  Currently,  we have direct  sales forces in
twelve cities in Western  Europe and have  established  indirect  sales offices,
through  arrangements with independent sales  representatives  and telemarketing
agents,   in  more  than  180  locations  in  Western  Europe.   We  have  sales
professionals  dedicated to marketing  and  maintaining  relationships  with our
wholesale  customers in the United States and in the United Kingdom.  In Europe,
our sales and marketing staff is currently  divided into two categories:  direct
sales   representatives  and  indirect  sales   representatives.   Direct  sales
representatives  are  responsible  for  face-to-face  sales  efforts  to  larger
accounts and indirect sales  representatives  are  responsible  for telesales to
smaller accounts.

         Our direct sales  personnel are currently  compensated  on a salary and
commission basis, with potential commissions being paid on the basis of revenues
generated by new customers solely during their first three months as a customer.
After such three month period, the customer is turned over to pro-active account
managers who manage the account and are compensated  based on the monthly growth
of such  account  above  certain  minimum  requirements.  We  believe  that this
compensation  structure  provides maximum incentive to our direct sales force to
continue to grow our customer base and revenue.

         Our   independent   sales    representatives    are   retained   on   a
non-exclusive/commission-only  basis,  with commissions  being subject to charge
back for revenues not collectible by us. We believe that our  relationship  with
our independent sale representatives is good.

INFORMATION SYSTEMS

         We believe that integrated and reliable billing and information systems
are key  elements  for growth and  success in the  telecommunications  industry.
Accordingly,  we have made  significant  investments  to acquire  and  implement
sophisticated  information  systems  which are  designed  to  enable us to:  (1)
monitor and respond to customer needs by developing new and customized services;
(2) manage least cost routing; (3) provide customized billing  information;  (4)
provide high quality customer service;  (5) detect and control fraud; (6) verify
payables to suppliers;  and (7) rapidly integrate new customers. We believe that
our network  intelligence,  billing and financial  reporting systems enhance our
ability  to   competitively   meet  the   increasingly   complex  and  demanding
requirements of the international  and national long distance markets.  While we
believe that such systems are  currently  sufficient  for our  operations,  such
network  intelligence,  selling and  financial  reporting  systems  will require
routine upgrades and ongoing investments.

         We currently have a turnaround time of  approximately  48 hours for new
account  entry,  subject  to  credit  approval.   Our  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.

         We have developed software to provide  telecommunications  services and
render  customer  support.  In certain  cases,  the software used to support our
services may reside outside of the switches and, therefore,  is not reliant on a
third party switch manufacturer for upgrades or support.  Each switch has a call
detail  recording  function  which is  designed  to  enable us to:  (1)  achieve
accelerated collection of call records; (2) detect fraud and unauthorized usage;
and (3) permit rapid call detail record analysis.

         We also  use  proprietary  software  to  assist  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 provide least cost routing, which
may result in call traffic being  transmitted over our 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 least

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<PAGE>
cost routing system is designed to transmit the traffic over the next least cost
route.  The least cost routing system  chooses among the following  variables to
minimize  the cost of a long  distance  call  over 15  different  suppliers  and
multiple  choices of  terminating  carrier per country.  The  performance of the
least cost routing system is verified based on a daily overflow report generated
by our network traffic management and a weekly/monthly  average termination cost
report generated by our billing system.

CARRIER CONTRACTS

         We have entered into  contracts to purchase  switched  minute  capacity
from  various  domestic  and  foreign  carriers  and  currently  depend  on such
contracts for  origination  and termination of traffic on our network as well as
for resale of such capacity to others.  Carrier  costs  constitute a significant
portion of our variable costs. Pursuant to these contracts, we obtain guaranteed
rates, which are generally more favorable than otherwise would be available,  by
committing to purchase  switched minute minimums from such carriers.  If we fail
to meet our switched minute minimum  requirements  under a carrier contract,  we
would still be required to pay the minimum monthly  commitment as a penalty.  We
do not  believe  that the loss of any one  supplier  or  contract  would  have a
material  adverse  impact on our  business,  financial  condition  or results of
operations.

COMPETITION

         Our  success   depends   upon  our   ability  to  compete   with  other
telecommunications providers in each of our markets. These providers include the
incumbent  telecommunications  operator in each country in which we operate, and
global alliances among some of the world's largest telecommunications  carriers,
such as Global One (Sprint,  France Telecom and Deutsche  Telekom),  an alliance
between MCI WorldCom and  Telefonica de Espana and an alliance  between AT&T and
British Telecom. Other potential competitors include:

          o    cable communications companies,

          o    wireless telephone companies,

          o    electric and other utilities with rights-of-way,

          o    railways, microwave carriers, and

          o    large end users which have private networks.

         The intensity of competition  and price declines has increased over the
past several years and we believe that such  competition and price declines will
continue to intensity,  particularly in Western Europe.  Many of our current and
potential competitors have substantially greater financial,  marketing and other
resources than we do. If our competitors devote significant additional resources
to the provision of international  or national long distance  telecommunications
services to our target customer base, this action could have a material  adverse
effect on our business,  financial  condition  and results of operations  and we
cannot provide any assurance that we will be able to compete successfully.

         Because all of our current and intended  European  markets  (other than
the United  Kingdom)  have only  liberalized  the  provision  of switched  voice
telephony  during the past year or still are in the process of liberalizing  the
provision  of  voice  telephony,  customers  in  most  of the  markets  are  not
accustomed    to   obtaining    services   from    competitors    to   incumbent
telecommunications   operators   and   may  be   reluctant   to   use   emerging
telecommunications  providers, such as us. In particular,  our targeted customer
base may be reluctant to entrust their telecommunications needs to new operators
that are believed to be unproven. In addition, in continental Europe, certain of
our competitors (including the incumbent  telecommunications  operators) provide
potential customers with a broader range of services than we can offer.

         Competition  for  customers  in  the  telecommunications   industry  is
primarily based on price and quality of services offered.  We price our services
primarily   by  offering   discounts   to  the  prices   charged  by   incumbent


                                       11
<PAGE>

telecommunications  operators and other major competitors.  However,  prices for
long distance calls have decreased  substantially over the past few years in the
markets  in which we  currently  maintain  operations  and in which we expect to
establish  operations.  Some of our larger  competitors may be able to use their
greater financial resources   to cause severe price competition in the countries
in which we operate or expect to operate. Incumbent telecommunications operators
in several Western  European  countries are responding to deregulation  far more
rapidly and aggressively  than occurred after  deregulation in the United States
and the United Kingdom.  We expect that prices for our services will continue to
decrease  for the  foreseeable  future  and  that  incumbent  telecommunications
operators  and other  dominant  telecommunications  providers  will  continue to
improve  their  product  offerings.  The  improvement  in product  offerings and
customer  service by the  incumbent  telecommunications  operators  could have a
material adverse effect on our  competitiveness to the extent that we are unable
to  provide  similar  levels  of  offerings  and  services.   If  the  incumbent
telecommunications  operator in any jurisdiction uses its competitive advantages
to their fullest extent,  our operations in such jurisdiction would be adversely
affected.  Furthermore,  the  marginal  cost of carrying  calls over fiber optic
cable is extremely low. As a result,  certain industry  observers have predicted
that, within a few years, there may be dramatic and substantial price reductions
and that long distance calls will not be significantly more expensive than local
calls. In addition, numerous carriers currently offer, or are implementing plans
to offer, telecommunications services over the Internet at substantially reduced
prices.  Any price  competition  could  have a  material  adverse  effect on our
business, financial condition and results of operations.

         Incumbent   telecommunications   operators   generally   have   certain
competitive  advantages  that we and other  competitors do not have due to their
control over local  connectivity.  We rely on the  incumbent  telecommunications
operator for access to the public switched  telephone  network and the provision
of leased lines, and the failure of the incumbent  telecommunications  operators
to  provide  such  access  or leased  lines at  reasonable  pricing  or within a
reasonable  time frame  could have a material  adverse  effect on our  business,
financial  condition and results of operations.  The reluctance of some national
regulators to provide  operative  interconnection,  grant regulatory  approvals,
provide necessary  provisions and enforce access to such operators' networks and
essential  facilities  could have a material  adverse effect on our  competitive
position.  We cannot assure you that we would be able to compete  effectively in
any of our  current or  proposed  markets.  The Circe  Network  will  reduce our
dependence on incumbent telecommunications operators for leased long-haul lines,
but it will not reduce our  dependence on such carriers to "last mile" access to
the vast majority of our end user customers.

GOVERNMENT REGULATION

         OVERVIEW.  National  and  local  laws  and  regulations  governing  the
provision  of   telecommunications   services  differ  significantly  among  the
countries   in  which  we   currently   operate  and  intend  to  operate.   The
interpretation  and  enforcement of such laws and  regulations  varies and could
limit our  ability to provide  certain  telecommunications  services  in certain
markets.  We cannot make any  assurance  that future  regulatory,  judicial  and
legislative changes will not have a material adverse effect on us, that domestic
or international regulators or third parties will not raise material issues with
regard to our compliance  with applicable  laws and  regulations,  or that other
regulatory  activities will not have a material  adverse effect on our business,
financial condition and results of operations.

         INTERNATIONAL TRAFFIC. Under the World Trade Organization Basic Telecom
Agreement  (the "WTO  Agreement")  concluded on February 15, 1997,  69 countries
comprising 95% of the global market for basic telecommunications services agreed
to permit competition from foreign carriers.  In addition, 59 of these countries
have  subscribed  to  specific  procompetitive  regulatory  principles.  The WTO
Agreement  became  effective  on February 5, 1998 and has been  implemented,  to
varying degrees, by the signatory  countries.  We believe that the WTO Agreement
will  increase  opportunities  for us and our  competitors.  However,  we cannot
assure  you  that  the  WTO  Agreement  will  result  in  beneficial  regulatory
liberalization in all signatory countries.

         On November 26, 1997,  the Federal  Communications  Commission  ("FCC")
adopted the Foreign  Participation Order to implement the U.S. obligations under
the WTO  Agreement.  In this order,  the FCC adopted an open entry  standard for
carriers from WTO member countries, generally facilitating market entry for such
applicants by eliminating  certain existing tests. These tests remain in effect,
however,  for carriers  from  non-World  Trade  Organization  member  countries.
Requests for  reconsideration of the Foreign  Participation Order are pending at
the FCC.

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<PAGE>

         International carriers serving the United States,  including us, remain
subject to the FCC's international settlement policies,  including rules adopted
by the FCC regarding  international  settlement rates, which became effective on
January  1,  1998.  The  international  accounting  rate  system  allows  a U.S.
facilities-based  carrier  to  negotiate  an  "accounting  rate"  with a foreign
carrier  for  handling  each minute of  international  telephone  service.  Each
carrier's portion of the accounting rate,  usually  one-half,  is referred to as
the settlement  rate. The new  International  Settlement  Rates Order  generally
requires U.S. facilities based carriers to negotiate settlement rates with their
foreign  correspondent  at no greater than FCC established  "benchmark"  prices.
Historically,  international  settlement  rates have vastly exceeded the cost of
terminating   telecommunications   traffic.   In  addition,   the  International
Settlement Rates Order imposed new conditions upon certain  carriers,  including
us. First, the FCC conditioned facilities-based  authorizations for service on a
route on which a carrier  has a foreign  affiliate  upon the  foreign  affiliate
offering  all other U.S.  carriers a  settlement  rate at or below the  relevant
benchmark.  Our foreign  affiliates  satisfy  this  condition.  Second,  the FCC
conditioned  any   authorization  to  provide  switched   services  over  either
facilities-based or resold  international  private lines upon the condition that
at least half of the facilities based  international  message  telephone service
traffic on the subject route is settled at or below the relevant benchmark rate.
This condition  applies  whether or not the licensee has a foreign  affiliate on
the route in  question.  In the Foreign  Participation  Order  described  above,
however, if the subject route does not comply with the benchmark requirement,  a
carrier can demonstrate  that the foreign country provides  "equivalent"  resale
opportunities.  Accordingly,  since the February 9, 1998  effective  date of the
Foreign  Participation Order, we have been permitted to resell private lines for
the provision of switched  services to any country that either has been found by
the FCC to comply with the  benchmarks or has been  determined to be equivalent.
We,  however,  remain  subject to prior FCC approval in order to provide  resold
private lines to any country in which we have an affiliated carrier that has not
been found by the FCC to lack market  power.  Many  parties  have  appealed  the
International  Settlement  Rates Order to the U.S. Court of Appeals for the D.C.
Circuit or have filed petitions for reconsideration with the FCC. On January 12,
1999, the U.S. Court of Appeals for the D.C.  Circuit issued an order  resolving
this appeal, upholding the International Settlement Rates Order in all respects.
The appealing  parties now have the option of requesting  that the case be heard
by the U.S. Supreme Court. The petition for  reconsideration is still pending at
the FCC. We cannot predict the outcome of these  proceedings  and their possible
impact on us.

         Increasing    regulatory     liberalization    in    many    countries'
telecommunications  markets now permits more flexibility in the way we can route
calls.  Although  certain  FCC rules  limit the way in which some  international
calls  can  be  routed,  we do  not  believe  that  our  network  configuration,
specifically  the way in which traffic is routed  through our  facilities in the
U.K.,  is  specifically  prohibited  by, or undermines in any way the intent of,
these rules. It is possible,  however,  that the FCC could find that our network
configuration violates these rules. If we were found to be in violation of these
routing  restrictions,  and if the violation  were  sufficiently  severe,  it is
possible that the FCC could impose sanctions and penalties upon us.

          REGULATORY STATUS. A summary  discussion of the regulatory  situations
in  certain  geographic  regions  in  which  we  operate  or have  targeted  for
penetration is set forth below.

         EUROPEAN  UNION.  The European Union  consists of the following  member
states: Austria,  Belgium,  Denmark,  Finland, France, Germany, Greece, Ireland,
Italy,  Luxembourg,  The  Netherlands,  Portugal,  Spain,  Sweden and the United
Kingdom. The European Union was established by the Treaty of Rome and subsequent
treaties.  European  Union member  states are  required to implement  directives
issued by the European  Commission and the European  Council by passing national
legislation.  If a European  Union member state fails to effect such  directives
with national (or, as the case may be, regional, community or local) legislation
and/or fails to render the provisions of such  directives  effective  within its
territory,  the European  Commission  may take action against the European Union
member state,  including in proceedings before the European Court of Justice, to
enforce the directives.  Private parties may also bring actions against European
Union member states for failures to implement such legislation.

         In an effort to promote  competition  and  efficiency  in the  European
Union  telecommunications  market, the European  Commission and European Council
have issued a number of key  directives  establishing  basic  principles for the
liberalization  of the European  Union  telecommunications  market.  The general
framework  for this  liberalized  environment  has been set out in the  European
Commission's  Services  Directive (the "Services  Directive") and its subsequent
amendments, including, in particular, the Full Competition Directive, adopted in
March 1996 (the "Full  Competition  Directive").  These directives  require most
European  Union member states to permit  competition  in all  telecommunications
services  and had set January 1, 1998 as the date by which all  restrictions  on
the   provision   of   telecommunications    services   and   telecommunications
infrastructure  were to be removed.  These directives have been  supplemented by
various  harmonizing  directives,  which  include  the  Open  Network  Provision
Directives,  as well as two additional directives adopted in 1997, the Licensing
Directive and the Interconnection Directive.


                                       13
<PAGE>

         The  Licensing  Directive  established  a framework for the granting of
national authorizations and licenses related to telecommunications  services. It
permits  European  Union member  states to  establish  different  categories  of
licenses for providers of infrastructure and services,  but requires the overall
scheme to be transparent and non-discriminatory.  The Interconnection  Directive
requires  member  states  to  remove  restrictions   preventing  negotiation  of
interconnection  agreements,   ensure  that  interconnection   requirements  are
non-discriminatory   and  transparent  and  to  ensure  adequate  and  efficient
interconnection  for public  telecommunications  networks and publicly available
telecommunications services.

         In October 1997, the European Commission issued a consultative document
supporting the implementation of long run incremental cost principles as a basis
for  interconnection  pricing.  This  document  also sets forth  interconnection
pricing  benchmarks  reflecting current  interconnection  agreements in European
Union member states. The European  Commission believes such benchmarks should be
relied upon pending the adoption of accounting systems and interconnection rates
based on long run incremental cost principles.

         Several   European  Union  member  states  have  chosen  to  apply  the
provisions of the  Interconnection  Directive within their jurisdictions in such
ways as to give more favorable treatment to infrastructure providers and network
operators  than to  carriers  and  resellers  that have  made no  infrastructure
investment.  Such distinctions  must be objectively  justified on the grounds of
the  type  of   interconnection   provided  or  because  of  relevant  licensing
conditions.  The Licensing  Directive does not provide a clear  definition of an
infrastructure  investment,  and many European  Union member states have adopted
inconsistent  approaches  with  respect to the level and type of  infrastructure
investment required to justify differences in interconnection  charges. While we
believe that the European  Commission will seek to minimize these disparities in
national  interconnection  policies,  there  can  be  no  assurance  that  these
disparities  can be  eliminated  or  significantly  reduced  or  that  any  such
differences in regulatory  treatment will not have a material  adverse effect on
us. To the extent incumbent  telecommunications operators deny or delay granting
us  interconnection,  even if only for a limited  period of time,  in any of the
countries in which we have or will have points of presence, we will be forced to
terminate  traffic  through  refile or resale  agreements  with other  carriers,
resulting in higher costs.

         Each  European  Union member  state in which we  currently  conduct our
business has a different  regulatory regime and such differences are expected to
continue.   The  requirements   for  us  to  obtain  necessary   approvals  vary
considerably from country to country.

          BELGIUM. In December 1997, the Belgian Federal Parliament provided for
full liberalization of the provision of  telecommunications  services.  However,
this law and secondary legislation are not yet complete.

         Under  the  existing  licensing  scheme,  applicants  seeking a network
operator  license must commit to invest 400 million  Belgian Francs or to deploy
500 kilometers of transmission infrastructure within three years of the date the
license is granted as well as investing an amount equal to 1% of annual turnover
in order to fund research and development and other initiatives. Notwithstanding
these  stringent  requirements  (which may be modified  by  European  Commission
intervention that has been formally commenced),  we obtained a license under the
provisional  licensing  system for the  establishment  and operation of a public
telecommunications  network on June 30, 1998 and a  provisional  license for the
provision  of voice  telephony  on July 3,  1998.  Recently,  these  provisional
licenses were converted into definitive licenses.

         Belgium is one of the European Union member states which differentiates
between  interconnection for infrastructure  providers and network operators and
switch-based  carriers and resellers.  The  interconnection  tariffs of Belgacom
(Belgium's  incumbent  telecommunications  operator),  which has been officially
approved by the Belgian  Institute for Postal  Services and  Telecommunications,
provides more favorable  interconnection rates for infrastructure  providers and
network operators than for switch-based  carriers and resellers.  As a result of
the  construction  of the Circe  Network,  we qualify  for these more  favorable
rates.

         The  modified  Belgian  Telecommunications  Law also  provides  for the
creation of a Universal Service Fund, to be managed by the Belgian Institute for
Postal  Services and  Telecommunications,  to which operators may be required to
contribute   funds  in   proportion   to  their   revenues   from  the   Belgian
telecommunications  market.  However, the Universal Service Fund system will not
be activated before the year 2000, and then only insofar as: (1) Belgacom claims
a  compensation  for being  the  universal  service  provider,  (2) the  Belgian
                                       14
<PAGE>

Institute for Postal  Services and  Telecommunications  considers that universal
service provision  represents a net cost, and (3) the Belgian Federal Government
takes a formal  decision to  activate  the  Universal  Service  Fund.  From 1998
onwards, the Belgian Institute for Postal Services and  Telecommunications  will
"dry-run" the universal service costing model and keep operators informed of the
contributions  that  they may be  required  to make if and  when  the  Universal
Service Fund is activated.

          FRANCE.  In July  1996,  legislation  was  enacted  providing  for the
liberalization  of all  telecommunications  activities  in France by  January 1,
1998.

         The establishment and operation of public  telecommunications  networks
and the provision of voice telephony services are subject to individual licenses
granted by the Minister in charge of  telecommunications  upon recommendation of
France's new independent  regulatory authority,  the Authorite de Regulation des
Telecommunications ("ART").

         In  December  1997,  we filed a joint  application  for a license  as a
public  telecommunications  network  operator (under Article L33.1 of the French
Code de Postes et  Telecommunications)  and provider of voice telephony services
to  the  public   (under   Article  L34.1  of  the  French  Code  de  Postes  et
Telecommunications).  The license  application  was approved by both ART and the
relevant  Minister  during  1998.  In March 1999,  we  obtained  interconnection
arrangements  which allow customers in the greater Paris region to originate and
terminate  calls  throughout  France  and  all  countries  serviced  by  Viatel.
Additional interconnections to the Strasbourg and Amiens regions are expected to
be obtained in mid-1999.

         We are subject to certain  obligations  in the  operation of its public
telecommunications   network,   most  notably  in  terms  of  non-discriminatory
treatment of  customers  and an  obligation  to accept  reasonable  requests for
interconnection from other carriers.

         France  is  also  one  of  the  European   Union  member  states  which
differentiates  between  interconnection for public  telecommunications  network
operators,  holding a L33.1  license,  and voice  telephony  service  providers,
holding a L34.1 license.  The interconnection  tariffs of France Telecom,  which
have been  officially  approved by ART,  provide  substantially  more  favorable
interconnection rates for public  telecommunications  network operators than for
voice telephony service providers.

         GERMANY.  The German  Telecommunications  Act of July 25, 1996 provided
for the liberalization of all telecommunications  activities by January 1, 1998.
The German  Telecommunications  Act has been supplemented by several  ordinances
concerning, among other things, license fees, rate regulation,  interconnection,
universal   service,   frequencies   and   customer   protection.   The   German
telecommunications  sector is currently  overseen by a new Regulatory  Authority
for Telecommunications and Post ("RegTP") that operates under the supervision of
the Ministry of Economics and has taken over the regulatory  responsibilities of
the disbanded Ministry of Post and Telecommunications.

         Under the  German  regulatory  structure,  licenses  can be issued  for
different types of infrastructure as well as for the provision of services based
on  transmission  lines  provided by other  service  providers.  Viatel has been
issued a nationwide  class 3  infrastructure  license and a  nationwide  class 4
license for the provision of voice telephony.

         All existing interconnection agreements with Deutsche Telekom have been
terminated  effective December 31, 1999,  requiring all affected parties to seek
new  interconnection  with Deutche Telekom. In a letter dated February 19, 1999,
the FCC expressed its concerns about the new  interconnection  regime and argued
that the action taken by Deutsche  Telekom,  as well as other  actions  taken by
other such carriers,  was designed to impede  effective and  competitive  market
entry.  Although we believe that we will be able to obtain a new interconnection
agreement  with Deutsche  Telekom prior to December 31, 1999, we cannot  provide
any assurance that this will be the case or that the interconnection arrangement
obtained will contain  terms which are as favorable to us as those  contained in
our current interconnection arrangement.


                                       15
<PAGE>

         ITALY. In 1997, the Italian authorities enacted a legislative framework
for the full liberalization of  telecommunications  services by January 1, 1998.
On February 12, 1999, we received a license to provide  voice  telephony as well
as to own and operate infrastructure.

         On July 24, 1998,  Telecom Italia published its Reference  Interconnect
Offer,  which  has  been  amended  recently  due to  decisions  by  the  Italian
regulator.  The offer allows  interconnection  at one point of interconnect  and
brought  interconnection rates down to a level much closer to the European Union
benchmarks.  We initiated  interconnection  negotiations towards the end of 1998
and expect to have an  interconnection  agreement with Telecom Italia by the end
of the third quarter of 1999.

         In Italy,  providers  of  network  infrastructure  and  switched  voice
services as well as national  mobile  operators  must  contribute to a universal
service fund. Such a requirement is to take effect in 1999 provided that Telecom
Italia demonstrates by March 31, 1999, on the basis of audited reports, that its
universal  service   obligations  impose  on  it  net  losses.   Even  in  these
circumstances,  the Italian regulator can exempt new entrants from an obligation
to contribute to such a universal  service  fund.  Both the Italian  competition
agency and the European  Commission  are likely to  recommend  such an exemption
scheme to the  Italian  regulator.  However,  we cannot  assess at this time any
possible  impact of any such  universal  service  obligations  on our  operating
margins.

         THE NETHERLANDS.  The Netherlands  liberalized  voice telephony in July
1997,  and  necessary  legislation  to implement  the  requirements  of the Full
Competition  Directive  has been  enacted.  We have  signed  an  interconnection
agreement with KPN Telecom. According to the terms of the new telecommunications
law, our original  registration has been replaced by new general  authorizations
for the provision of voice telephony and infrastructure.

         SPAIN. The Spanish  government  implemented the full  liberalization of
public  switched  telephone  services  on December  1, 1998.  We were  granted a
nationwide  infrastructure  and voice telephone license in March 1999. We expect
to sign an  interconnection  agreement  with  Telefonica de Espana in the fourth
quarter of 1999.

         SWITZERLAND.  A new  Telecommunications  Act was  adopted  by the Swiss
Parliament in April 1997 and came into effect on January 1, 1998,  together with
certain    ordinances    containing   more   detailed    regulations    covering
telecommunications services, frequency management, numbering, terminal equipment
and license fees. The new  Telecommunications Act provides for liberalization of
the Swiss telecommunications market as of January 1, 1998.

         The Swiss  telecommunications  regulatory framework  facilitates market
entry by: (1) applying a notification  procedure for  resellers,  (2) applying a
procedure for operators wishing to be granted a concession for the establishment
and  operation  of  transmission  facilities  and (3)  providing  rights-of-way,
subject  to  a  procedure   of   authorization,   over  the  public   domain  to
facilities-based carriers.  Pro-competitive regulation is also applicable in the
area of numbering.

         We have  registered  our  activities  as a provider of voice  telephony
services  in  Switzerland   but  have  not  yet  completed   negotiation  of  an
interconnection  agreement (in accordance with the notification  procedure).  We
are applying for a concession as a facilities-based carrier.

         Switzerland  is not a member of the  European  Union and,  accordingly,
directives do not apply. Switzerland is, however, a party to the WTO Agreement.

         UNITED  KINGDOM.  The  Telecommunications  Act 1984  (the  "U.K.  Act")
provides a licensing and regulatory framework for telecommunications  activities
in the United Kingdom. The U.K. has liberalized its market substantially to meet
the requirements of the Full Competition  Directive.  There is pending secondary
legislation  to fully  implement the European  Commission  Directives  which may
affect the licenses which have been granted to us and our competitors. We cannot
predict what effect, if any, this legislation will have on our business.

         Viatel  UK has  been  granted  an  international  simple  voice  resale
standard license and was awarded an international  facilities  license with code
powers in June 1998. In addition, Viatel UK has interconnection  agreements with
Cable & Wireless and British Telecom.


                                       16
<PAGE>

         OTHER EUROPEAN  MARKETS.  Our ability to expand in other countries will
be affected by the degree to which  liberalization  has been implemented in that
country.  If for strategic reasons we decide to build out infrastructure in each
particular market prior to full  liberalization and liberalization is delayed or
not fully implemented, we could sustain a loss on our infrastructure investment.

         LATIN AMERICA AND THE PACIFIC RIM.  Outside of the European  Union,  we
provide  our  customers  with  access to our  services  through  the use of call
reorigination.  A substantial  number of countries have prohibited certain forms
of call  reorigination.  There can be no assurance  that certain of our services
and  transmission  methods will not be or will not become  prohibited in certain
jurisdictions.

         We are  subject to a  different  regulatory  regime in each  country in
Latin  America  and  the  Pacific  Rim  in  which  we  conduct  business.  Local
regulations  determine issues significant to our business,  including whether we
can  obtain  authorization  to offer  transmission  of voice and voice band data
directly or through call reorigination. In general, competition is restricted in
the region,  with the result that our ability to offer such  service is limited.
Regulations  governing  enhanced  services (such as facsimile and voice mail and
data  transmission)  tend  to be  more  permissive  than  those  covering  voice
telephony.

         ARGENTINA. The telecommunications  industry in Argentina was privatized
in 1990, but  opportunities  for competitive  entry in basic telephony  services
remain restricted.  The companies created at the time of privatization,  Telecom
and Telefonica,  respectively,  were granted  exclusive rights until 1997 to the
provision of domestic  local and long distance  fixed  telephone  service in the
northern and southern portions of Argentina,  respectively.  Telintar, a company
owned equally by Telecom and Telefonica,  was given exclusive  rights until 1997
for the provision of international telephony and data transmission services.

         Value-added services may be competitively  provided and are essentially
deregulated.  Although a license must be obtained,  such  licenses are routinely
granted. Facilities for international value-added services must be obtained from
Telintar.  Currently,  call  reorigination  is legal in Argentina,  although the
established carriers have advocated  strenuously against it and the government's
view has changed  from time to time.  Telecom  and  Telefonica  have  instituted
significant   rate   rebalancing   measures  which  are  likely  to  lessen  the
attractiveness of call reorigination.  The Supreme Court recently ruled in favor
of rate rebalancing, rejecting several challenges to it.

         We have had a sales  representative  in Argentina  since 1991.  We have
focused    on    call    reorigination,     Internet-initiated     international
business-to-business  service and international calling card services. We do not
currently hold any licenses in Argentina.

         BRAZIL.  In  Brazil,  value-added  services  are not  considered  to be
telecommunications  services  and  currently  can be  provided  on a  completely
unregulated basis,  without the necessity of obtaining a permit or a concession.
However,  the service  provider must operate through a Brazilian  company.  Call
reorigination is not prohibited in Brazil.  A foreign  ownership limit of 49% is
imposed under the 1996 "Minimal Law" for B-Band cellular, satellite and cable TV
services.  There are presently no foreign ownership limits for limited services,
including specialized limited services, or value-added services.  Under the 1997
"General  Telecommunications Law," the President retains the authority to impose
foreign  ownership  limits on other services,  but by decree dated May 15, 1998,
the President expressly decided not to impose any such limits.

         Our  services  in  Brazil  currently  include  call  reorigination  and
international  calling cards and fax store and forward  which are  classified as
value-added  services and  therefore do not require a license.  We plan to offer
such  services  as well as to apply for  licenses to offer  specialized  limited
services which include private line and data transmission services.

         COLOMBIA.  Under a new Constitution adopted in 1991, the possibility of
private  provision of public  services was ratified in Colombia.  This paved the
way for both privatization of the state-owned long distance company, TELECOM, as
well  as the  competitive  entry  of  other  entities.  Specific  plans  for the
privatization  of TELECOM have faltered due to, among other things,  labor union
resistance.  However,  the government mandated that competition be introduced in
1998. Two  competitors to TELECOM have been  licensed.  A federal  judicial body
with  jurisdiction  over public  contracts has recently  issued a writ declaring
that the issuance of licenses for any  additional  competition  in long distance
services  must  be  authorized  by new  legislation.  The  implications  of this
decision for us are not clear.

                                       17
<PAGE>

         In Colombia, there are in excess of 35 local operating companies,  many
municipally  owned.  Under  Colombian  law,  local  service has been  completely
deregulated  and may be  provided  without a  telecommunications  concession  or
license.  Other  telecommunications  services  require  a  concession  or  other
authorization.

         Value-added  services are competitive,  but must be licensed.  There is
currently intense competition for value-added services,  and the market for data
communications  is one of the most  dynamic  segments of the  telecommunications
sector. Although Colombian law requires that all telecommunications  services be
rendered by Colombian entities, foreign investment is not limited.

         Most of our customers in Colombia access our network via  international
toll free numbers. We have formed a Colombian subsidiary and have been awarded a
value-added  services license. We are working on the establishment and operation
of a network to utilize the value-added services license.

         VENEZUELA.   Pursuant  to  the  Telecommunications  Law  of  1940,  all
telecommunications  activities  in  Venezuela  are  reserved to the  government,
although  concessions  or permits  for the  provision  of such  services  may be
granted to third parties.  The administration,  inspection and monitoring of all
communications  systems  in  Venezuela  are  carried  out  by  the  Ministry  of
Transportation   and   Communications   through   the   Comision   Nacional   de
Telecommunicaciones.

         The national telephone company of Venezuela,  Compania Anonima Nacional
de Telefonos de Venezuela,  was privatized in 1991 and its  concession  grants a
monopoly in the provision of basic  telecommunications  services  until the year
2000. The only exceptions to this exclusivity are recently  awarded  concessions
for the  provision  of basic  services  to rural  areas not  reached by Compania
Anonima Nacional de Telefonos de Venezuela.

         Other telecommunications services, such as cellular telephony and other
mobile  radio  services,  private  telecommunications  networks,  switched  data
networks and  value-added  services  (including  e-mail,  Internet,  video text,
telenext,  voicemail  and  faxmail)  are open to  competition  upon receipt of a
concession or permit, as applicable. Call reorigination is officially illegal in
Venezuela.  The  prohibition is supposed to be enforced by Comision  Nacional de
Telecommunicaciones  with the  unofficial  aid of Compania  Anonmia  Nacional de
Telefonos  de  Venezuela  through  termination  of  subscriber  service,  but in
practice the prohibition is widely evaded.

         We do not  have a local  affiliate  in  Venezuela  and do not  hold any
Venezuelan  concessions or authorizations.  At present,  our agents in Argentina
offer only Internet-initiated  international  business-to-business  services and
international calling cards in Venezuela.  We do not believe that these services
are encompassed  within the prohibition  against call  reorigination,  but it is
possible that  Venezuelan  authorities may consider them to raise similar policy
issues to prohibited  call  reorigination  services.  If the call  reorigination
prohibition is deemed to apply,  we may have to  discontinue  Internet-initiated
services in Venezuela.



                                       18
<PAGE>

         UNITED  STATES.  Our  provision of  international  service to, from and
through the United States generally is subject to regulation by the FCC. Section
214 of the Communications Act of 1934 requires a company to make application to,
and  receive   authorization   from,  the  FCC  to  provide  such  international
telecommunications  services.  In May 1994,  the FCC  authorized  us pursuant to
Section   214   of   the   Communications   Act  to   resell   public   switched
telecommunications  services of other United  States  carriers (the "Section 214
Switched  Authorization").  The Section 214 Switched Authorization requires that
services be provided in a manner that is  consistent  with the laws of countries
in which we  operate.  We also have a license  to resell  international  private
lines for the provision of switched  services  between the United States and the
United  Kingdom  and  between the United  States and  Canada.  Additionally,  in
September 1996 we received final approval for another Section 214  authorization
from the FCC to provide  both  facilities-based  services  and  resale  services
(including both the resale of switched  services and the resale of private lines
for the provision of switched services) to all permissible international points.
Finally,  in September 1996 we 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").

EMPLOYEES

         As of  December 31, 1998, we had 488  full-time  employees, 234 of whom
were engaged  in sales,  marketing  and customer service.  None of our employees
is  covered  by   a  collective  bargaining  agreement.   We  believe  that  our
relationship with our employees is good.

ITEM 2.  PROPERTIES.

         We currently occupy approximately 42,000 square feet of office space at
two sites in New York City, which serve as our principal executive office and an
international  gateway  switching  center.  The leases have an aggregate  annual
rental  obligation of approximately  $1,596,000 and expire on March 31, 2009 and
May 31, 2007,  respectively.  We also lease approximately  26,000 square feet of
office  space  in  Somerset,  New  Jersey,  which  serves  as our  U.S.  Network
Operations  Center. In addition,  we lease  approximately  22,000 square feet of
office  space in Omaha,  Nebraska,  which serves as an  operations  center and a
switching  center.  This lease has an annual rental  obligation of approximately
$120,000 and expires on May 31, 2004.

         We also  lease  office  space in  various  cities  in  Europe  where we
maintain  sales  offices  with  annual  rents  ranging  from  $18,000 in Rome to
$511,800 in London  (based on foreign  currency  exchange  rates in effect as of
December 31, 1998).  Our aggregate  annual rental  obligations  for our European
offices is approximately $2,038,000 (based on foreign currency exchange rates in
effect as of December 31, 1998).

ITEM 3.  LEGAL PROCEEDINGS.

         We are  involved  from  time to time in  litigation  incidental  to the
conduct of our business.  We believe that any potential adverse determination in
any pending  action  will not have a material  adverse  effect on our  business,
financial condition or results of operations.

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

         None.


                                       19
<PAGE>

                                     PART II

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

         Since  completion of our initial  public  offering in October 1996 (the
"IPO"),  our common  stock,  $0.01 par value per share (the "Common  Stock") has
been traded on the Nasdaq Stock Market under the symbol  "VYTL." As of March 10,
1999 there were 23,185,765 shares of Common Stock  outstanding.  We believe that
there are in excess of 500 beneficial  owners of our common stock. The following
table sets  forth,  for each of the  periods  indicated,  the high and low sales
prices per share of Common Stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>

                                              HIGH           LOW
1998
<S>                                          <C>             <C>
Fourth Quarter................................   23-1/2          6-7/8
Third Quarter ................................   22-3/4          8-1/8
Second Quarter................................   17-5/8          6-3/4
First Quarter ................................   14              5

1997
Fourth Quarter................................    7-7/8          4-1/2
Third Quarter ................................    6-3/4          4-1/8
Second Quarter................................    7              6
First Quarter ................................    9-1/2          6-1/2

1996                                          
Fourth Quarter (from October 18, 1996)........   12-1/4          8-1/2
</TABLE>

         To date,  we have  never  declared  or paid any cash  dividends  on our
Common Stock and we do not expect to do so in the foreseeable  future. We do not
expect  to generate any net income in the  foreseeable  future,  but  anticipate
that future  earnings  generated  from  operations,  if any, will be retained to
finance the  expansion  and continued  development  of our business.  Any future
determination  with respect to the payment of dividends on its Common Stock will
be within the sole  discretion  of our Board of Directors  and will depend upon,
among  other  things,  our  earnings,  capital  requirements,  the  terms of the
existing   indebtedness,   applicable   requirements  of  the  Delaware  General
Corporation Law, general economic  conditions and such other factors  considered
relevant  by our  Board of  Directors.  In  addition,  our  ability  to pay cash
dividends is currently restricted under the terms of the indentures,  each dated
April  8,  1998  between  us and The Bank of New  York,  pursuant  to which  our
outstanding  senior notes and senior  discount  notes due 2008 were  issued.  On
March 19, 1999, we raised approximately $365.5 million of gross proceeds through
a high yield offering of senior notes. The principal purpose of this offering is
to fund the further expansion of the Circe Network.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following  selected  Consolidated  Statement of  Operations,  Other
Financial Data and Balance Sheet Data as of and for the years ended December 31,
1998,  1997,  1996,  1995 and  1994  have  been  derived  from our  Consolidated
Financial  Statements and the notes related thereto,  which were audited by KPMG
LLP,  Independent  Certified  Public  Accountants.  The  consolidated  financial
statements  as of  December  31,  1998 and 1997 and for each of the years in the
three-year  period  ended  December 31, 1998 and the report of KPMG LLP thereon,
are  included  elsewhere  in this  Report.  This  information  should be read in
conjunction  with "Item 7.  Management's  Discussion  and  Analysis of Financial
Condition and Results of  Operations"  our  Consolidated  Financial  Statements,
including the notes thereto,  and the other financial data included elsewhere in
this Report.


                                       20
<PAGE>

<TABLE>
<CAPTION>

                                                                                     YEAR ENDED DECEMBER 31,
                                                            ------------------------------------------------------------------------
                                                                 1998            1997           1996          1995           1994
                                                                 ----            ----           ----          ----           ----
                                                                    (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S>                                                            <C>            <C>            <C>           <C>            <C>      
STATEMENT OF OPERATIONS DATA:
  Communication services revenue                               $135,188       $  73,018      $  50,419     $  32,313      $  26,268
  Operating expenses:
      Cost of communication services                            122,109          63,504         42,130        27,648         22,953
      Selling, general and administrative                        44,893          36,077         32,866        24,370         14,463
      Depreciation and amortization                              16,268           7,717          4,802         2,637            789
      Equipment impairment loss                                      -               -              -            560             -
                                                            -----------      ----------     ----------    ----------     ----------
        Total operating expenses                                183,270         107,298         79,798        55,215         38,205
                                                            -----------      ----------     ----------    ----------     -----------
  Operating loss                                                (48,082)        (34,280)       (29,379)      (22,902)       (11,937)
  Interest income                                                28,259           3,686          1,852         3,282            214
  Interest expense                                              (79,177)        (12,450)       (10,848)       (8,856)          (772)
                                                            ------------     -----------    -----------   -----------   ------------
  Loss before extraordinary loss                                (99,000)        (43,044)       (38,375)      (28,476)       (12,495)
      Extraordinary loss on debt prepayment                     (28,304)             -              -             -              -
                                                            ------------     -----------    -----------   -----------    -----------
  Net loss                                                     (127,304)        (43,044)       (38,375)      (28,476)       (12,495)
      Dividend on redeemable convertible preferred stock         (3,301)             -              -             -              -
                                                            ------------     -----------    -----------   -----------    -----------
  Net loss attributable to common stockholders              $  (130,605)     $  (43,044)    $  (38,375)   $  (28,476)    $  (12,495)
                                                            ============     ===========    ===========   ===========    ===========
  Loss per common share, basic and diluted:
  Before extraordinary item (1)                             $     (4.44)     $    (1.90)    $    (2.47)   $    (2.09)    $    (1.22)
                                                            ------------     -----------    -----------   -----------    -----------
  From extraordinary item                                         (1.23)              -              -             -              -
                                                            ------------     -----------    -----------   -----------    -----------
  Net loss attributable to
      common stockholders                                   $     (5.67)         $(1.90)    $    (2.47)   $    (2.09)    $    (1.22)
                                                            ============     ===========    ===========   ===========    ===========

OTHER FINANCIAL DATA:
   EBITDA(2)                                                   $(31,814)      $ (26,563)     $ (24,577)    $ (20,265)     $ (11,148)
   Net cash used in operating activities                        (60,318)        (22,525)       (26,331)      (18,489)       (11,571)
   Net cash used in investing activities                       (349,992)        (43,164)        (1,592)      (37,057)        (4,996)
   Net cash provided by (used in) financing activities          729,035          11,286         94,772        (2,306)        80,984
   Capital expenditures                                          94,674(3)       34,190          9,423        11,378          3,672
   Deficiency of earnings to fixed charges(5)                  (130,605)        (43,044)       (38,375)      (28,476)       (12,495)

OTHER OPERATING DATA:
   Billable minutes (000s)                                      383,875         140,918         62,249        25,932         14,981
   Average revenue per billable minute                      $        .34     $       .51    $       .80   $     1.23     $     1.70
   Average cost per billable minute                         $        .31     $       .44    $       .67   $     1.04     $     1.53
   Switches(4)                                                       15              14             13            10              2
   Points of presence(4)                                             34              33             13            11              3
   Customers(4)                                                  15,010          21,515         18,172         9,218          6,469

BALANCE SHEET DATA(4):
   Cash, cash equivalents and marketable securities            $501,282      $   47,143     $   92,982    $   35,066     $   66,762
   Restricted cash equivalents and restricted
      marketable securities                                     144,523(5)           -              -             -              -
   Property and equipment, net                                  266,256          54,094         21,074        15,715          6,933
   Total assets                                               1,009,111         126,809        134,664        65,613         83,923
   Long-term debt, excluding current installments               921,139          99,610         77,904        67,283         59,955
   Redeemable convertible preferred stock                        47,121              -              -             -              -
   Stockholders' (deficiency) equity                           (137,292)         (8,564)        38,483       (17,618)        10,985
</TABLE>

-----------


                                       21
<PAGE>

(1)       Net loss per share is computed on the basis described in Note 1 of our
          Consolidated Financial Statements.
(2)       As used herein, "EBITDA" consists of earnings before interest,  income
          taxes,   extraordinary   loss,   dividends  on  preferred   stock  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,  is not
          necessarily comparable to similarly titled measures of other companies
          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.
(3)       As of  December  31,  1998,  we also had a $97.3  million  payable for
          purchase of property  and  equipment.  During 1998,  we also  acquired
          $30.4 million of assets under capital lease obligations.
(4)       Information presented as of the end of the periods indicated.
(5)       Restricted cash equivalents include $9.3 million of funds deposited by
          Metromedia Fiber Networks, Inc. and Carrier 1, Inc. in connection with
          the joint  construction  of civil  works  associated  with a  national
          communications network being constructed by each party in Germany. See
          Note 3 to our Consolidated Financial Statements. Restricted marketable
          securities  represents  government  obligations  purchased by us which
          secure  the  payment  of  the  next  five  interest  payments  on  our
          outstanding senior notes.


                                       22
<PAGE>

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

         THE  FOLLOWING  DISCUSSION  SHOULD  BE READ  IN  CONJUNCTION  WITH  OUR
FINANCIAL  STATEMENTS,  THE NOTES THERETO, AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE  IN  THIS  REPORT.   THE   FOLLOWING   DISCUSSION   INCLUDES   CERTAIN
FORWARD-LOOKING  STATEMENTS.  FOR A DISCUSSION OF IMPORTANT FACTORS,  INCLUDING,
BUT NOT  LIMITED  TO, THE  CONTINUED  DEVELOPMENT  OF OUR  BUSINESS,  ACTIONS OF
REGULATORY  AUTHORITIES AND COMPETITORS,  PRICE DECLINES AND OTHER FACTORS WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY FROM THE RESULTS REFERRED TO IN
THE  FORWARD-LOOKING  STATEMENTS,  SEE " - CERTAIN  FACTORS WHICH MAY AFFECT OUR
FUTURE RESULTS."

OVERVIEW

         Since our inception in 1991, we have invested heavily in developing our
ability to provide international  communications  services within Western Europe
and expanding  our market  presence.  During the past seven years,  we have made
substantial   investments   in   software   and  back  office   operations,   an
administrative infrastructure and a direct sales organization in Western Europe.
Furthermore, we have created an extensive commercial  telecommunications network
in Western Europe which we believe is necessary to economically render the voice
and data  services  we offer  and  intend to offer.  We have also  expanded  our
ability to generate revenues in North America, in part due to the acquisition of
Flat Rate Communications, Inc., during 1998. Currently, our revenues are derived
from wholesale and retail sales. Beginning in 1999, our revenues are expected to
be derived from three primary sources:  wholesale sales,  retail sales (which is
composed  of sales to end users) and  revenue  from the sale of  capacity on our
network.  Each  revenue  source  has  a  different  impact  on  our  results  of
operations.  The sale of capacity on the Circe  Network will vary  substantially
from period to period and will result in fluctuations in our operating  results.
For a discussion of the effects of the Circe Network on  communication  services
revenue and other line items, see "--The Circe Network."

         COMMUNICATION SERVICES REVENUE

         Our communication  services revenue is currently based primarily on the
number of minutes of use billed ("billable minutes") and, to a lesser extent, on
the  additional  services and products  provided  through our network.  While we
provide  both  international  and  national  long  distance   telecommunications
services,  we currently derive our  communication  services revenue  principally
from  international  long  distance  telecommunications  services.  We  believe,
however,  that revenue from national long distance  telecommunications  services
will  continue to  increase  as a  percentage  of total  communication  services
revenue as the Circe Network is completed.

         During  recent  years,  the  following  key trends  have  affected  the
composition of our communication services revenue:

     o    A growing proportion of our customers, particularly in Western Europe,
          now access our network  using either  "indirect  access" or "dedicated
          access" rather than call  re-origination  or  international  toll-free
          access (See "Business--The Viatel Network").

     o    We have continued to expand our wholesale business,  which represented
          approximately  58.3%, 27.9% and 16.5% of total communication  services
          revenue for 1998, 1997 and 1996, respectively. Our acquisition of Flat
          Rate  Communications,  Inc.  during 1998 has,  in part,  resulted in a
          significant increase in our wholesale business,  and has increased our
          revenues  generated  in  North  America.  While  we  believe  that the
          revenues  generated  in North  America will  continue to increase,  we
          anticipate  that the  percentage  of such revenue  will  decrease as a
          percentage  of total  communications  revenue as revenues from Western
          Europe are expected to grow at an  increasing  rate and as we begin to
          recognize revenue from the sale of capacity.

     o    Western  Europe has  continued to become an  important  market for us.
          During 1998, approximately 46.6% of our communication services revenue
          was generated in Western Europe, as compared to approximately 44.7% of
          such  communication  services  revenue for 1997 and 41.9% for 1996. In
          contrast,   communication   services   revenue   from  Latin   America
          represented  approximately 10.8% of our communication services revenue
          for  1998,  as  compared  to   approximately   22.2%  for  1997,   and


                                       23
<PAGE>

          communications  services  revenue from the  Asia/Pacific Rim and other
          areas represented  approximately  1.0% of our  communication  services
          revenue  for 1998,  as compared to  approximately  11.2% for 1997.  We
          anticipate  that the revenue  which we derive from Latin  America will
          continue to decrease as a percentage of total  communications  revenue
          as we continue to grow our business in Western Europe.

         We have  experienced,  and expect to continue to experience,  declining
revenue  per  minute in all of our  markets,  in part as a result of  increasing
worldwide  competition  within  the  telecommunications  industry.  We  believe,
however,  that the impact on our results of operations from price decreases will
be at  least  partially  offset  by (1)  continuing  decreases  in our  cost  of
providing  telecommunications  services,  particularly those decreases resulting
from our continued  efforts to convert from leased to owned  infrastructure  and
reduce  interconnection  costs  through  the use of the Circe  Network  as it is
expanded,  (2) the  introduction  of  new products  and  services  and  (3)  our
ability  to  enter  into  additional interconnection agreements. There can be no
assurance,  however,  that  the  results  referred to in  the foregoing forward-
looking  statement,  including a decline in our cost of  communication services,
can be achieved.

         The table set forth below presents our communication  services revenue,
as a percentage of total revenue,  from different  regions (based on where calls
originated on our Network):
<TABLE>
<CAPTION>
                                          Year Ended December 31,
                                   ----------------------------------
                                      1998       1997        1996
                                      ----       ----        ----
<S>                                   <C>        <C>         <C>  
Western Europe                        46.6%      44.7%       41.9%
North America                         41.6       21.9        16.9
Latin America                         10.8       22.2        28.4
Asia/Pacific Rim and Other             1.0       11.2        12.8
</TABLE>


         COST OF COMMUNICATION SERVICES

         Our cost of communication services can be classified into three general
categories:  access costs,  network costs and  termination  costs.  Access costs
generally  represent the costs  associated with  transporting the traffic from a
customer's  premises to the closest access point on the Viatel  network.  Access
costs vary  depending  upon the  distance to  the  customer's  premises and from
country to country. We currently expect  that the effective  per  minute cost of
these access costs  will be  reduced  as deregulation  continues and competition
accelerates, certain European Union  directives  requiring cost-oriented pricing
(i.e., costs that an effectively  competitive market would yield or that deregu-
lation  would seek  to  ensure)  by  incumbent  telecommunications operators are
enforced and as we are able to obtain cost effective interconnection agreements,
although  there can be no assurance  regarding the extent or timing of such cost
decreases.  In  the event that such  access  costs were to fall at a slower rate
than our price per minute, our gross margins could be adversely impacted.

         Network  costs  represent  the  costs of  transporting  calls  over our
network from its point of entry to its point of exit.  Network  costs  generally
consist of leased line rental costs, facility/network management costs and costs
associated with interconnection with facilities of incumbent  telecommunications
operators.  Network costs will decrease  substantially as each ring of the Circe
Network is placed into service and we secure  infrastructure  ownership on other
routes, which will enhance gross margins.  However,  there will be an associated
increase  in  depreciation  and  amortization  expense  (which is  included in a
different line item).  In order to succeed,  we will need our per minute cost of
services  to  decline  substantially  compared  to our per  minute  revenue.  We
generated  only  $.03 of gross  profit per minute in 1998.  See  "--Depreciation
and Amortization."

         Termination  costs currently  represent the costs which we are required
to pay to other carriers from the point of exit from our network to the point of
destination.  Termination  costs are generally  variable with traffic volume and
traffic  mix.  If a call is  terminated  in a city in which we have a switch  or
point  of  presence,  the  call is  usually  transferred  to the  public  switch
telephone network for local  termination.  If the call is to a location in which
we do not have a switch or point of presence,  then the call must be transferred
to another  carrier  with  which we are  interconnected.  We utilize  least cost
routing  designed to terminate  traffic in the most cost  effective  manner.  We

                                       24
<PAGE>

believe that local  termination  costs should  decrease as we (1) add additional
switches and points of presence,  (2)  interconnect  with  additional  incumbent
telecommunications   operators  and  other  infrastructure   providers  and  (3)
construct or purchase  additional  transmission  facilities.  Local  termination
costs should also decrease as new  telecommunications  service  providers emerge
and, in Western  Europe,  as European Union member states  implement and enforce
regulations requiring incumbent  telecommunications operators to establish rates
which are set at the  forward-looking,  long run  economic  costs  that would be
incurred by an efficient provider using state-of-the-art  technology.  We cannot
provide  any  assurance  regarding  the  results  referred  to in the  foregoing
forward-looking  statements,  including the extent or timing of cost  decreases.
See "--Certain Factors Which May Affect Our Future Results."

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Our selling,  general and administrative  expenses include  commissions
paid to independent sales representatives and overhead costs associated with our
headquarters,  back office and network operations centers and sales offices. Our
selling,  general and  administrative  expenses have continued to increase since
our inception as we developed and expanded our business, although these expenses
have fallen as a percentage of communications  revenue. We anticipate that these
expenses  will  continue to increase as our  business is expanded in the future,
however,  we cannot  provide  any  assurance  that  this  will be the  case.  We
anticipate  that these  expenses  will  continue  to be  incurred  in advance of
anticipated related communication services revenue.

         DEPRECIATION AND AMORTIZATION

         Depreciation  and  amortization  expense  includes  charges relating to
depreciation   of  property  and   equipment,   which  consist   principally  of
telecommunications-related  equipment  such as switches  and points of presence,
indefeasible  rights  of  use  and  minimum  investment  units,   furniture  and
equipment,  leasehold  improvements,  and  amortization  of intangibles  assets,
including  goodwill and costs  associated with acquired  employee base and sales
forces. We depreciate our network over periods ranging from five to 15 years and
amortize our intangible  assets over periods  ranging from three to 25 years. We
expect  depreciation and  amortization  expense to increase as we further expand
our  network,  particularly  as each ring of the Circe  Network  is placed  into
service, at least until significant portions of the Circe Network are sold.

THE CIRCE NETWORK

         The Circe Network,  which is being  constructed with funds raised by us
through our April 1998 and March 1999 high yield  offerings, is expected to have
significant effects  on  our results of operations.  The sale of capacity on the
Circe  Network  will vary  substantially from period to period and may result in
fluctuations  in  our operating  results.  We will  capitalize  all of the costs
associated  with  designing,  building,  funding  and  placing  each ring of the
Circe  Network into service.

         We intend to sell capacity on the Circe Network.  Revenue from capacity
sales that qualify under generally accepted accounting  principles to be treated
as sales will be recognized in the period when the capacity is sold under a line
item to be titled  "Capacity  sales  revenue." The related cost of sales will be
reported in the same period.  With  respect to any given sale of  capacity,  the
related cost of capacity  sales will be equal to a  proportionate  amount of the
total capitalized cost of the Circe Network. Revenue from leases of private line
circuits,  which will be included in communications  services  revenue,  will be
recognized on a straight  line basis over the life of the lease.  The portion of
the total  capitalized  cost of the Circe Network used to provide leased private
line  circuits  will be  included  in  property  and  equipment  and  charged to
depreciation and amortization over its useful life.

         In  addition,  we expect to trade  capacity  on the Circe  Network  for
capacity on other cable  systems.  These  trades of capacity  are expected to be
non-monetary  exchanges  and are not  expected to have a material  affect on our
statement of operations.  We will also incur selling, general and administrative
expenses with respect to the Circe Network that will not be capitalized and will
affect our results of operations,  particularly while the Circe Network is being
designed and built and placed into service,  and will incur additional operating
and  maintenance  expenses  until  capacity on the Circe  Network is sold.  As a
result of financing the Circe Network with debt, we will capitalize a portion of
the interest  incurred  that relates to the  construction  of the Circe  Network
until it is placed in service and will incur  substantial  increases in interest
expense thereafter.


                                       25
<PAGE>

         The Circe  Network is  expected  to  decrease  our per minute  costs of
communication services.

RESULTS OF OPERATIONS

         The  following  table  summarizes  the  breakdown  of  our  results  of
operations as a percentage of communication services revenue:

<TABLE>
<CAPTION>
                                               1998          1997       1996
                                             --------      --------   --------
<S>                                            <C>          <C>        <C>   
Communication revenue                          100.0%       100.0%     100.0%
Cost of communication services                  90.3%        87.0%      83.6%
Selling, general and administrative expenses    33.2%        49.4%      65.2%
Depreciation and amortization                   12.0%        10.6%       9.5%
EBITDA loss (1)                                (23.5%)      (36.4%)    (48.7%)
</TABLE>

-------------------
(1) As used herein "EBITDA" consists of earnings before interest,  income taxes,
extraordinary   loss,   dividends  on  preferred  stock  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,  is not necessarily comparable to similarly titled measures of other
companies  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.

1998 COMPARED TO 1997

         COMMUNICATION   SERVICES   REVENUE.   Communication   services  revenue
increased by 85.1% to $135.2 million on 383.9 million  billable minutes for 1998
from $73.0 million on 140.9  million  billable  minutes for 1997.  Communication
services revenue growth for 1998 was generated primarily from increased European
retail traffic and growth in our carrier business in Western Europe and in North
America which was partially offset by decreased revenue from our Pacific Rim and
Latin American operations.

         The overall  increase of 172.4% in billable  minutes  from 1997 to 1998
was partially offset by declining  revenue per billable  minute,  as revenue per
billable minute  declined by 33.3% to $.34 in 1998 from $.51 in 1997,  primarily
because  of  (1)  a  higher   percentage  of  lower-priced   intra-European  and
intranational   long   distance   traffic  on  our   network  as   compared   to
intercontinental  traffic,  (2) a  higher  percentage  of  lower-priced  carrier
traffic as  compared  to retail  traffic  and (3)  reductions  in certain  rates
charged  to retail  customers  in  response  to  pricing  reductions  enacted by
incumbent  telecommunications  operators  and  other  carriers  in  many  of our
markets. See "- Cost of Communication Services."

         Communication  services  revenue per  billable  minute from the sale of
services to retail customers,  which  represented  41.7% of total  communication
services revenue for 1998,  compared to 72.1% for 1997,  decreased 43.5% to $.39
in 1998 from $.69 in 1997.  Communication  services  revenue per billable minute
from the sale of services to carriers and other  resellers  increased by 3.3% to
$.31 in 1998 from $.30 in 1997 due  primarily  to changes in  traffic  mix.  The
number of contracted  customers  billed declined 30.2% to 15,010 at December 31,
1998 from 21,515 at December 31,  1997.  This  decline in  contracted  customers
billed is primarily  attributable to our Pacific Rim operations where the number
of  customers  billed  declined  93.2% to 369 at December 31, 1998 from 5,424 at
December 31, 1997,  representing a net loss of 5,055  customers,  as a result of
currency  fluctuations caused by the Asian economic crisis, which made our rates
noncompetitive.

         During 1998,  approximately 46.6% of our communication services revenue
was  generated  in Western  Europe as  compared  to  approximately  44.7% of our
communication services revenue during 1997.  Communication services revenue from
Latin America  represented  approximately  10.8% of our  communication  services
revenue  during  1998  compared  to  approximately  22.2%  of our  communication
services  revenue during 1997.  Communication  services revenue from the Pacific
Rim represented  approximately 1.0% of our communication services revenue during
1998 as compared to approximately 11.2% during 1997.


                                       26
<PAGE>

         During 1998 as compared to 1997, we significantly increased our carrier
business  through  which we sell  switched  minutes,  private lines and ports to
carriers,  Internet service providers and other resellers.  The carrier business
has enabled us to recover partially the costs associated with increased capacity
in advance of demand from retail  customers.  The  resulting  economies of scale
have allowed us to use our network more profitably for network  originations and
terminations within Europe. The carrier business represented approximately 58.3%
of total  communication  services  revenue and  approximately  62.0% of billable
minutes  for 1998 as  compared  to  approximately  27.9% of total  communication
services  revenue  and  approximately  46.1% of billable  minutes for 1997.  The
increase in  communication  services  revenue  derived  from  carriers and other
resellers  is  partially   attributable   to  the   acquisition   of  Flat  Rate
Communications,  Inc., a long distance telecommunications  reseller, on February
27, 1998, which also significantly increased our North American revenues.

         COST  OF  COMMUNICATION   SERVICES.   Cost  of  communication  services
increased  to  $122.1  million  in 1998 from  $63.5  million  in 1997 and,  as a
percentage of communication  services revenue,  increased to approximately 90.3%
from  approximately  87.0%.  Our gross  margin  decreased,  as a  percentage  of
communication  services  revenue,  to 9.7% for 1998 from  13.0%  for 1997.  This
expected  decrease  was  primarily  due  to (1)  decreased  revenue  per  minute
resulting from price competition and foreign currency fluctuations which was not
offset by corresponding  decreases in infrastructure  costs, (2) increased sales
to carrier  customers  which generate  substantially  lower margins,  and (3) an
increase in intra-European and national long distance traffic compared to higher
margin international  traffic. This decrease in gross margin, as a percentage of
revenue,  is one of the  principal  reasons we  initiated  a strategy to own key
elements of our network infrastructure.  Although it did not decrease as fast as
revenues  per minute,  our average cost per  billable  minute  decreased to $.31
during  1998 from $.44 during  1997,  a 29.5%  decrease.  This  decrease,  which
partially  offset the effect of the  decline in  average  revenue  per  billable
minute, was attributable primarily to increased traffic being routed through our
network and increased  switched minutes generated by our carrier business,  both
of which  increased  the  utilization  of fixed  cost  leased  lines.  Increased
utilization of our network also reduced costs on a per minute basis with respect
to European long distance telecommunications services.

         Cost of communication services increased in 1998 in part because of the
relatively  high cost of leased  infrastructure.  These  costs are  expected  to
decrease as a percentage  of  communication  services  revenue as we continue to
migrate from leased to owned infrastructure. From 1997 to 1998, we increased our
private line circuits capacity and, as a result, costs for private line circuits
increased  to  approximately  $17.1  million  for 1998  (approximately  12.6% of
communication  services  revenue)  from  approximately  $9.6  million  for  1997
(approximately 13.1% of communication services revenue).

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative expenses increased to $44.9 million in 1998 from $36.1 million in
1997 and, as a  percentage  of  communication  services  revenue,  decreased  to
approximately  33.2% in 1998  from  approximately  49.4% in 1997.  Much of these
expenses are  attributable to overhead costs  associated with our  headquarters,
back  office  and  network  operations  as well as  maintaining  sales  offices.
Salaries  and  commissions,  as a  percentage  of  total  selling,  general  and
administrative  expenses,  were approximately 49.3% and 51.6% for 1998 and 1997,
respectively.  Advertising  and  promotion  expenses,  as a percentage  of total
selling,  general and administrative  expenses, were approximately 3.6% and 1.2%
for 1998 and 1997,  respectively.  We expect to incur additional  expenses as we
continue to invest our sales and marketing  infrastructure  and actively  market
our products and services.

         EBITDA LOSS. EBITDA loss increased to $31.8 million for 1998 from $26.6
million for 1997. As a percentage of communication services revenue, EBITDA loss
decreased to approximately 23.5% in 1998 from approximately 36.4% in 1997. These
losses  resulted  from lower  gross  margins as a  percentage  of  communication
services revenue due to the relatively high cost of intra-European  leased lines
which was  compounded  by the impact on revenue of aggressive  price  reductions
implemented by incumbent telecommunications operators.

         DEPRECIATION AND AMORTIZATION.  Depreciation and amortization  expense,
which includes  depreciation of our network,  increased to  approximately  $16.3
million in 1998 from  approximately  $7.7 million in 1997.  The increase was due
primarily to (1) the depreciation of equipment  related to network expansion and
fiber  optic  cable  systems   placed   in  service  during  1997  and  (2)  the
amortization   of  goodwill   associated  with  the  acquisition  of  Flat  Rate
Communications,  Inc. in  February  1998.  Depreciation  expense  will  increase
substantially as each ring of the Circe Network becomes operational.


                                       27
<PAGE>

         INTEREST.  Interest expense increased to approximately $79.2 million in
1998 from approximately  $12.5 million in 1997 primarily as a result of our high
yield  offering   completed  in  April  1998.   Interest  income   increased  to
approximately  $28.3  million for 1998 from  approximately  $3.7 million in 1997
primarily as a result of the interim  investment  of the net  proceeds  from the
1998 high yield offering.  During 1998, we capitalized  $3.3 million of interest
costs.

1997 COMPARED TO 1996

         COMMUNICATION   SERVICES   REVENUE.   Communication   services  revenue
increased by 44.8% to $73.0  million on 140.9 million  billable minutes for 1997
from  $50.4  million  on 62.2 million  billable minutes for 1996.  Communication
services revenue growth for 1997 was generated  primarily from increased traffic
volume on our  network  from  growth in our  carrier  business  and, to a lesser
extent, increased traffic volume in Latin America and the Pacific Rim.

         The overall  increase of 126.4% in billable  minutes  from 1996 to 1997
was  partially  offset by  declining  revenue per  billable  minute,  as average
revenue per billable minute declined by 36.3% to $.51 in 1997, from $.80 in 1996
primarily because of (1) a higher percentage of lower-priced  intra-European and
national long distance traffic from our network as compared to  intercontinental
traffic,  (2) a higher percentage of lower-priced carrier traffic as compared to
retail traffic,  (3) reductions in certain rates charged to retail  customers in
response to pricing reductions  enacted by certain incumbent  telecommunications
operators  and other  carriers in many of our  markets,  (4) changes in customer
access  methods  and  (5)  foreign  currency   fluctuations.   See  "-  Cost  of
Communication Services."

         Communication  services  revenue per  billable  minute from the sale of
services to retail customers,  which  represented  72.1% of total  communication
services  revenue in 1997,  compared to 83.5% in 1996, decreased to $.69 in 1997
from $1.04 in 1996 .  Communication  services  revenue per  billable minute from
the sale of services to carriers and other resellers decreased from $.38 in 1996
to $.30 in 1997,  primarily  as a result  of price  competition.  The  number of
customers  billed  rose  18.4% from  18,172 at  December  31,  1996 to 21,515 at
December 31, 1997.

         During 1997,  approximately 44.7% of our communication services revenue
was  generated  in Western  Europe as  compared  to  approximately  41.9% of our
communication  services  revenue in 1996.  Despite an increase of  approximately
14.1% over 1996,  communication  services revenue from Latin America represented
approximately  22.2%  of our  communication  services  revenue  during  1997  as
compared to  approximately  28.4% of our  communication  services revenue during
1996.   Communication   services   revenue  from  the  Pacific  Rim  represented
approximately 11.2% of our communication services revenue in 1997 as compared to
approximately 12.4%  of our  communication  services  revenue  during  1996.

         The  carrier  business   represented   approximately   27.9%  of  total
communication  services revenue and approximately  46.1% of billable minutes for
1997 as compared to approximately 16.5% of total communication  services revenue
and  approximately  35.2%  of  billable  minutes  for  1996.  This  increase  in
communication  services revenue  represents an increase of approximately  147.0%
over 1996.

         COST  OF  COMMUNICATION   SERVICES.   Cost  of  communication  services
increased  to $63.5  million  in 1997  from  $42.1  million  in 1996  and,  as a
percentage of communication  services revenue,  increased to approximately 87.0%
from  approximately  83.6% for 1997 and  1996,  respectively.  Our gross  margin
decreased to 13% for 1997 from 16.4% for 1996.  This  decrease was primarily due
to (1) decreased revenue per minute resulting from price competition and foreign
currency  fluctuations  which  were not  offset by  corresponding  decreases  in
infrastructure  costs,  (2) increased sales to carrier  customers which generate
substantially lower margins,  and (3) an increase in intra-European and national
long distance traffic compared to higher margin international traffic.  Although
it did not  decrease  as fast as  revenues  per  minute,  our  average  cost per
billable  minute  decreased  to $.44 during 1997 from $.67 during  1996, a 34.3%
decrease.  This decrease,  which  partially  offset the effect of the decline in
average revenue per billable minute, was attributable primarily to (1) increased
traffic being routed  through our network,  which  increased the  utilization of
fixed cost leased lines, (2) increased switched minutes generated by our carrier
business,  which also increased the utilization of fixed cost leased lines,  and
(3) changes in customer access methods.  Increased European network  utilization
helped reduce costs on a per minute basis with respect to European long distance
telecommunications services.


                                       28
<PAGE>

         Cost  of  communication  services  increased  in  1997  because  of the
relatively high cost of leased  infrastructure  and the  accelerated  rollout of
European  points  of  presence.  These  costs  are  expected  to  decrease  as a
percentage  of  communication  services  revenue as we  continue  our efforts to
convert from leased to owned  capacity.  We increased  our private line circuits
capacity by 311%, and as a result the fixed costs  associated  with our network,
costs for private line circuits increased to approximately $6.0 million for 1997
(approximately  8.2% of communication  services revenue) from approximately $4.1
million for 1996 (approximately 8.2% of communication services revenue).

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative expenses increased to $36.1 million in 1997 from $32.9 million in
1996 and, as a  percentage  of  communication  services  revenue,  decreased  to
approximately  49.4% in 1997  from  approximately  65.2% in 1996.  Much of these
expenses are  attributable to overhead costs  associated with our  headquarters,
back office and network operations as well as maintaining a physical presence in
seventeen different jurisdictions.  Salaries and commissions, as a percentage of
total selling, general and administrative expenses, were approximately 51.6% and
49.0% for 1997 and 1996, respectively.

         EBITDA LOSS. EBITDA loss increased to $26.6 million for 1997 from $24.6
million for 1996. As a percentage of communication services revenue, EBITDA loss
decreased to approximately 36.4% in 1997 from approximately 48.7% in 1996. These
losses  resulted  from lower  gross  margins as a  percentage  of  communication
services revenue due to the relatively high cost of intra-European  leased lines
which was  compounded  by the impact on revenue of aggressive  price  reductions
implemented by certain incumbent telecommunications operators.

         DEPRECIATION AND AMORTIZATION.  Depreciation and amortization  expense,
which includes  depreciation  of our network,  increased to  approximately  $7.7
million in 1997 from  approximately  $4.8 million in 1996.  The increase was due
primarily to the  depreciation  of equipment  related to network  expansion  and
fiber optic cable systems placed in service during 1997.

         INTEREST.  Interest expense increased to approximately $12.5 million in
1997 from  approximately  $10.8 million in 1996 due to the accretion of non-cash
interest  on  the  notes  we  issued  in  1994.  Interest  income  increased  to
approximately  $3.7  million in 1997 from  approximately  $1.9 million for 1996,
primarily as a result of the  investment  of the net  proceeds  from our initial
public offering.

LIQUIDITY AND CAPITAL RESOURCES

         We have incurred  losses from  operating  activities in each year since
our inception  and expect to continue to incur  operating and net losses for the
next several years. Since inception, we have utilized cash provided by financing
activities to fund  operating  losses and capital  expenditures.  The sources of
this cash have  primarily  been  through  private  and  public  equity  and debt
financings and, to a lesser extent, equipment-based financing. In particular, in
1996 we raised  approximately  $104.0 million of gross  proceeds  (approximately
$94.5  million  net  proceeds)  from the sale of our  common  stock,  in 1998 we
completed a high yield  offering  through which we raised  approximately  $889.6
million of gross proceeds  (approximately $856.6 million of net proceeds) and in
March  199  we  completed  a  high  yield  offering   through  which  we  raised
approximately $365.5 million of gross proceeds  (approximately $352.6 million of
net  proceeds).  A portion of the proceeds from the 1998 high yield offering was
utilized by us to retire our 15% Senior  Discount  Notes due 2005  pursuant to a
tender  offer.  Additionally,  a portion of the proceeds  from the 1998 and 1999
high yield  offerings  was used to  purchase  securities  which were  pledged as
security for each of the interest payment on the notes. As of December 31, 1998,
we had $501.3 million of cash, cash equivalents and other liquid investments and
$144.5 million of restricted cash equivalents and other  restricted  investments
which  secure the next five  interest  payments  on our  outstanding  high yield
notes.  Approximately $78.2 million of the proceeds from the March 1999 offering
were  used  to  purchase  government  obligations  which  will  be  recorded  as
restricted investments in our first quarter financials.

         We  believe  that the net  proceeds  from the  March  1999  high  yield
offering,  together with cash and marketable  securities on hand and the sale of
capacity on the Circe Network will provide sufficient funds for us to expand our
business as planned and to fund operating  losses for at least the next 12 to 18
months.  However,  the amount of our future capital requirement will depend on a
number of factors,  including the success of our business, the start-up dates of
each  ring of the  Circe  Network,  the  dates at which we  further  expand  our
network,  the types of  services we offer,  staffing  levels,  acquisitions  and
customer  growth,  as well as other  factors  that are not within  our  control,
including competitive conditions, government regulatory developments and capital
costs. In the event our plan or assumptions change or prove to be inaccurate, we
are unable to convert from leased to owned infrastructure in accordance with our
current  plans or the net proceeds of this  offering,  cash and  investments  on
hand,  equity  offerings and the proceeds from the sale of capacity on the Circe
Network  prove to be  insufficient  to fund our  growth in the manner and at the
rate currently  anticipated,  we may be required to delay or abandon some or all
of our  development and expansion plans or we may be required to seek additional
sources of financing  earlier than  currently  anticipated.  In the event we are
required  to  seek  additional  financing,  there  can be  assurance  that  such
financing will be available on acceptable terms or at all.


                                       29
<PAGE>

         CAPITAL EXPENDITURES;  COMMITMENTS. The development of our business has
required  substantial  capital   expenditures.   During  1998,  we  had  capital
expenditures of  approximately  $94.7 million,  acquired $30.4 million of assets
under  capital  lease  obligations  and at December 31, 1998,  had $97.3 million
payable for  purchase of property  and  equipment.  We have entered into certain
agreements  associated with the Circe Network,  purchase commitments for network
expansion  and other items  aggregating  $168.8  million at December  31,  1998.
During 1999, we also intend to enter into certain agreements associated with the
Circe  Network,  purchase  commitments  for  network  expansion  and other items
aggregating over $500 million. At December 31, 1998, we entered into a letter of
intent  with  Metromedia  Fiber  Networks,  Inc.  and Carrier 1, Inc. to jointly
construct  the civil works  associated  with a national  communications  network
being  constructed  by each party in  Germany.  In  February  1999,  the parties
entered  into a  definitive  agreement  which  required  each  party to supply a
standby  letter  of  credit to cover the  construction  costs  related  to their
portion of the network.  In  addition,  we have minimum  volume  commitments  to
purchase  transmission  capacity  from  various  domestic  and foreign  carriers
aggregating approximately $13.2 million for 1999.

         FOREIGN   CURRENCY.   We  have  exposure  to  fluctuations  in  foreign
currencies  relative to the U.S.  Dollar as a result of billing  portions of our
communication services revenue in the local European currency in countries where
the local currency is relatively stable while many of our obligations, including
a  substantial  portion  of our  transmission  costs,  are  denominated  in U.S.
Dollars. In countries with less stable currencies,  such as Brazil, we billed in
U.S.  Dollars.  For  1998,  approximately  45.4% of our  communication  services
revenue was billed in various  European  currencies.  Debt service on certain of
the notes issued in our 1998 high yield offering are currently payable in Euros.
Substantially  all of the costs of acquisition  and upgrade of our switches have
been, and are expected to continue to be, U.S. Dollar denominated  transactions.
A substantial  portion of the costs to construct  each ring of the Circe Network
has been and will continue to be  denominated  in various  European  currencies,
including  the Euro.  Most of the  European  currencies  in which we do business
converged effective January 1, 1999, with the exception of the Pound Sterling.

         With the continued  expansion of our network, a substantial  portion of
the  costs of  communications  service,  such as local  access  and  termination
charges and a portion of the leased  line costs,  as well as a majority of local
selling expenses and debt service related to the Euro denominated notes, will be
charged to us in the same  currencies as revenue is billed.  These  developments
create a natural hedge against a portion of our foreign  exchange  exposure.  To
date,  much of the  funding  necessary  to  establish  the  local  direct  sales
organizations  has been derived  from  communication  services  revenue that was
billed in local currencies. Consequently, we believe that our financial position
as of  December  31,  1998 and our  results  of  operations  for the year  ended
December 31, 1998 were not  significantly  impacted by  fluctuations in the U.S.
Dollar in relation to European currencies.

YEAR 2000

         The  Year  2000   problem   is  the   result  of   computer   programs,
microprocessors  and embedded date reliant  systems using two digits rather than
four to define the  applicable  year. If such programs are not  corrected,  such
date  sensitive  computer  programs,  microprocessors  and embedded  systems may
recognize  a date using "00" as the year 1900  rather  than the Year 2000.  This
could  result in a system  failure  or  miscalculation  causing  disruptions  in
operations.

         In an effort to assess our Year 2000 state of readiness, during 1997 we
began performing a complete inventory assessment of all of our internal systems,
which we have  divided  into two  categories,  business  essential  and  support
systems. Business essential systems include communications switching systems and
billing systems.  The inventory of our business  essential  systems is complete.
The  backbone  of our  communications  network is  primarily  composed of Nortel
switches  which are Year 2000  complaint with the exception of one Nortel switch
which is scheduled for upgrade in April 1999.  Additional  testing has been done
on our  Nortel  switches  to ensure  Year  2000  compliance.  Certain  ancillary
switches  used  in our  communications  network  are  currently  not  Year  2000


                                       30
<PAGE>

compliant.  We have  identified  the  upgrades  required to make these  switches
compliant and have  developed a plan to complete the upgrades by July 1999.  Our
message  processing  and billing  systems,  which are used to record and process
millions of call detail  records,  are Year 2000 compliant.  Additional  testing
using a wide range of data has been planned and is scheduled  for  completion in
May 1999.

         Our inventory and  assessment of our support  systems is  approximately
30%  complete.  The global  nature of our business  makes the inventory of these
systems more  difficult.  Most of these systems have been  purchased  within the
last  year and have  already  been  assessed  for Year  2000  problems  prior to
purchase.  The assessment of all remaining systems are scheduled to be completed
by July 1999. We will replace or modify any  non-compliant  Year 2000 systems as
required.

         We have initiated formal communications with the key carriers and other
vendors on which our  operations and  infrastructure  are dependent to determine
the extent to which we are  susceptible  to a failure  resulting from such third
parties'  inability to remediate  their own Year 2000 problems.  There can be no
assurance  that the  carriers  and other  vendors  on which our  operations  and
infrastructure  rely are or will be Year  2000  compliant  in a  timely  manner.
Interruptions in the services provided to us by these third parties could result
in  disruptions  in our services.  Depending upon the extent and duration of any
such disruptions and the specific services affected, such disruptions could have
a material  adverse affect on our business,  financial  condition and results of
operations.  As a  contingency  against  any  possible  disruptions  in services
provided by vendors,  we have sought to diversify  our vendor  base.  We believe
that the  diversity  of our vendor  base is  sufficient  to  mitigate  Year 2000
related  disruptions in service to our customers.  In addition,  we believe that
the fact that we conduct business in, and derive revenue from,  multiple Western
European  countries helps to mitigate the potential  impact of Year 2000 related
disruptions.

         In addition,  disruptions in the economy generally  resulting from Year
2000  problems  could  also have a  material  adverse  effect on us. We could be
subject to litigation resulting from any disruption in our services.  The amount
and potential  liability or lost revenue cannot be reasonably  estimated at this
time.

EURO

         On January 1,  1999,  eleven of the  fifteen  member  countries  of the
European Union  established  irrevocable  fixed  conversion  rates between their
existing  sovereign  currencies  and a single  currency  called  the  Euro.  The
sovereign  currencies are scheduled to remain legal tender as  denominations  of
the Euro during a transition period from January 1, 1999 to January 1, 2002.

         We have completed an internal analysis  regarding  business and systems
issues  related  to  the  Euro  conversion  and,  as a  result,  made  necessary
modifications to our business  processes and software  applications.  We are now
able to conduct  business in both Euro and  sovereign  currencies  on a parallel
basis, as required by the European Union.

         We believe that the Euro  conversion  has not and will  continue to not
have a  significant  impact on our  business  strategy  in Europe.  The costs to
convert all systems to be Euro  compliant did not have a  significant  impact on
our results of operations.

INFLATION

         We do not believe that  inflation has had a  significant  effect on our
operations to date.

PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

         Statement  of  Financial  Accounting  Standards  No. 133 ("SFAS  133"),
"Accounting for Derivative  Instruments and Hedging  Activities,"  was issued in
June 1998.  SFAS 133  standardizes  the accounting  for derivative  instruments,
including  certain  derivative  instruments  embedded  in  other  contracts,  by
requiring  recognition  of those  instruments as assets and  liabilities  and to
measure them at fair value.  SFAS 133 will be effective for us in the year 2000.
We have not  completed  our  analysis  of the  impact of this  statement  on our
financial statements but do not currently believe it will be material.



                                       31
<PAGE>

         The American Institute of Certified Public Accountants issued Statement
of Position No. 98-1 (SOP 98-1)  "Accounting for the Costs of Computer  Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that  certain  costs  related to the  development  or purchase  of  internal-use
software be  capitalized  and amortized  over the  estimated  useful life of the
software.  SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred.  We are required to adopt both new statements in the
first quarter of 1999. The adoption of these  statements is not expected to have
a material effect on our consolidated financial statements.

CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS

OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO RUN OUR BUSINESS

         We  have  now  and  will  continue  to  have a  significant  amount  of
indebtedness  (approximately $1.3 billion).  Our substantial  indebtedness could
have important consequences to you. For example, it could:

          o    increase  the chance that we will not be able to make payments on
               our outstanding indebtedness;

          o    limit our ability to obtain  additional  financing  in the future
               for  working  capital,  capital  expenditures,  acquisitions  and
               general corporate purposes;

          o    require  us to  dedicate a  substantial  portion of our cash flow
               from operations to payments on our indebtedness, thereby reducing
               the funds available to us for other purposes,  including  working
               capital, capital expenditures, acquisitions and general corporate
               purposes;

          o    make us more  vulnerable  to  economic  downturns,  limiting  our
               ability  to  withstand   competitive  pressures  and  reduce  our
               flexibility  in  responding  to changing  business  and  economic
               conditions;

          o    limit our flexibility in planning for, or reacting to, changes in
               our business and the industry in which we operate;

          o    place  us  at  a   competitive   disadvantage   compared  to  our
               competitors that have less debt; and

          o    limit, along with the financial and other restrictive  covenants,
               our ability to borrow additional funds.

TERMS OF OUR INDEBTEDNESS RESTRICT OUR CORPORATE ACTIVITIES

         The indentures under which our long-term debt was issued restrict,  and
in some cases significantly  limit or prohibit,  among other things, our ability
and the ability of our subsidiaries to:

          o    incur additional indebtedness,

          o    make prepayments of certain indebtedness,

          o    pay dividends,

          o    make investments,

          o    engage in transactions with stockholders and affiliates,

          o    issue capital stock,

          o    create liens,

          o    sell assets, and

          o    engage in mergers and consolidations.

         However,  the limitations  contained in our indentures are subject to a
number of important  qualifications  and  exceptions.  In particular,  while the
indentures restrict our ability to incur additional indebtedness, they permit us
and our  subsidiaries  to,  among other  things,  incur an  unlimited  amount of
secured indebtedness to finance  telecommunications  assets and build-out. If we
incur new indebtedness,  the related risks that we and our subsidiaries now face
could intensify.


                                       32
<PAGE>

WE HAVE A LIMITED  OPERATING HISTORY UPON WHICH TO EVALUATE OUR BUSINESS AND, TO
DATE,  WE HAVE  INCURRED  SUBSTANTIAL  NET  LOSSES AND  NEGATIVE  CASH FLOW FROM
OPERATIONS

         We commenced operations in 1991.  Consequently,  we have only a limited
operating history upon which you can evaluate our business.  You should evaluate
our  chances  of  financial  and  operational  success  in light  of the  risks,
uncertainties,  expenses,  delays and  difficulties  frequently  encountered  by
companies in their early stage of development.

         Our operating loss, negative EBITDA and net loss has increased for each
of the last four years.  In 1998,  we had an  operating  loss of $48.1  million,
negative EBITDA of $31.8 million and a net loss of $127.3  million.  We also had
interest  expense of $79.2  million and  capitalized  interest of $3.3  million.
Interest expense will increase substantially as a result of this offering. These
losses and interest expense present a significant risk for investors. We need to
begin placing traffic on the Circe Network to reverse these trends.

         Our  negative  EBITDA and  negative  cash flows are likely to  continue
beyond the year 2000 if:

          o    we extend our expansion plans,

          o    prices charged to end users decline faster than we anticipated,

          o    interconnection  rates  and  wholesale  prices  paid by us do not
               decline as quickly as we anticipated, or

          o    any  of  the  other  risks   described  in  this  Annual   Report
               materialize.

         Accordingly,  we cannot  assure  you that we will  achieve  or  sustain
profitability or positive cash flows from operating activities in the future. If
we  cannot  achieve   profitability   or  positive  cash  flows  from  operating
activities, we may be unable to meet our working capital and future debt service
requirements  which  would  have a  material  adverse  effect  on our  business,
financial  condition  and results of  operations.  See "-Our Future  Growth will
Require  Substantial  Additional Capital  Requirements Which May Exceed Budgeted
Amounts"  and  "-  Our   Operating   Results  May  Be  Subject  to   Substantial
Fluctuations."

OUR FUTURE GROWTH WILL REQUIRE SUBSTANTIAL ADDITIONAL CAPITAL REQUIREMENTS WHICH
MAY EXCEED BUDGETED AMOUNTS

         We  currently  have  budgeted  approximately  $720  million for capital
expenditures in 1999 and 2000,  including the proposed  expansion of our network
into southern France and  Switzerland.  That network  expansion could cost us as
much as $350 million including civil  construction costs and the cost of network
equipment and related facilities.  We will seek to reduce this amount by sharing
civil  construction  costs with a partner.  However,  we do not currently have a
partner  for the  expansion  project.  If we do not  find a  partner,  we may be
required to reduce our planned  network  expansion.  In that event, we might not
build a "ring." As a result,  a fiber cut would  interrupt  our  service on that
segment.  We  cannot  assure  you that  actual  costs of our  network  expansion
projects will not  substantially  exceed our budget for these  projects.  Future
sources of financing may include:

          o    additional public and private debt and equity offerings,

          o    project financing,

          o    equipment financings, and

          o    the sale of capacity on our network.

         We cannot assure you that  additional  financing  arrangements  will be
available  to us on  acceptable  terms or at all.  Moreover,  the  amount of our
outstanding  indebtedness  may adversely  affect our ability to raise additional
funds.

         We  believe  that the net  proceeds  from our 1998 and 1999 high  yield
offerings,  cash and investments on hand and the sale of capacity on our network
will provide sufficient funds for us to expand our business as planned and to


                                       33
<PAGE>

fund our operating  losses for at least the next 12 to 18 months.  However,  the
actual  amount of our future  capital  requirements  will  depend on a number of
factors, including:

          o    the success of our business;

          o    the start-up  and  ready-for-service  dates for new  transmission
               infrastructure;

          o    the rate at which we further expand our network;

          o    the types of services that we offer;

          o    staffing levels;

          o    acquisitions and customer growth; and

          o    other  factors  that  are  not  within  our  control,   including
               competitive  conditions,  government regulatory  developments and
               capital costs.

         In the  event  that our  plans  or  assumptions  change  or prove to be
inaccurate or available cash and proceeds from the sale of equity securities and
capacity  on our  network  prove to be  insufficient  to fund our  growth in the
manner and at the rate we currently anticipated,  we may be required to delay or
abandon some or all of our development and expansion plans or we may be required
to seek additional sources of financing earlier than currently anticipated.

SIGNIFICANT  PRICE  DECLINES  RESULTING FROM  COMPETITION  AND OTHER FACTORS MAY
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE

         Prices for  international  long distance calls were  historically  kept
artificially  high in part by above-cost  international  settlement  rates which
allowed  carriers to enjoy high gross margins on international  calls.  However,
many  observers   believe  that,  given  the  negligible   marginal  cost  to  a
facilities-based  carrier  of  carrying  an  international  call and  given  the
emergence of competition in many countries,  the  international  settlement rate
system is in the process of collapsing and that the price of international calls
will not be  sufficiently  more expensive than domestic long distance  calls. In
addition, the European Union Interconnection  Directive,  which became effective
in January 1998, requires European Union operators with significant market power
to  charge  cost-based  and   non-discriminatory   prices  for  transmission  of
cross-border  traffic. This has had an effect on settlement rates with countries
and  territories  outside  the  European  Union and may also  contribute  to the
collapse of the international settlement rate system. For the foregoing reasons,
during  the  past  year   substantial   price   reductions   were  reflected  in
international rates,  particularly the rates charged for calls between countries
where competition exists. This represents a steep decline from rates charged for
such calls as recently as several years ago and we expect rates on international
calls, particularly between the United States and Western Europe, to continue to
decline significantly.  Furthermore,  the Federal Communications Commission (the
"FCC") has adopted the international settlement rate order, which is designed to
bring  downward  pressure on  international  telephone  rates by requiring  U.S.
carriers to pay lower settlement rates to their correspondent foreign carriers.

         Industry observers predict that telephone charges will be less affected
by the distance a call is carried,  particularly with the possible increased use
of voice  services  over the  Internet.  As a  consequence,  if we are unable to
effectively implement our strategy of owning,  rather than leasing,  facilities,
we will not be able to increase our gross margin on  international  calls which,
absent a substantial  increase in billable minutes of traffic carried or charges
for additional  services,  would have a material adverse effect on our business,
financial condition and results of operations. In addition, during 1998 a number
of incumbent  telecommunications  operators took steps to  substantially  reduce
retail  prices,  in excess of  reductions in wholesale  prices,  in an effort to
protect their market and deter  competitors,  such as us. See "- Our Industry Is
Highly Competitive, Many Participants Have Greater Resources Than We Do."

INABILITY TO MANAGE  EFFECTIVELY OUR GROWTH STRATEGY COULD ADVERSELY  AFFECT OUR
OPERATIONS

         Our rapid and continued growth has placed,  and is expected to continue
to place, a significant strain on our administrative,  operational and financial
resources and has increased demands on our systems and controls. In addition, we


                                       34
<PAGE>

cannot  assure you that we will be able to  successfully  add services or expand
our geographic  markets or that existing  regulatory  barriers to our current or
future operations will be reduced or eliminated. As we increase our services and
expand our geographic markets,  there will be additional demands on our customer
support,   sales  and  marketing  and   administrative   resources  and  network
infrastructure. We cannot assure you that our systems and infrastructure will be
adequate to maintain and  effectively  monitor  future growth or that we will be
able to successfully attract, train and manage additional employees. The failure
to continue to upgrade  our  administrative,  operating  and  financial  control
systems  and   infrastructure   or  the   occurrence  of  unexpected   expansion
difficulties  could have a material  adverse  effect on our business,  financial
condition and results of operations.

OUR OPERATING RESULTS MAY BE SUBJECT TO SUBSTANTIAL FLUCTUATIONS

         Our quarterly operating results have fluctuated in the past,  primarily
as a result of the evolution of our business, and may fluctuate substantially in
the future as a result of a variety of factors, including:

          o    pricing changes in the industry;

          o    the  start-up  and  ready-for-service  dates of each phase of the
               Circe Network;

          o    timing of capacity sales;

          o    changes in the mix of  services  sold or channels  through  which
               those services are sold;

          o    changes in user demand, customer terminations of service, capital
               expenditures  and other costs  relating to the  expansion  of our
               network;

          o    the timing and costs of any  acquisitions  of customer  bases and
               businesses, services or technologies;

          o    the timing and costs of marketing and advertising efforts;

          o    the effects of government regulation and regulatory changes; and

          o    specific economic conditions in the telecommunications industry.

         Variability  in our  operating  results  could have a material  adverse
effect on our  business,  financial  condition  and results of  operations.  Any
significant   shortfall   in  demand  for  our   services  in  relation  to  our
expectations, or the occurrence of any other factor which causes revenue to fall
significantly  short of our  expectations,  would also have a  material  adverse
effect on our  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 our transmission
methodology  from  switchless  resale  to use  of  our  network  may  result  in
substantial quarterly fluctuations in our operating results.

OUR INDUSTRY IS HIGHLY  COMPETITIVE,  MANY  PARTICIPANTS  HAVE GREATER RESOURCES
THAN WE DO

         Our  success   depends   upon  our   ability  to  compete   with  other
telecommunications  providers  in  each  of  our  markets  many  of  which  have
substantially greater financial, marketing and other resources than we do. These
providers include the incumbent  telecommunications  operator in each country in
which  we  operate,   global   alliances  among  some  of  the  world's  largest
telecommunications  carriers,  such as "Global One" (Sprint,  France Telecom and
Deutsche Telekom), an alliance between MCI Worldcom and Telefonica de Espana, an
alliance between AT&T and British Telecom and new entrants,  such as alternative
carriers,   Internet  backbone  networks  and  other  service  providers.  Other
potential competitors include:

          o    cable communications companies,

          o    wireless telephone companies,

          o    electric and other utilities with rights-of-way,

          o    railways,

          o    microwave carriers, and

                                       35
<PAGE>

          o    large end-users which have private networks.

         If our  competitors  devote  significant  additional  resources  to the
provision of international or national long distance telecommunications services
to our target customer base, this action could have a material adverse effect on
our business, financial condition and results of operations and we cannot assure
you that we will be able to compete  successfully.  The intensity of competition
and price  declines  have  increased  over the past several years and we believe
that competition and price declines will continue to intensify,  particularly in
Western Europe, as other providers obtain operative connectivity.

         Customers in most of our current and targeted  European markets are not
accustomed    to   obtaining    services   from    competitors    to   incumbent
telecommunications   operators   and   may  be   reluctant   to   use   emerging
telecommunications  providers,  such as us. In particular,  our target  customer
base may be reluctant to entrust their telecommunications needs to new operators
that are believed to be unproven. In addition, in continental Europe, certain of
our competitors,  including the incumbent telecommunications  operators, provide
potential customers with a broader range of services than we currently offer.

         Competition  for  customers  in  the  telecommunications   industry  is
primarily  based on price and quality of  services  offered.  We price  services
primarily   by  offering   discounts   to  the  prices   charged  by   incumbent
telecommunications  operators and other major competitors.  However,  prices for
international long distance calls have decreased substantially over the past few
years in the markets in which we currently  maintain  operations and in which we
expect to establish  operations.  Some of our larger  competitors may be able to
use their greater  financial  resources to cause severe price competition in the
countries   in   which   we   operate   and   expect   to   operate.   Incumbent
telecommunications  operators in Western Europe are  responding to  deregulation
far more rapidly and aggressively than occurred after deregulation in the United
States and the United  Kingdom.  We expect  that  prices for our  services  will
continue   to  decrease   for  the   foreseeable   future  and  that   incumbent
telecommunications  operators and other  dominant  telecommunications  providers
will continue to improve their product  offerings.  The  improvement  in product
offerings  and customer  service by the incumbent  telecommunications  operators
could have a material adverse effect on our  competitiveness  to the extent that
we are  unable to provide  similar  levels of  offerings  and  services.  If the
incumbent  telecommunications  operator in any jurisdiction uses its competitive
advantages to their fullest extent, our operations in such jurisdiction would be
adversely affected.  Furthermore, the marginal cost of carrying calls over fiber
optic cable is  extremely  low. As a result,  certain  industry  observers  have
predicted that, within a few years,  there may be dramatic and substantial price
reductions and that long distance calls will not be significantly more expensive
than local calls. In addition,  certain carriers are implementing plans to offer
telecommunications  services over the Internet at substantially  reduced prices.
Any price  competition  could have a material  adverse  effect on our  business,
financial condition and results of operations.

         Incumbent   telecommunications   operators   generally   have   certain
competitive  advantages  that we and other  competitors do not have due to their
control  over  local   connectivity.   We  currently   rely  on  the   incumbent
telecommunications operators for access to the public switched telephone network
and  the  provision  of  leased   lines,   and  the  failure  of  the  incumbent
telecommunications   operators  to  provide  such  access  or  leased  lines  at
reasonable  pricing  or within a  reasonable  time  frame  could have a material
adverse effect on our business,  financial  condition and results of operations.
The reluctance of some national regulators to provide operative  interconnection
as a result of their failure to grant regulatory  approvals,  provide  necessary
provisioning  and  enforce  access to such  operators'  networks  and  essential
facilities could have a material adverse effect on our competitive  position. We
cannot  assure  you that we will be able to  compete  effectively  in any of our
current or proposed markets.

A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM CARRIER CUSTOMERS

         We derive a significant portion of our revenues from a relatively small
number of carrier customers.  In 1998, carrier customers  accounted for 58.3% of
our total communications revenues with the top five carrier customers accounting
for 25.8% of such amount.  Over the next several years, we expect to continue to
derive  a  substantial   portion  of  our  revenues   from  carrier   customers.
Accordingly,  the loss of revenue from several  carrier  customers  could have a
material  adverse effect upon our business,  financial  condition and results of
operations.


                                       36
<PAGE>

         Carrier  customers are extremely price sensitive,  generate  relatively
low margin  business  and often  choose to move their  business  based solely on
small price  changes.  In addition,  smaller  carrier  customers  generally  are
perceived  in the  telecommunications  industry as  presenting  a higher risk of
payment  delinquency  or  non-payment  than other types of  customers.  While we
believe that our credit criteria enables us to reduce our exposure to the higher
payment risks generally associated with carrier customers,  we cannot assure you
that such criteria will afford adequate protection against such risks.

THERE ARE SIGNIFICANT RISKS OF ENTRY INTO DATA TRANSMISSION BUSINESS

         We have no  direct  experience  providing  data  transmission  services
although  we  have  extensive  experience  in  the  telecommunication   business
including an executive team with significant  telecommunications  expertise.  We
intend to begin offering data  transmission  services by the end of 1999.  These
services, which will include frame relay and asynchronous transfer mode, will be
targeted  at  our  existing  and  potential   customers  with  substantial  data
communications requirements.

         The data transmission business is extremely competitive and prices have
declined  substantially in recent years and are expected to continue to decline.
In providing these services, we will be dependent upon vendors for assistance in
the planning and  deployment of our data product  offerings,  as well as ongoing
training and support.  Our provider for asynchronous  transfer mode equipment is
Lucent Technologies. We believe that Lucent Technologies does not have extensive
experience providing this equipment, or configuring data networks, in Europe. In
addition, this Lucent Technologies equipment will need to be integrated with our
existing  Nortel  Telecom-based  platforms.  In  Europe,  there  are a number of
different  protocols for data transmission.  Our network will need to be able to
handle all these protocols, which will pose technical difficulties.  The success
of our entry into the data  transmission  business will depend upon, among other
things,  our ability to select new equipment  and software and  integrate  these
into our  network,  hire and train  qualified  personnel,  enhance our  billing,
back-office and information  systems to accommodate data  transmission  services
and  customer  acceptance  of our  service  offerings.  We  cannot  provide  any
assurance that we will be successful in the data  transmission  business.  If we
are not  successful,  there may be a material  adverse  effect on our  business,
financial condition and results of operations.

RAPID  CHANGES  IN THE  TELECOMMUNICATIONS  INDUSTRY,  TECHNOLOGY  AND  CUSTOMER
REQUIREMENTS COULD PLACE US AT A COMPETITIVE DISADVANTAGE

         The  telecommunications  industry is changing rapidly. Such changes may
happen at any time and can  significantly  affect our operations  from period to
period.  Factors which are affecting the  telecommunications  industry  include,
among others:

          o    liberalization,

          o    privatization of incumbent telecommunications operators,

          o    technology and customer requirements,

          o    significant price declines,

          o    technological improvements,

          o    expansion of telecommunications infrastructure, and

          o    the  continued  globalization  of the world's  economies and free
               trade.

         We cannot  assure  you that one or more of the above  factors  will not
have  unforeseen  effects  which  could  have a material  adverse  effect on our
business.  Also,  we  cannot  assure  you,  even if  these  factors  turn out as
anticipated, that we will be able to implement our strategy or that our strategy
will be accepted in this rapidly evolving market.

         The   telecommunications   industry  is   characterized  by  rapid  and
significant  technological  advancements,  introductions  of  new  products  and
services  utilizing  new  technologies  and  broadband  applications,  increased
availability of transmission  capacity and increased utilization of the Internet
for voice and data transmission.  As new technologies  develop, we may be placed


                                       37
<PAGE>

at a  competitive  disadvantage  and  competitive  pressures  may  force  us  to
implement such new  technologies at substantial  cost. In addition,  competitors
may  implement  new  technologies  before  we are able to do so,  allowing  such
competitors to provide enhanced  services and superior quality compared to those
provided  by us. We cannot  assure  you that we will be able to  respond to such
competitive pressures and implement such technologies on a timely basis or at an
acceptable  cost. One or more of the technologies  currently  utilized by us, or
which we may  implement in the future,  may not be preferred by our customers or
may become  obsolete.  If we are 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 us do not achieve a significant  degree of
market  acceptance,  any such event could have a material  adverse effect on our
business, financial condition and results of operations.

COSTS AND DIFFICULTIES OF ACQUIRING AND INTEGRATING  BUSINESSES COULD AFFECT OUR
FUTURE GROWTH AND COMPETITIVENESS

         We may  seek to  acquire  customer  bases  and  businesses  from,  make
investments in, or enter into strategic  alliances  with,  other companies which
may expose us to the following risks:

          o    the  difficulty of  assimilating  the operations and personnel of
               the acquired entities;

          o    the potential disruption of our ongoing business;

          o    the  failure to  successfully  incorporate  licensed  or acquired
               technology and rights into our services;

          o    the failure to maintain uniform standards,  controls,  procedures
               and policies; and

          o    the  impairment of  relationships  with  employees as a result of
               changes in management and ownership.

         Additionally,  in connection  with an  acquisition,  we may  experience
rates of  customer  attrition  that are  significantly  higher  than the rate of
customer attrition which we generally  experience.  Further,  to the extent that
any transaction involves customer bases or businesses located outside the United
States,  the transaction  would involve the risks associated with  international
operations. We cannot assure you that we would be successful in overcoming these
risks or any  other  problems  encountered  with  acquisitions,  investments  or
strategic alliances.  See "- Risks Associated with the Expansion of Our Network,
Construction Delays and System Failures Could Adversely Affect Our Business" and
"-Operating   In  Foreign   Countries   Presents   Risks  That  May  Affect  Our
Performances."

RISKS  ASSOCIATED  WITH THE  EXPANSION OF OUR NETWORK,  CONSTRUCTION  DELAYS AND
SYSTEM FAILURES COULD ADVERSELY AFFECT OUR BUSINESS

         Our success is dependent, in part, on our ability to continue to expand
our network and on our ability to provide  seamless  technical  operation of the
network.  Furthermore,  as we continue  to expand our  network to  increase  its
capacity and reach, we will face increasing demands and challenges including:

          o    effectively  managing  the  construction  of  new  fiber  routes,
               obtaining any necessary  rights-of-way  and required licenses for
               such construction, and completing any such construction on budget
               and on time;

          o    increasing traffic volume on our network; and

          o    selling capacity on the network.

         If the costs of construction  projects  significantly exceed our budget
for those  projects,  we may be required to obtain  additional  financing  or to
abandon or curtail  portions of those  projects.  If we  encounter  construction
delays,  we will not be able to route our traffic over our owned  facilities  as
soon as we hope, which will, for some period of time, have a detrimental  effect
on our  ability to increase  traffic  volumes and gross  margins.  In  addition,
construction  delays  could  negatively  affect our ability to sell  capacity to
other carriers. Our network is subject to several risks which are outside of our
control, such as:

          o    the risk of damage to software and hardware resulting from fire,

                                       38
<PAGE>

          o    power loss,

          o    natural disasters, and

          o    general  transmission  failures  caused by a number of additional
               factors.

         Any  failure of our network or other  systems or  hardware  that causes
significant interruptions to our operations could have a material adverse effect
on our business, financial condition and results of operations.

         Our  operations  are also  dependent  on our  ability  to  successfully
integrate new and emerging  technologies  and equipment into the network,  which
could increase the risk of system failure and result in further strains upon our
network. We attempt to minimize customer  inconvenience in the event of a system
disruption by routing  traffic to other circuits and switches which may be owned
by other  carriers.  However,  prolonged  or  significant  system  failures,  or
difficulties  for customers in accessing  and  maintaining  connection  with our
network, could seriously damage our reputation and result in customer attrition,
reduced margins and financial losses. Additionally,  any damage to our switching
centers in New York, New York, Somerset, New Jersey or London, England (of which
there are two) could have a material  adverse  effect on our  ability to monitor
and manage our network operations and generate accurate call detail reports.

         The  expansion  and   development   of  our  network  will  entail  the
significant  expenditure of resources in projecting growth in traffic volume and
routing preferences and determining the most cost effective means of growing the
network, for example, through variable or fixed lease arrangements, the purchase
of rights capacity or minimum  investment units on digital fiber optic cables or
digital  microwave  equipment,  or  the  further  construction  of  transmission
infrastructure.   Failure  to  project  traffic  volume  and  route  preferences
correctly  or to determine  the optimal  means of  expanding  our network  would
result in less than optimal utilization of our network and could have a material
adverse effect on our business, financial condition and results of operations.

         We are aware that certain long  distance  carriers  and  consortia  are
expanding capacity in Europe and believe that other long distance  carriers,  as
well as potential new entrants,  such as alternative carriers,  global consortia
of  telecommunications  operators,  international  carriers,  Internet  backbone
networks,  resellers,  value-added  networks and other  service  providers,  are
considering  the  construction  of new  fiber  optic  and  other  long  distance
transmission  networks.  For  example,  the Ulysses  cable  system  owned by MCI
WorldCom  and  the  KPN/Qwest  cable  system  both  connect  London,  Amsterdam,
Brussels,  Paris and  Frankfurt,  and the Hermes Europe Railtel B.V cable system
connects London, Rotterdam, Amsterdam, Antwerp, Brussels, Paris, Dusseldorf, and
Frankfurt.  In  addition,  Level  3  Communications,   British  Telecom,  Global
Crossing,  and Colt Telecom Group have announced  their plans to construct fiber
optic  networks in Europe.  As a result,  there has been pricing  pressure  with
respect to sales of capacity on our network and  transmission  of calls  between
connected  cities.  Such price  competition  is expected to continue and further
price  competition  could  have a  material  adverse  effect  on  our  business,
financial  condition  and  results of  operations.  Since the cost of the actual
fiber is a relatively small portion of building new transmission lines,  persons
building such lines are likely to install fiber that provides substantially more
transmission  capacity  than  will be  needed  over the  short  or  medium-term.
Further,   recent   technological   advances,   such  as  dense  wave   division
multiplexing,  have shown the  potential  to  greatly  expand  the  capacity  of
existing  and new fiber  optic  cable,  which will add to  available  supply and
thereby create additional pricing pressure.  Demand for transmission capacity in
the  United  States  has  recently  been  fueled  by  businesses   seeking  data
transmission  capacity.   European  businesses  are  not  currently  using  data
transmission  to the same  extent as U.S.  businesses  due to higher  costs.  If
European  businesses  do  not  substantially  increase  their  demand  for  data
services,  our ability to utilize the full transmission  capacity of our network
will be  adversely  affected.  In  addition,  we intend to sell  capacity on our
network to other carriers,  which will result in competitors  having capacity on
various routes along our network, which in turn will result in pricing pressures
with  respect to traffic  carried  along  these  routes.  If  industry  capacity
expansion  results in total  available  capacity that exceeds  overall demand in
general or along any of our routes,  severe  additional  pricing  pressure could
develop.

FOREIGN CURRENCY EXCHANGE RATES COULD HAVE ADVERSE EFFECTS ON OUR BUSINESS

         Since our inception in 1991, we have invested heavily in developing our
ability to provide  international  telecommunications  services  within  Western
Europe and other deregulating markets and in developing and expanding our market
                                       39
<PAGE>

presence,  including entering into the national long distance telecommunications
markets in Belgium,  France,  Germany,  Italy, The  Netherlands,  and Spain. Our
payment obligations with respect to our outstanding indebtedness are denominated
in U.S.  Dollars and the Euro,  but certain of our revenues are  denominated  in
Pound  Sterling.  Any  appreciation  in the value of the U.S. Dollar or the Euro
relative  to the Pound  Sterling  could  have a material  adverse  effect on our
ability to make payments on such obligations.  We do not currently use financial
hedging transactions, although in the future we may elect to manage the exchange
rate exposure presented by our Euro denominated  obligations.  We cannot provide
any assurance that exchange rate  fluctuations  will not have a material adverse
effect on our  ability to make  payments  on our  outstanding  indebtedness.  In
addition,  we  cannot  assure  you  that the  laws or  administrative  practices
relating to taxation,  foreign  exchange or other  matters in  countries  within
which we operate will not change.  Any such change could have a material adverse
effect on our business, financial condition and results of operations.

OPERATING IN FOREIGN COUNTRIES PRESENTS RISKS THAT MAY AFFECT OUR PERFORMANCES

         There  are  certain  risks  inherent  in  conducting  an  international
business. These risks include, among others:

          o    regulatory  limitations  restricting or prohibiting the provision
               of our services;

          o    unexpected changes in regulatory requirements,  tariffs, customs,
               duties and other trade barriers;

          o    difficulties in staffing and managing foreign operations;

          o    longer payment cycles;

          o    problems in collecting accounts receivable;

          o    political risks;

          o    fluctuations in currency exchange rates and the conversion to the
               "euro" by several members of the European Union;

          o    foreign exchange controls which restrict or prohibit repatriation
               of funds;

          o    technology export and import restrictions or prohibitions;

          o    delays from custom's brokers or government agencies;

          o    seasonal reductions in business activity during the summer months
               in Europe and certain other parts of the world; and

          o    potentially adverse tax consequences  resulting from operating in
               multiple jurisdictions with different tax laws.

If any of these risks materialize, our business, financial condition and results
of operations could be materially and adversely affected.

WE MAY BE UNABLE TO IMPLEMENT REQUIRED ENHANCEMENTS TO OUR INFORMATION SYSTEMS

         To  efficiently  produce  customer  bills in a timely  manner,  we must
record and process millions of call detail records quickly and accurately. While
we believe that our billing and information systems are currently sufficient for
our operations,  our systems will require  enhancements and ongoing investments,
particularly  as  volume  increases.  We  cannot  assure  you  that we will  not
encounter  difficulties  in enhancing our systems or integrating  new technology
into our systems.  Our failure 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 our business, financial
condition and results of operations.

WE COULD EXPERIENCE  SYSTEM FAILURES AND SERVICE  DISRUPTIONS AS A RESULT OF THE
YEAR 2000 PROBLEM

         The  year  2000   problem   is  the   result  of   computer   programs,
microprocessors  and embedded date reliant  systems using two digits rather than
four to define the  applicable  year. If such programs are not  corrected,  such


                                       40
<PAGE>

date  sensitive  computer  programs,  microprocessors  and embedded  systems may
recognize  a date using "00" as the year 1900  rather  than the year 2000.  This
could  result in a system  failure  or  miscalculation  causing  disruptions  in
operations. In an effort to assess our year 2000 state of readiness, during 1997
we began  performing a complete  inventory  assessment of all of our information
technology and non-information  technology  systems,  the vast majority of which
have either been developed or purchased by us within the past four years.  Based
on our review to date, we believe that the vast majority of our existing systems
are year 2000 compliant.  However,  we cannot provide any assurance that such is
the case. With regard to systems which are not currently year 2000 compliant, we
are  actively  replacing  such systems to ensure our ability to continue to meet
our  internal  needs  and  the  requirements  of  our  customers.  We  currently
anticipate that the upgrade or modification of such  non-compliant  systems will
be  completed  during  the first  half of 1999.  We have also  initiated  formal
communications  with the key carriers and other vendors on which our  operations
and  infrastructure  are  dependent  to  determine  the  extent  to which we are
susceptible  to a  failure  resulting  from such  third  parties'  inability  to
remediate  their own year 2000 problems.  We cannot assure you that the carriers
and other vendors on which our operations and infrastructure rely are or will be
year 2000 compliant in a timely manner.  Interruptions in the services  provided
to us by these  third  parties  could  result in  disruptions  in our  services.
Depending  upon the extent and  duration  of any  disruptions  and the  specific
services affected, these disruptions could have a material adverse affect on our
business,   financial   condition  and  results  of  operations.   In  addition,
disruptions  in the economy  generally  resulting  from year 2000 problems could
also have a material adverse affect on us. The amount and potential liability or
lost revenue cannot be reasonably estimated at this time.

WE ARE  DEPENDENT  UPON THIRD  PARTIES FOR LEASED  CAPACITY AND  INTERCONNECTION
ARRANGEMENTS

         Other than our fiber  ring  which  connects  London,  Paris,  Brussels,
Antwerp and Rotterdam and capacity and minimum  investment units which we own in
certain  digital  fiber  optic  cables,  we  do  not  currently  own  any  other
telecommunications transmission lines. As a result, we are generally not able to
terminate   calls  over  our  own   network   and  are   dependent   upon  other
facilities-based  carriers,  virtually  all of  which  are our  competitors.  We
currently   lease   transmission    lines   from   the   respective    incumbent
telecommunications  operator in each  country in which we operate.  In addition,
our  ability to access  customers  and to  effectively  utilize  our  network is
dependent  upon our  ability  to secure  operative  interconnection  agreements,
providing access and egress into and from the public switched telephone network,
with the  respective  incumbent  telecommunications  operator  in each market in
which we operate.  We currently  have  interconnection  agreements  with Cable &
Wireless and British  Telecom in the United  Kingdom,  France Telecom in France,
KPN in The Netherlands, Infostrada in Italy and Deutsche Telekom in Germany, and
expect to secure additional interconnection agreements in certain other European
Union  member  states in which we operate.  Difficulties  or delays in obtaining
necessary  interconnections in a satisfactory or timely manner may significantly
delay or prevent  the  maximum  utilization  of our  network  which could have a
material adverse effect on us.

         Notwithstanding  our fiber ring  connecting  London,  Paris,  Brussels,
Antwerp and Rotterdam,  we currently lease capacity for point-to-point  circuits
with fixed monthly payments and buy minutes of use under agreements with maximum
twelve-month  terms and are  vulnerable  to changes  in our lease  arrangements,
capacity limitations and service cancellations. These lease arrangements present
us with high fixed costs,  while revenues  generated by the utilization of these
leases will vary based on traffic  volume and  pricing.  Accordingly,  if we are
unable to  generate  sufficient  traffic  volume over  particular  routes or are
unable to charge appropriate rates, we could fail to generate revenue sufficient
to meet the fixed costs  associated  with the lease and may incur negative gross
margins with respect to those routes.  Although we believe that our arrangements
and  relationships   with  other  carriers   generally  are  satisfactory,   the
deterioration or termination of our arrangements and  relationships  with one or
more  carriers  could  have a  material  adverse  effect on our cost  structure,
service  quality,   network  coverage,   financial   condition  and  results  of
operations.

THE FUTURE SUCCESS OF OUR BUSINESS DEPENDS UPON CERTAIN KEY PERSONNEL

         The success of our business is dependent, to a significant extent, upon
the abilities and continued efforts of our senior  management,  and particularly
upon the  abilities  and  efforts of Michael J.  Mahoney,  our  Chairman,  Chief
Executive Officer and President.  We do not currently have employment agreements
with any executive  officer other than Mr.  Mahoney,  Allan L. Shaw,  our Senior
Vice President, Finance and Chief Financial Officer, and Sheldon M. Goldman, our
Senior Vice President,  Business Affairs and General Counsel.  Except for a $3.0
million  "key-man"  life  insurance  policy which we obtained on the life of Mr.
                                       41
<PAGE>

Mahoney, we do not maintain and do not contemplate obtaining such life insurance
policies on any of our employees. Our success also will depend on our ability to
attract,  retain and motivate  qualified  management,  marketing,  technical and
sales  executives  and  other  personnel  who are in high  demand  and are often
subject to competing employment opportunities. In addition, the labor market for
software engineers and central office technicians has been extremely competitive
recently  and  we  may  lose  key  employees  or be  forced  to  increase  their
compensation.  The loss of the services of key  personnel,  or the  inability to
attract additional qualified personnel,  could have a material adverse effect on
our business,  financial  condition and results of operations.  We cannot assure
you  that  we  will  be  successful  in  attracting,  retaining  and  motivating
personnel.

WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION WHICH MAY AFFECT OUR ABILITY
TO OFFER CERTAIN SERVICES AND WHICH MAY CHANGE IN AN ADVERSE MANNER

         OVERVIEW.  National  and  local  laws  and  regulations  governing  the
provision  of   telecommunications   services  differ  significantly  among  the
countries   in  which  we   currently   operate  and  intend  to  operate.   The
interpretation  and  enforcement of such laws and  regulations  varies and could
limit our  ability to provide  certain  telecommunications  services  in certain
markets.  We cannot assure you that future regulatory,  judicial and legislative
changes  will not  have a  material  adverse  effect  on us,  that  domestic  or
international  regulators or third parties will not raise  material  issues with
regard to our compliance  with applicable  laws and  regulations,  or that other
regulatory  activities will not have a material  adverse effect on our business,
financial condition and results of operations.

         INTERNATIONAL TRAFFIC. Under the World Trade Organization Basic Telecom
Agreement  (the "WTO  Agreement"),  concluded on February 15, 1997, 69 countries
comprising 95% of the global market for basic telecommunications services agreed
to permit competition from foreign carriers.  In addition, 59 of these countries
have  subscribed  to  specific  procompetitive  regulatory  principles.  The WTO
Agreement  became  effective  on February 5, 1998 and has been  implemented,  to
varying degrees, by the signatory  countries.  We believe that the WTO Agreement
will  increase  opportunities  for us and our  competitors.  However,  we cannot
assure  you  that  the  WTO  Agreement  will  result  in  beneficial  regulatory
liberalization in all signatory countries.

         On November 26, 1997, the FCC adopted the Foreign  Participation  Order
to implement the U.S.  obligations  under the WTO Agreement.  In this order, the
FCC adopted an open entry  standard for carriers  from World Trade  Organization
member  countries,  generally  facilitating  market entry for such applicants by
eliminating certain existing tests. These tests remain in effect,  however,  for
carriers  from  non-World  Trade  Organization  member  countries.  Requests for
reconsideration of the Foreign Participation Order are pending at the FCC.

         International carriers serving the United States,  including us, remain
subject to the FCC's international settlement policies,  including rules adopted
by the FCC regarding  international  settlement  rates which became effective on
January  1,  1998.  The  international  accounting  rate  system  allows  a U.S.
facilities-based  carrier  to  negotiate  an  "accounting  rate"  with a foreign
carrier  for  handling  each minute of  international  telephone  service.  Each
carrier's portion of the accounting rate,  usually  one-half,  is referred to as
the settlement rate. The International Settlement Rates Order generally requires
U.S.  facilities-based carriers to negotiate settlement rates with their foreign
correspondent   at  no  greater   than   FCC-established   "benchmark"   prices.
Historically,  international  settlement  rates have vastly exceeded the cost of
terminating   telecommunications   traffic.   In  addition,   the  International
Settlement Rates Order imposed new conditions upon certain  carriers,  including
us. First, the FCC conditioned facilities-based  authorizations for service on a
route on which a carrier  has a foreign  affiliate  upon the  foreign  affiliate
offering  all other U.S.  carriers a  settlement  rate at or below the  relevant
benchmark.  Our foreign  affiliates  satisfy  this  condition.  Second,  the FCC
conditioned  any   authorization  to  provide  switched   services  over  either
facilities-based or resold  international  private lines upon the condition that
at least half of the facilities based  international  message  telephone service
traffic on the subject route is settled at or below the relevant benchmark rate.
This condition  applies  whether or not the licensee has a foreign  affiliate on
the route in  question.  In the Foreign  Participation  Order  described  above,
however, if the subject route does not comply with the benchmark requirement,  a
carrier can demonstrate  that the foreign country provides  "equivalent"  resale
opportunities.  Accordingly,  since the February 9, 1998  effective  date of the
Foreign  Participation Order, we have been permitted to resell private lines for
the provision of switched  services to any country that either has been found by
the FCC to comply with the  benchmarks or has been  determined to be equivalent.
We,  however,  remain  subject to prior FCC approval in order to provide  resold
private lines to any country in which we have an affiliated carrier that has not
                                       42
<PAGE>

been found by the FCC to lack market  power.  Many  parties  have  appealed  the
International  Settlement  Rates Order to the U.S. Court of Appeals for the D.C.
Circuit  or  have  filed   requests   for   reconsideration   with  the  Federal
Communications  Commission.  On January 12, 1999,  the U.S. Court of Appeals for
the  D.C.  Circuit  issued  an  order  resolving  this  appeal,   upholding  the
International  Settlement Rates Order in all respects. The appealing parties now
have the option of requesting that the case be heard by the U.S.  Supreme Court.
The petition for  reconsideration is still pending at the FCC. We cannot predict
the outcome of these proceedings and their possible impact on us.

         Increasing    regulatory     liberalization    in    many    countries'
telecommunications  markets now permits more flexibility in the way we can route
calls.  Although  certain  FCC rules  limit the way in which some  international
calls  can  be  routed,  we do  not  believe  that  our  network  configuration,
specifically  the way in which traffic is routed  through our  facilities in the
U.K.,  is  specifically  prohibited  by, or undermines in any way the intent of,
these rules. It is possible,  however,  that the FCC could find that our network
configuration violates these rules. If we were found to be in violation of these
routing  restrictions,  and if the  violation  was  sufficiently  severe,  it is
possible that the FCC could impose sanctions and penalties upon us.

         CALL REORIGINATION.  In addition, outside the European Union we provide
a small  number of  customers  with access to  services  through the use of call
reorigination.  A substantial  number of countries have prohibited certain forms
of call  reorigination.  We cannot  assure you that  certain of our services and
transmission   methods  will  not  be  or  not  become   prohibited  in  certain
jurisdictions  and,  depending on the  jurisdictions,  services and transmission
methods  affected,  there could be a material  adverse  effect on our  business,
financial condition and results of operations.

         UNSETTLED NATURE OF REGULATORY ENVIRONMENT.  We have pursued and expect
to continue to pursue a strategy of providing our services to the maximum extent
we believe  permissible under applicable laws and regulations.  Our provision of
services in Western  Europe may also be affected if any  European  Union  member
state imposes greater  restrictions on non-European Union international  service
than on such service  within the European  Union.  We cannot assure you that the
United  States  or  foreign  jurisdictions  will not  adopt  laws or  regulatory
requirements that will adversely affect us.  Additionally,  we cannot assure you
that future United States or foreign regulatory, judicial or legislative changes
will  not have a  material  adverse  effect  on us or that  regulators  or third
parties  will not raise  material  issues  with  regard to our  compliance  with
applicable laws or regulations.  If we are unable to provide the services we are
presently  providing or intend to provide or to use our existing or contemplated
transmission  methods,  due to our  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 of such  compliance,  such
events could have a material adverse effect on our business, financial condition
and results of operations.

         Since January 1, 1998, we, as well as our U.S.  competitors,  have been
required  by the  FCC to  make  contributions  to a  universal  service  fund to
subsidize  telecommunications  services  for  low-income  persons,  schools  and
libraries,  and rural health care providers.  These contributions are based upon
our gross revenues. There can be no assurance that we will be able fully to pass
the cost of these  contributions  on to our  customers or that doing so will not
result in a loss of customers.

         EUROPEAN IMPLEMENTATION. The national governments of the European Union
member   states  were   required  to  pass   legislation   to   liberalize   the
telecommunications   markets  within  their  countries  to  implement   European
Commission  directives.  Although most of the member states have now implemented
the required  legislation,  they have done so on an inconsistent,  and sometimes
unclear,  basis. In addition,  the legislation and/or its implementation has, in
certain circumstances,  imposed significant obstacles on the ability of carriers
to  proceed  with  the  necessary  licensing  process.   Such  barriers  include
requirements  that carriers post significant  bonds,  make  significant  capital
commitments   to   build   infrastructure,    complete   extensive   application
documentation  and pay significant  license fees.  Implementation  has also been
slow in certain  member  states as a result of such  member  state's  failure to
dedicate the resources necessary to have a functioning regulatory body in place.
The above factors and other  potential  obstacles  associated with the effective
implementation  of  liberalization  could have a material  adverse effect on our
operations by preventing us from expanding our  operations  either as quickly or
as currently  intended,  as well as a material  adverse  effect on our business,
financial condition and results of operations.


                                       43
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         We are  subject to foreign  currency  exchange  rate risk  relating  to
receipts  from  customers,  payments to suppliers  and interest  payments on the
outstanding Euro denominated senior notes, senior discount notes and subordinate
convertible debentures in foreign currencies. We do not consider the market risk
exposure relating to foreign currency exchange to be material. See "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources - Foreign Currency."

         We have financial  instruments  that are subject to interest rate risk,
principally  short-term investments and debt obligations issued at a fixed rate.
Historically,  we have not experienced  material gains or losses due to interest
rate  changes when  selling  short-term  investments  and  typically  hold these
securities  until  maturity.   Based  on  our  current  holdings  of  short-term
investments, our exposure to interest rate risk is not material. Fixed-rate debt
obligations issued by us are generally not callable until maturity.
  


                                     44
<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............................................. 46

Consolidated Balance Sheets as of December 31, 1998 and 1997............. 47

Consolidated Statements of Operations for the Years Ended
     December 31, 1998, 1997 and 1996.................................... 48

Consolidated Statements of Comprehensive Loss for the Years Ended
     December 31, 1998, 1997 and 1996.................................... 49

Consolidated Statements of Stockholders' Equity (Deficiency) for the
     Years ended December 31, 1998, 1997 and 1996........................ 50

Consolidated Statements of Cash Flows for the Years ended
     December 31, 1998, 1997 and 1996.................................... 51

Notes to Consolidated Financial Statements for the Years
     Ended December 31, 1998, 1997 and 1996.............................. 52

II. Valuation and Qualifying Accounts.................................... 64




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.



                                       45
<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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 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.



                                                     /S/ KPMG LLP


New York, New York
February 26, 1999



                                       46
<PAGE>

<TABLE>
<CAPTION>


                                                     VIATEL, INC. AND SUBSIDIARIES
                                                      CONSOLIDATED BALANCE SHEETS
                                                      DECEMBER 31, 1998 AND 1997
                                                   (IN THOUSANDS, EXCEPT SHARE DATA)

                                                                                         1998           1997
                                                                                   --------------- --------------
                                            ASSETS
<S>                                                                                  <C>            <C>       
Current Assets:
  Cash and cash equivalents                                                          $   329,511    $   21,096
  Restricted cash equivalents                                                             10,310           -
  Restricted marketable securities, current                                               50,870           -
  Marketable securities, current                                                         171,771         3,500
  Trade accounts receivable, net of allowance for
     doubtful accounts of $3,093 and $1,041, respectively                                 28,517        10,981

  Other receivables                                                                       13,404         6,505
  Prepaid expenses                                                                         2,417         1,348
                                                                                   --------------  --------------
     Total current assets                                                                606,800        43,430
Restricted marketable securities, non-current                                             83,343           -
Marketable securities, non-current                                                         -            22,547
Property and equipment, net                                                              266,256        54,094
Intangible assets, net                                                                    46,968         4,338
Other assets                                                                               5,744         2,400
                                                                                   ==============  ==============
                                                                                     $ 1,009,111    $  126,809
                                                                                   ==============  ==============

                           LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities:
  Accrued telecommunications costs                                                  $     26,518   $    16,898
  Accounts payable and other accrued expenses                                             23,656        10,753
  Property and equipment purchases payable                                                97,288         4,739
  Accrued interest                                                                        12,240           -
  Liability under joint construction agreement                                             9,523           -
  Current installments of notes payable and obligations under capital leases               8,918         3,373
                                                                                   --------------  -------------
     Total current liabilities                                                           178,143        35,763
                                                                                   --------------  -------------
Long term liabilities:
  Long term debt                                                                         896,503        89,855
  Notes payable and obligations under capital leases, excluding current
  installments                                                                            24,636         8,255
  Equipment purchase obligation                                                                -         1,500
                                                                                   --------------  -------------
     Total long term liabilities                                                         921,139        99,610
                                                                                   --------------  -------------
Series A Redeemable Convertible Preferred Stock, $.01 par value; Authorized
   718,042 Share issued and outstanding 461,258 and no shares, respectively               47,121           -
                                                                                   --------------  -------------
Commitments and contingencies
Stockholders' deficiency:
  Preferred Stock, $.01 par value. Authorized 1,281,958 shares, no shares issued
     and outstanding                                                                           -           -
  Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and
     outstanding 23,184,465 and 22,635,267 shares, respectively                              232           226
  Additional paid-in capital                                                             128,357       125,661
  Unearned compensation                                                                        -           (65)
  Accumulated other comprehensive loss                                                    (6,246)       (5,356)
  Accumulated deficit                                                                   (259,635)     (129,030)
                                                                                   --------------  --------------
     Total stockholders' deficiency                                                     (137,292)       (8,564)
                                                                                   --------------  --------------
                                                                                   $   1,009,111    $  126,809
                                                                                   ==============  ==============

          See accompanying notes to consolidated financial statements.
</TABLE>


                                       47
<PAGE>


                          VIATEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                 1998                  1997                    1996
                                                        --------------------   ---------------------  --------------------
<S>                                                             <C>                     <C>                     <C>    
Communication services revenue                                  $135,188                $73,018                 $50,419
                                                        --------------------   ---------------------  --------------------
Operating expenses:
   Cost of communication services                                122,109                 63,504                  42,130
   Selling, general and administrative expenses                   44,893                 36,077                  32,866
   Depreciation and amortization                                  16,268                  7,717                   4,802
                                                        --------------------   ---------------------  --------------------
     Total operating expenses                                    183,270                107,298                  79,798
                                                        --------------------   ---------------------  --------------------
Other income (expense):
   Interest income                                                28,259                  3,686                   1,852
   Interest expense                                              (79,177)               (12,450)                (10,848)
                                                        --------------------   ---------------------  --------------------

Loss before extraordinary loss                                   (99,000)               (43,044)                (38,375)
   Extraordinary loss on debt prepayment                         (28,304)                     -                       -
                                                        --------------------   ---------------------  --------------------
Net loss                                                        (127,304)               (43,044)                (38,375)
   Dividend on redeemable convertible preferred stock             (3,301)                     -                       -
                                                        ====================   =====================  ====================
Net loss applicable to common stockholders                     $(130,605)              $(43,044)              $(38,375)
                                                        ====================   =====================  ====================

Loss per common share, basic and diluted:
   Before extraordinary item                                  $    (4.44)            $    (1.90)            $    (2.47)
   From extraordinary item                                                                             
                                                                   (1.23)                     -                      -
                                                        --------------------   ---------------------  --------------------
Net loss per common share attributable to common 
stockholders                                                 $     (5.67)           $     (1.90)          $      (2.47)
                                                        ====================   =====================  ====================

Weighted average common shares outstanding                        23,054                 22,620                  15,514
                                                        ====================   =====================  ====================
</TABLE>



        See accompanying notes to consolidated financial statements.


                                       48
<PAGE>

                          VIATEL, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                         1998                    1997                    1996
                                                -----------------------  ---------------------   ----------------------
<S>                                                  <C>                     <C>                      <C>      
Net loss                                             $(127,304)              $  (43,044)              $(38,375)
  Foreign currency translation adjustments                (890)                  (4,494)                  (698)
                                                -----------------------  ---------------------   ----------------------
Comprehensive loss                                   $(128,194)              $  (47,538)              $(39,073)
                                                =======================  =====================   ======================
</TABLE>







        See accompanying notes to consolidated financial statements.



                                       49
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                      Number of
                                                        Number of      Class A                                 
                                                         Common         Common                      Class A    
                                                          Stock          Stock         Common        Common    
                                                         Shares         Shares         Stock         Stock     
                                                    --------------  --------------  -----------   -----------  
<S>                                                    <C>           <C>               <C>            <C>      
Balance at January 1, 1996                             10,736,135    2,904,846         $107           $29      
Issuance of restricted common stock                        66,666            -            1             -      
Issuance of common stock, net of                                                                               
  $9,541,954 issue costs                                8,667,000            -           87             -      
Conversion of Class A common stock to                                                                          
  common stock                                          2,904,846   (2,904,846)          29           (29)     
Stock options exercised                                   138,579            -            1             -      
Foreign currency translation adjustment                         -            -            -             -      
Net loss                                                        -            -            -             -      
                                                    --------------  --------------  -----------   -----------  
Balance at December 31, 1996                           22,513,226            -          225             -      
Stock options exercised                                   122,041            -            1             -      
Earned compensation                                             -            -            -             -      
Foreign currency translation adjustment                         -            -            -             -      
Net loss                                                        -            -            -             -      
                                                    --------------  --------------  -----------   -----------  
Balance at December 31, 1997                           22,635,267            -          226             -      
Stock options exercised                                   174,198            -            2             -      
Issuance costs of Series A Redeemable                                         
  Convertible Preferred Stock                                   -            -            -             -      
                                                                              
Issuance of common stock related to                                           
  business purchase                                       375,000            -            4             -      
Earned compensation                                             -            -            -             -      
Foreign currency translation adjustment                         -            -            -             -      
Dividends on redeemable convertible                                           
  preferred stock                                               -            -            -             -      
Net loss                                                        -            -            -             -      
                                                    --------------  --------------  -----------   -----------  
Balance at December 31, 1998                           23,184,465            -         $232        $    -      
                                                    ==============  ==============  ===========   ===========  
</TABLE>


<TABLE>
<CAPTION>
                                                                        Accumulated                                      
                                                                           other                                         
                                                        Unearned       Comprehensive        Accumulated                  
                                                      Compensation         Loss               Deficit          Total     
                                                    ----------------  ----------------  -----------------  ------------  
<S>                                                     <C>               <C>               <C>              <C>         
Balance at January 1, 1996                              $(78)             $(164)            $(47,611)        $(17,618)   
Issuance of restricted common stock                      (52)                 -                    -              338    
Issuance of common stock, net of                                                                                         
  $9,541,954 issue costs                                   -                  -                    -           94,462    
Conversion of Class A common stock to                                                                                    
  common stock                                             -                  -                    -                -    
Stock options exercised                                    -                  -                    -              374    
Foreign currency translation adjustment                    -               (698)                   -             (698)   
Net loss                                                   -                  -              (38,375)         (38,375)   
                                                    ----------------  ----------------  -----------------  ------------  
Balance at December 31, 1996                             (130)             (862)             (85,986)          38,483    
Stock options exercised                                     -                 -                    -              426    
Earned compensation                                        65                 -                    -               65    
Foreign currency translation adjustment                     -            (4,494)                   -           (4,494)   
Net loss                                                    -                 -              (43,044)         (43,044)   
                                                    ----------------  ----------------  -----------------  ------------  
Balance at December 31, 1997                              (65)           (5,356)            (129,030)          (8,564)   
Stock options exercised                                     -                 -                    -              947    
Issuance costs of Series A Redeemable                                                                                    
  Convertible Preferred Stock                               -                 -                    -           (1,620)   
                                                                                                                         
Issuance of common stock related to                                                                                      
  business purchase                                         -                 -                    -            3,375    
Earned compensation                                        65                 -                    -               65    
Foreign currency translation adjustment                     -              (890)                   -             (890)   
Dividends on redeemable convertible                                                                                      
  preferred stock                                           -                 -               (3,301)          (3,301)   
Net loss                                                    -                 -             (127,304)        (127,304)   
                                                    ----------------  ----------------  -----------------  ------------  
Balance at December 31, 1998                         $      -           $(6,246)           $(259,635)       $(137,292)   
                                                    ================  ================  =================  ============= 
</TABLE>



          See accompanying notes to consolidated financial statements.




                                       50
<PAGE>

                          VIATEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       1998                 1997                1996
                                                                -------------------  -------------------  ------------------
<S>                                                               <C>                   <C>                 <C>          
Cash flows from operating activities:
   Net loss                                                       $   (127,304)         $   (43,044)        $    (38,375)
   Adjustments to reconcile net loss to net cash
      used in operating activities:
      Depreciation and amortization                                     16,268                7,717                4,802
      Accreted interest expense on long term debt                       35,417               12,479               10,783
      Provision for losses on accounts receivable                        4,225                2,733                2,225
      Extraordinary loss on debt prepayment                             28,304                    -                    -
      Earned compensation                                                   65                   65                  338
   Changes in assets and liabilities:
      Increase in accounts receivable                                  (20,302)              (6,221)              (6,058)
      Increase in accrued interest expense on Senior Notes              11,969                    -                    -
      Increase in prepaid expenses and other receivables                (8,291)              (3,482)              (1,384)
      Increase in other assets and intangible assets                   (12,625)              (1,022)                (315)
      Increase in accrued telecommunications costs,
        accounts payable and other accrued expenses                     11,956                8,250                1,653
                                                                -------------------  -------------------  ------------------
        Net cash used in operating activities                          (60,318)             (22,525)             (26,331)
                                                                -------------------  -------------------  ------------------

   Cash flows from investing activities:
      Purchase of property, equipment and software                     (94,674)             (34,190)              (9,423)
      Payment for business acquired excluding cash
        acquired of $364                                                (5,000)                   -                    -
      Purchase of marketable securities                               (310,625)             (49,098)             (30,571)
      Proceeds from maturity of marketable securities                   60,307               40,124               38,807
      Investment in affiliate                                                -                    -                 (102)
      Issuance of notes receivable                                           -                    -                 (303)
                                                                -------------------  -------------------  ------------------
      Net cash used in investing activities                           (349,992)             (43,164)              (1,592)
                                                                -------------------  -------------------  ------------------

   Cash flows from financing activities:
      Proceeds from issuance of long term debt                         845,752                    -                    -
      Proceeds from issuance of redeemable
        convertible preferred stock                                     42,198                    -                    -
      Prepayment of senior discount notes                             (119,282)                   -                    -
      Deferred financing costs                                         (31,547)                   -                    -
      Proceeds from issuance of Common Stock                               947                  426               94,836
      Borrowings on notes payable                                            -               11,121                    -
      Payments under capital leases                                     (5,480)                (525)                 (64)
      Repayment of notes payable and bank credit line                   (3,553)                (336)                   -
      Borrowings under bank credit line                                      -                  600                    -
                                                                -------------------  -------------------  ------------------
      Net cash provided by financing activities                        729,035               11,286               94,772
                                                                -------------------  -------------------  ------------------
Effects of exchange rate changes on cash                                     -                 (297)                  12
                                                                -------------------  -------------------  ------------------
Net (decrease) increase in cash and cash equivalents                   318,725              (54,700)              66,861
Cash and cash equivalents at beginning of year                          21,096               75,796                8,935
                                                                -------------------  -------------------  ------------------
Cash and cash equivalents at end of year                          $    339,821          $    21,096         $     75,796
                                                                ===================  ===================  ==================

Supplemental disclosures of cash flow information:
   Interest paid                                                  $     31,560          $       134         $         65
                                                                ===================  ===================  ==================
   Assets acquired under capital lease obligations                $     30,359          $     1,122         $        310
                                                                ===================  ===================  ==================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       51
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A) DESCRIPTION OF BUSINESS

         Viatel,  Inc.  (the  "Company")  is an  international  facilities-based
global provider of communications  services offering  international and domestic
long distance telecommunications  services,  primarily to small and medium-sized
businesses,   carriers  and  resellers.  The  Company  operates  a  pan-European
communication  network with international  gateway switching centers in New York
and London and network points of presence throughout Western Europe. The Company
is  constructing  a fiber optic ring which will connect five European  countries
(the "Circe Network").

         (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.  Unrestricted  cash  equivalents,   which  include  highly  liquid  debt
instruments  purchased  with a maturity  of three  months or less,  were  $278.9
million and $8.2 million at December 31, 1998 and 1997, respectively.

         (D) REVENUE

         The Company records  communication  services revenue as earned,  at the
time services are provided.  Network capacity sales are recorded at the time the
capacity is provided to the customer.

         (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.  Assets acquired under capital
leases are 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 systems........................................   5 to 7 years
Fiber optic cable systems.....................................   15 years
Leasehold improvements........................................   2 to 5 years
Furniture, equipment and other................................   5 years

         (F) INTANGIBLE ASSETS

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

                                       52
<PAGE>

         Licenses issued by governing bodies are being amortized over the lesser
of 25 years or the term of the license.

         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, five to 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.

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

         (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,
1998, 1997 and 1996, the Company  experienced no material  exchange  transaction
gains or losses.

         (I) NET LOSS PER SHARE

         Basic earnings per share ("EPS") is computed by dividing income or loss
attributable  to common  stockholders  by the weighted  average number of common
shares  outstanding for the period.  Diluted EPS reflects the potential dilution
from the exercise or conversion of securities into common stock.

         Net loss and weighted  average  shares  outstanding  used for computing
diluted  loss per common  share were the same as that used for  computing  basic
loss per common share for each of the years ended  December  31, 1998,  1997 and
1996.

         The Company had potentially  dilutive  common stock  equivalents of 7.2
million, 1.1 million and 1.0 million for the years ended December 31, 1998, 1997
and 1996, respectively.  These common stock equivalents were not included in the
computation of diluted net loss per common share because they were  antidilutive
for the periods presented.

         (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.  The Company
does not believe there is any  concentration of credit risk on trade receivables
as a result of the large and diverse nature of the Company's  worldwide customer
base.

         During 1998, one customer, LD Exchange.com,  accounted for 10.6% of the
Company's revenues.

                                       53
<PAGE>

         (K) RECLASSIFICATIONS

         Certain  reclassifications have been made to the prior years' 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

         The  Company  accounts  for its stock  option plan in  accordance  with
Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 123 which  allows
entities to continue to apply the  provisions  of  Accounting  Principles  Board
("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 apply the  provisions of APB Opinion No. 25
and provide the pro forma disclosure required by SFAS No. 123. See Note 12.

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

         Long-lived assets and certain identifiable intangibles are 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.

(2) 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.  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 Company does not invest in securities for
the purpose of trading and as such does not classify any securities as trading.

         The 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 accretion are included in
interest income. There were no securities classified as available for sale as of
December  31,  1998  and no  securities  classified  as held to  maturity  as of
December 31, 1997.

                                       54
<PAGE>

         The following is a summary of the amortized  cost,  which  approximates
fair value of  restricted  securities  held to maturity at December 31, 1998 (in
thousands):

            U.S. Treasury obligations                     $105,508
            German government obligations                   28,705
                                                    ===============
                  Total                                   $134,213
                                                    ===============

         The following is a summary of the amortized  cost,  which  approximates
fair value of securities held to maturity at December 31, 1998 (in thousands):

          European corporate debt securities             $ 122,299
          U.S. corporate debt securities                    49,472
                                                    ---------------
                Total                                    $ 171,771
                                                    ===============

         The  following is a summary of the fair value of  securities  available
for sale at December 31, 1997 (in thousands):

          U.S. Treasury obligations                        $ 2,028
          Corporate debt securities                         13,482
          Federal agencies obligations                      10,537
                                                    ---------------
                Total                                     $ 26,047
                                                    ===============

         Unrealized  gains or losses on  securities  classified as available for
sale are not material at December 31, 1997.

         The  amortized  cost,  which  approximates  fair value,  of  restricted
securities held to maturity at December 31, 1998 are shown below (in thousands):

          Due within one year                             $ 50,870
          Due after one year through two years              54,328
          Due after two years                               29,015
                                                    ---------------
              Total                                      $ 134,213
                                                    ===============

         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.

(3) PROPERTY AND EQUIPMENT

         Property and equipment  consists of the following as of December 31 (in
thousands):

                                                 1998             1997
                                            ---------------   --------------

          Communications system                   $ 70,971         $ 43,322
          Construction in progress                 172,630           10,094
          Fiber optic cable systems                 25,222            1,432
          Furniture, equipment and other            16,450            8,924
          Leasehold improvements                     6,651            3,254
                                            ---------------   --------------
                                                   291,924           67,026
          Less accumulated depreciation 
           and amortization                         25,668           12,932
                                            ---------------   --------------
                                                  $266,256         $ 54,094
                                            ===============   ==============

         At December 31, 1998,  construction in progress represents construction
of the Circe Network. At December 31, 1997,  construction in progress represents
a portion of the  expansion of the  Company's  European  network.  For the years
ended  December 31, 1998,  1997 and 1996,  $3.3  million,  $0.2 million and $0.1
million of interest was capitalized.

                                       55
<PAGE>

         The Company trades indefeasible  rights-of-use or capacity on the Circe
Network for indefeasible rights-of-use or capacity on other cable systems. These
trades  of  indefeasible   rights-of-use   or  capacity  are  accounted  for  as
non-monetary  exchanges  and do not  have a  material  effect  on the  Company's
statement of operations.

         At December 31,  1998,  the Company has entered into a letter of intent
with Metromedia  Fiber Networks,  Inc. and Carrier 1, Inc. to jointly  construct
the  civil  works  associated  with  a  national  communications  network  being
constructed  by  each  party  in  Germany.  As  part of the  letter  of  intent,
Metromedia  Fiber  Networks,  Inc. and Carrier 1, Inc. were required to place in
escrow  with  the  Company  an  amount  of $9.3  million  which is  included  in
restricted cash equivalents in the accompanying  consolidated balance sheets. In
February 1999, the parties  entered into a definitive  agreement  which required
each party to supply a standby letter of credit to cover the construction  costs
related to their portion of the network.

(4) INTANGIBLE ASSETS

         Intangible  assets  consist  of the  following  as of  December  31 (in
thousands):

<TABLE>
<CAPTION>
                                                                        1998              1997
                                                               ----------------   --------------
       <S>                                                            <C>               <C>    
        Deferred financing and registration costs                     $ 31,547          $ 3,789
        Licenses, trademarks and servicemarks                           10,031              464
        Goodwill                                                         8,744              474
        Purchased software                                               1,859            1,494
        Acquired employee base and sales force in place                      -            1,607
        Other                                                              206              385
                                                               ----------------   --------------
                                                                        52,387            8,213
        Less accumulated amortization                                    5,419            3,875
                                                               ================   ==============
                                                                      $ 46,968          $ 4,338
                                                               ================   ==============
</TABLE>

(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued  expenses  consists of the following as of
December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                        1998              1997
                                                               ----------------   --------------
       <S>                                                            <C>               <C>    
        Accounts payable                                               $ 5,566          $ 6,231
        Accrued expenses                                                16,224            3,253
        Accrued compensation and benefits                                1,866            1,269
                                                               ----------------  ---------------
                                                                       $23,656         $ 10,753
                                                               ================  ===============
</TABLE>

(6) LINE OF CREDIT AND LETTERS OF CREDIT

         The Company has a revolving line of credit agreement which provides for
secured borrowings of up to $11.2 million.  Borrowings under this line of credit
agreement can be made under either of the following interest rate formulas:  (i)
the  lending  institution's  prime rate or (ii) the LIBOR rate plus two  hundred
basis points.  The Company had no borrowings  under the line of credit agreement
at December  31, 1998 and $0.6  million in  borrowings  under the line of credit
agreement  at  December  31,  1997.  The terms of the line of  credit  agreement
include, among other provisions,  requirements for maintaining defined levels of
securities and other liquid collateral. At December 31, 1998, standby letters of
credit of approximately  $3.3 million have been issued under this line of credit
agreement.

         In connection with the Company's joint  construction of the civil works
associated with national communications networks being constructed by each party
in  Germany,  in February  1999 the  Company was  required to obtain a letter of
credit of  approximately  $123  million  (DM219.1  million)  in  support  of its
obligations.

         The weighted-average  interest rate on short-term  borrowings under the
line of credit agreement at December 31, 1997 was 8.0%.

                                       56
<PAGE>

(7) LONG TERM LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK

         (A) LONG TERM DEBT AND REDEEMABLE CONVERTIBLE PREFERRED STOCK

         On April 8, 1998,  the  Company  completed  an  offering  of units (the
"Units  Offering")  consisting of senior notes or senior discount notes due 2008
and  shares of 10%  Series A  Redeemable  Convertible  Preferred  Stock due 2010
("Series A  Preferred"),  $.01 par value per  share,  of the  Company  and units
consisting of senior notes or senior  discount  notes due 2008 and  subordinated
convertible debentures due 2011 (the "Subordinated Debentures") through which it
raised  approximately  $889.6 million of gross proceeds  ($856.6  million of net
proceeds).  The Company  utilized  $118.9 million of the proceeds from the Units
Offering  to retire  its 15%  Senior  Discount  Notes due 2005  resulting  in an
extraordinary  loss of $28.3  million.  Additionally,  a portion of the proceeds
from the Units  Offering were used to purchase  approximately  $122.8 million of
U.S.  government  securities  which were  pledged as security  for the first six
interest payments on the U.S. dollar  denominated senior notes and approximately
$30.6 million of German  government  obligations  which were pledged as security
for the first six interest  payments on the  Deutsche  Mark  denominated  senior
notes issued in the Units  Offering.  The senior  discount notes accrete through
April 15, 2003 and interest becomes payable in cash in semi-annual  installments
thereafter.  The  interest  on  the  senior  notes  is  payable  in  semi-annual
installments.  The Series A Preferred and the  Subordinated  Debentures  require
quarterly  payments  which  are  paid  in  additional  securities,  cash  or any
combination  thereof through April 15, 2003 and payable in cash thereafter.  The
Series A Preferred and the Subordinated  Debentures are mandatorily  convertible
in the event the closing  price of the Company's  common stock  exceeds  certain
predetermined  annual price  targets.  The Series A Preferred  and  Subordinated
Debentures conversion rates are $13.20 and DM24.473 ($14.58),  respectively.  In
addition,  the  terms of the  Series A  Preferred  and  Subordinated  Debentures
provide for special dividends and special interest payments, respectively, under
certain conditions.

         The  indentures  pursuant  to which the  senior  notes  and the  senior
discount notes were issued contain certain  covenants that,  among other things,
limit the ability of the Company to incur additional indebtedness, pay dividends
or make certain other  distributions,  enter into transactions with stockholders
and  affiliates  and create liens on its assets.  In addition,  upon a change of
control,  the Company is required to make an offer to purchase  the senior notes
and the senior discount notes at a purchase price equal to 101% of the principal
amount,  in the case of the senior notes,  and 101% of the accreted value of the
notes, in the case of the senior discount notes. The indenture pursuant to which
the Subordinated  Debentures were issued also requires that the Company offer to
repurchase  the  debentures  at 101% of the  principal  amount in the event of a
change of control.

         On September  30, 1998,  the Company  consummated  an offer to exchange
senior notes and senior discount notes due 2008 which have been registered under
the  Securities  Act of 1933,  as amended,  for  outstanding  notes of each such
series which were not registered under the Securities Act of 1933, as amended.

         Long  term  debt  consists  of  the  following  as of  December  31 (in
thousands):

<TABLE>
<CAPTION>
                                                                        1998              1997
                                                               ----------------   --------------
      <S>                                                             <C>               <C>    
      11.25% Senior Notes                                          $400,000          $        -  
      11.15% Senior Notes (DM178,000)                               106,015                   -  
      12.50% Senior Discount Notes, less discount 
        of $202,716                                                 297,284                   -  
      12.40%  Senior  Discount  Notes  (DM134,916),
        less discount of $54,249 (DM91,084)                          80,355                   -  
      10% Subordinated convertible debentures (DM 21,573)            12,849                   -  
      15% Senior discount notes, less discount of $30,845               -                  89,855
                                                               =================     =================
                                                                   $896,503               $89,855
                                                               =================     =================
</TABLE>

         (B) EQUIPMENT FINANCING

         In  November  and  December  1997,  the Company  entered  into Loan and
Security  Agreements,  as amended,  with  Charter  Financial,  Inc.  ("Charter")
pursuant to which the Company  borrowed an aggregate of $11.1 million,  of which
                                       57
<PAGE>

$7.8 million was  outstanding as of December 31, 1998.  Repayment of these loans
commenced in December  1997 and January 1998 and are  repayable in thirty-two or
thirty-six  successive  monthly  installments  respectively.  Under the terms of
these  arrangements,  the  Company is  required  to satisfy  certain  EBITDA and
unrestricted cash requirements.  As of December 31, 1998, the Company was either
in compliance  with, or had received  waivers to, these  covenants.  Obligations
under these Loan and Security  Agreements are secured by the grant to Charter of
a  security  interest  in certain  designated  telecommunications  equipment.  A
portion of the payment  obligations under these borrowing  arrangements are also
secured by letters of credit.

(8) STOCKHOLDERS' EQUITY

         On October 23, 1996, the Company  completed an initial public  offering
("IPO") of its 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 shares of then 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  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 two 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  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.

(9) ACQUISITION

         On February 27, 1998,  the Company  acquired Flat Rate  Communications,
Inc.  ("Flat  Rate"),  a long  distance  telecommunications  reseller,  for $5.0
million of cash,  375,000  shares of the Common Stock and a  contingent  payment
based upon key operating  performance targets for the twelve month period ending
February  28, 1999 which will range from zero to $21.0  million in cash and zero
to 1.0 million  shares of Common  Stock.  The Company  recorded the  acquisition
under the purchase  method of accounting.  The purchase price has been allocated
to the assets  acquired and liabilities  assumed,  based upon the estimated fair
values at the date of  acquisition.  The excess  purchase price was $8.3 million
and will be amortized on a straight line basis over a five-year  period.  If the
acquisition had occurred on January 1, 1996 (i)  communication  services revenue
for the years 1998, 1997 and 1996 would have been $138.5 million, $101.8 million
and $53.4 million,  respectively,  (ii) loss before  extraordinary loss for 1998
would  have  been  $(98.9)   million,   (iii)  net  loss  applicable  to  common
shareholders for the years 1998, 1997 and 1996 would have been $(130.5) million,
$(42.8)  million and (38.5) million,  respectively  and (iv) net loss per common
share for the years  1998,  1997 and 1996 would have been  $(5.65),  $(1.86) and
$(2.43), respectively.

(10) INCOME TAXES

         The statutory  Federal tax rates for the years ended December 31, 1998,
1997 and 1996 were 35%.  The  effective  tax rates were zero for the years ended
December  31, 1998,  1997 and 1996 due to the Company  incurring  net  operating
losses for which no tax benefit was recorded.

         For Federal and foreign income tax purposes, the Company has unused net
operating loss  carryforwards of  approximately  $218.8 million expiring in 2007
through 2018. 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 may be further  restricted  as a result of future sales of
Company stock and other events.

                                       58
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                        --------------------------------------
                                                                              1998                1997
                                                                        -----------------  -------------------
           <S>                                                           <C>               <C>           
             Accounts receivable principally due to
                    allowance for doubtful accounts                      $      1,506      $          587
             OID Interest not deductible in current period                     11,125              11,149
             Federal net operating loss carryforwards                          68,579              29,093
             Foreign net operating loss carryforwards                           7,989               3,777
                                                                        -----------------  -------------------
                                                                        -----------------  -------------------
                     Total gross deferred tax assets                           89,199              44,606
             Less valuation allowance                                         (89,199)            (44,606)
                                                                        -----------------  -------------------
                     Net deferred tax assets                            $         -        $          -
                                                                        =================  ===================
</TABLE>

         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 1998 and
1997,  the valuation  allowance  increased by $44.6  million and $14.7  million,
respectively.

(11) SEGMENT AND GEOGRAPHIC DATA

         All of the  Company's  operations  are in a  single  industry  segment,
communications  services.  While the Company's chief decision maker monitors the
revenue streams of the various products and geographic locations, operations are
managed  and  financial  performance  is  evaluated  based  on the  delivery  of
multiple,  integrated  services to customers over a single network. As a result,
there are many shared  expenses  generated  by the various  revenue  streams and
management  believes that any  allocation  of the expenses  incurred to multiple
revenue  streams or geographic  locations  would be  impractical  and arbitrary.
Management does not currently make such allocations internally.

The Company  groups its products and services by two customer  types,  wholesale
and retail. The information below summarizes  communication  services revenue by
customer type (in thousands):

                              1998       1997         1996   
                          -----------  ---------  -----------

        Wholesale          $  78,777    $20,397    $  9,516
        Retail                56,411     52,621      40,903
                          ===========  =========  ===========
        Consolidated        $135,188    $73,018     $50,419
                          ===========  =========  ===========



                                       59
<PAGE>

The information  below summarizes  communication  services revenue by geographic
area (in thousands):

                                           1998       1997         1996   
                                       -----------  ---------  -----------

        Western Europe                   $ 62,946    $32,647    $19,917
        North America                      56,172     15,936      9,516
        Latin America                      14,653     16,240     14,402
        Asia/PacificRim and other           1,417      8,195      6,584
                                       ===========  =========  =========
        Consolidated                     $135,188    $73,018    $50,419
                                       ===========  =========  =========


The  information  below  summarizes  long lived  assets by  geographic  area (in
thousands):

                                           1998                1997
                                     ------------------  ------------------

        Western Europe                     $237,443             $32,640
        North America                        75,492              25,626
        Latin America                           289                 166
                                     ==================  ==================
        Consolidated                       $313,224             $58,432
                                     ==================  ==================


(12) STOCK OPTION PLAN

         During 1993,  the Board of Directors  approved the 1993 Flexible  Stock
Incentive  Plan,  as  amended,   (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  4,166,666  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 1998, 1997 and 1996 was $6.40, $5.99 and $2.29, respectively, on the date
of grant  using  the  Black-Scholes  option  pricing  model  with the  following
assumptions:  (1) a risk free interest rate of 5.0% in 1998 and 5.5% in 1997 and
1996,  (2) an  expected  life of 10  years  for all  years,  (3)  volatility  of
approximately  92.7%  for  1998,  52.2%  for 1997 and  35.9% for 1996 and (4) an
annual dividend yield of 0% for all years.

         The Company  applies the provisions of 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 since the exercise
price was equal to or greater  than the fair market  value at the date of grant.
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:

                                               1998        1997         1996
                                            ----------- ----------- -----------
                                                        
   Net loss, as reported (in thousands)      $(130,605)  $(43,044)   $(38,375)
   Net loss, pro forma (in thousands)         (135,458)   (44,171)    (38,986)
   Net loss per common share, as reported        (5.67)     (1.90)      (2.47)
   Net loss per common share, pro forma          (5.88)     (1.95)      (2.51)

         Pro forma net loss reflects only options granted since January 1, 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.

                                       60
<PAGE>

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

                                              WEIGHTED
                                              AVERAGE         NUMBER OF
                                              EXERCISE       SHARES (IN
                                               PRICES         THOUSANDS)

        Outstanding at January 1, 1996         $4.01             474
        Granted                                 6.75             823
        Forfeited                               5.77            (188)
        Exercised                               2.70            (139)
                                           -------------   ---------------
        Outstanding at December 31, 1996        6.18             970
        Granted                                 8.61             428
        Forfeited                               6.68            (197)
        Expired                                 5.46             (27)
        Exercised                               3.49            (122)
                                           -------------   ---------------
        Outstanding at December 31, 1997        7.40           1,052
        Granted                                 7.19           1,794
        Forfeited                               7.14             (64)
        Expired                                 5.05             (14)
        Exercised                               5.44            (174)
                                           =============   ===============
        Outstanding at December 31, 1998       $7.41           2,594
                                           =============   ===============

         The following table summarizes  weighted-average  option exercise price
information:

<TABLE>
<CAPTION>
                               OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
                   ---------------------------------------------         -------------------------------------
                        NUMBER                                                                                
                    OUTSTANDING AT     WEIGHTED      WEIGHTED                  NUMBER             WEIGHTED
    RANGE OF         DECEMBER 31,       AVERAGE      AVERAGE               EXERCISABLE AT         AVERAGE
    EXERCISE           1998 (IN        REMAINING     EXERCISE            DECEMBER 31, 1998        EXERCISE
     PRICES           THOUSANDS)         LIFE         PRICE                (IN THOUSANDS)          PRICE
-----------------  ---------------------------------------------         -------------------   ---------------
<S>                         <C>        <C>            <C>                         <C>               <C> 
$0.75  - $ 3.50             2          5 Years       $0.75                        2                $0.75
 3.51  -   5.75           999          9 Years        5.22                       19                 3.74
 5.76  -   8.75           552          8 Years        6.17                      291                 5.90
 8.76  -  12.00         1,041          9 Years       10.13                      148                10.22
                   ------------------              -------------         -------------------   ---------------
                        2,594                        $7.41                      460                $7.18
                   ==================              =============         ===================   ===============
</TABLE>

          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.

         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, 1998.

(13) COMMITMENTS AND CONTINGENCIES

         (A) LEASES

         At December 31, 1998,  the Company was committed  under  non-cancelable
operating and capital leases for the rental of office space,  network  locations
and for fiber optic cable systems.

                                       61
<PAGE>

         The Company's  future minimum  capital and operating lease payments are
as follows (in thousands):

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

1999                               $  6,890           $   3,917
2000                                  6,952               4,277
2001                                  4,372               4,206
2002                                  1,635               4,263
2003                                  1,635               4,231
Thereafter                           32,692              28,853
                               ----------------   ----------------
                                     54,176           $  49,747
                                                  ================
Less interest costs                  28,453
                               ----------------
                                  $  25,723
                               ================

          Total rent  expense  amounted to $1.8  million,  $1.3 million and $1.5
million for the years ended December 31, 1998, 1997 and 1996, respectively.

         (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 approximately $13.2 million
for the year ending  December 31, 1999. The Company is involved in disputes with
carriers  arising in the ordinary course of business.  The Company  believes the
outcome of all current disputes will not have a material effect on the Company's
financial position or results of operations.

         (C) PURCHASE COMMITMENTS

         The Company is continually  upgrading and expanding its network and its
switching  facilities.  In  connection  therewith,  the Company has entered into
purchase commitments to expend approximately $38.2 million.

         The Company is developing a fiber-optic ring which will connect over 30
cities in Western  Europe (the "Circe  Network").  In connection  with the Circe
Network,   the  Company  has  entered  into  purchase   commitments   to  expend
approximately $130.6 million.

         (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, 1998 for the next three years under such
contracts aggregates approximately $1.4 million.

         (E) LITIGATION

         From time to time,  the Company is subject to  litigation in the normal
course  of  business.  The  Company  believes  that  any  adverse  outcome  from
litigation would not have a material adverse effect on its financial position or
results of operations.

(14) 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.

                                       62
<PAGE>

(15) RELATED PARTY TRANSACTION

         During 1998,  the Company  entered into an agreement with Cignal Global
Communications,   Inc.   ("Cignal"),   pursuant  to  which  the   Company   sold
transatlantic capacity. Consideration received was in the form of 650,000 shares
of Cignal's common stock. The Company  recognized $3.25 million of revenue,  the
fair value of the  transatlantic  capacity.  In addition,  the Company agreed to
sell capacity on the Circe Network in exchange for an additional  350,000 shares
of Cignal's  common  stock.  Pending  delivery of the capacity to Cignal,  these
350,000  shares are being  held in  escrow.  The  Company's  Chairman  and Chief
Executive Officer is a director of Cignal.

         On  June  3,  1998,  the  Company  entered  into a  Mutual  Cooperation
Agreement with Martin Varsavsky,  a greater than ten percent  stockholder of the
Company,  and Jazz  Telecom  S.A.  pursuant  to which the parties  made  certain
agreements including the following:  (1) subject to Jazz Telecom S.A. completing
a high yield  offering  with net  proceeds to Jazz Telecom S.A. of at least $100
million (the "Offering Condition"),  the Company and Jazz Telecom S.A. agreed to
use  commercially  reasonable  efforts to  execute  and  deliver a  construction
agreement  no later than  January 1, 1999 to  construct a fiber optic  submarine
cable system between Spain and the United  Kingdom,  (2) subject to the Offering
Condition,  the company agreed to purchase $6.0 million Jazz Telecom S.A. common
stock,  (3) the Company and Jazz  Telecom S.A.  agreed to the purchase  from the
other  international  switched minutes and to transmit at least one-third of our
Spanish  domestic  switched  minute  traffic over Jazz Telecom  S.A.'s  network,
assuming  the prices  charged by Jazz  Telecom  S.A.  are  competitive,  (4) the
Company and Jazz  Telecom S.A.  agreed to sell  capacity to each other for fixed
prices,  (5) Mr.  Varsavsky  agreed to lock-up his Viatel shares for a specified
period,  (6) the Company agreed to release any past claims which the Company had
against  either Jazz  Telecom  S.A.  and Mr.  Varsavsky  in  exchange  for their
respective  release of any claims  against  the  Company  and (7) Mr.  Varsavsky
agreed to pay the  Company  liquidated  damages  in the event  that he  violates
certain  provisions  of the  agreement.  The Company and Jazz  Telecom  S.A. are
currently in  discussions  to certain  modifications  to the terms of the Mutual
Corporation Agreement.

         On November 13, 1998, Mr. Varsavsky entered into an additional  lock-up
agreement with us pursuant to which Mr. Varsavsky agreed that he would not sell,
contract to sell,  announce an intention to sell, pledge or otherwise dispose of
his shares of our common stock, either directly or indirectly, without the prior
written consent of the Company until after August 12, 1999.

(16) SUBSEQUENT EVENT--UNAUDITED

         On March 19, 1999, the Company  completed a $365.5 million  offering of
debt  securities  consisting of $200 million of U.S.  denominated  11.50% Senior
Notes Due 2009 and $165 million Euro  denominated  11.50% Senior Notes Due 2009.
The net proceeds from the sale of these notes will be used primarily to fund the
further expansion of the Circe Network into southern France and Switzerland.


                                       63
<PAGE>

                          VIATEL, INC. AND SUBSIDIARIES
                SCHEDULE II - VALUATIONS AND QUALIFYING ACCOUNTS
                                 (in thousands)
<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, 1996                   473         2,225           2,096                -          602

     Year ended December 31, 1997                   602         2,733           2,294                -        1,041

     Year ended December 31, 1998                 1,041         4,225           2,173                -        3,093

Allowances for asset impairment

     Year ended December 31, 1996                   560             -               -                -          560

     Year ended December 31, 1997                   560             -               -                -          560

     Year ended December 31, 1998                   560             -               -                -          560
</TABLE>


                                       64
<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.

         The following table sets forth certain  information with respect to the
executive officers of the Company as of March 15, 1999.

<TABLE>
<CAPTION>
NAME                                    AGE                                   POSITION
                                                  ------------------------------------------------------------------
<S>                                      <C>      <C>                                                            
Michael J. Mahoney....................   39       Chairman of the Board, Chief Executive Officer and President
Allan L. Shaw.........................   35       Senior Vice President, Finance; Chief Financial Officer and
                                                  Director
Lawrence G. Malone....................   47       Senior Vice President, Global Sales and Marketing
Sheldon M. Goldman....................   39       Senior Vice President, Business Affairs; General Counsel and
                                                  Secretary
Francis J. Mount......................   56       Senior Vice President, Engineering and Network Operations and
                                                  Director
John G. Graham........................   60       Director
Paul G. Pizzani.......................   39       Director
</TABLE>

         MICHAEL J. MAHONEY.  Mr. Mahoney has served as Chairman of the Board of
Viatel since  September  1998, as its Chief  Executive  Officer since  September
1997, as its President  since  September  1996 and as a director since 1995. Mr.
Mahoney  was also Chief  Operating  Officer  of Viatel  from  September  1996 to
September 1997,  Executive Vice  President,  Operations and Technology of Viatel
from July 1994 to September  1996 and  Managing  Director,  Intercontinental  of
Viatel from January 1996 to September  1996.  From August 1990 to June 1994, Mr.
Mahoney was employed by SITEL Corporation, a teleservices 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 Senior Vice  President,  Finance
of Viatel  since  December  1997 and has  served as Chief  Financial  Officer of
Viatel  since  January  1996.  Mr. Shaw has served as a director of Viatel since
June 1996. Mr. Shaw was Vice  President,  Finance of Viatel from January 1996 to
December 1997 and Treasurer of Viatel from September  1996 to April 1998.  Prior
to becoming Viatel's Vice President,  Finance and Chief Financial  Officer,  Mr.
Shaw served as Corporate  Controller  of Viatel 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 Senior Vice  President,
Global Sales and  Marketing of Viatel since May 1997.  Mr. Malone served as Vice
President and Managing Director,  Intercontinental of Viatel from September 1996
to May 1997 and  served as its Vice  President  of Sales for  Carriers/Wholesale
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.

         SHELDON M. GOLDMAN.  Mr.  Goldman has served as Senior Vice  President,
Business  Affairs and General  Counsel of Viatel since December  1997.  Prior to
becoming  Senior Vice  President,  Business  Affairs and  General  Counsel,  Mr.
Goldman  served as Vice  President,  Business  and Legal  Affairs of Viatel from


                                       65
<PAGE>

December 1996 to December 1997 and served as United  States  General  Counsel of
Viatel from April 1996 to 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.

         FRANCIS  J.  MOUNT.  Mr.  Mount has  served as Senior  Vice  President,
Engineering  and  Network  Operations  of Viatel  since  December  1997 and as a
Director  of Viatel  since June 1998.  Prior to joining  Viatel,  Mr.  Mount was
Senior Vice President,  Business Initiatives of Primus  Telecommunications Group
from October 1997 to December 1997, responsible for Internet telephony, European
operations  and network  quality.  From June 1996 to October 1997, Mr. Mount was
Executive Vice President and Chief Operating  Officer of Telepassport,  Inc. and
was Vice  President  and Chief  Operating  Officer of  Telepassport,  Inc.  from
January 1996 to June 1997.  From 1990 to January 1996, Mr. Mount was employed by
MCI, most  recently as Director,  Global  Technical  Services,  responsible  for
international development,  alliance management and all technical operations and
services  outside the United States,  including the construction and maintenance
of large networks such as Hyperstream,  "Concert" and private networks for large
accounts such as J.P. Morgan,  Proctor and Gamble and I.B.M.  From March 1967 to
December 1989, Mr. Mount was employed by AT&T in various positions.

          JOHN G.  GRAHAM.  Mr.  Graham has served as a director of Viatel since
June 1998.  Mr.  Graham has been elected as the  President  and Chief  Operating
Officer of Utilities  Mutual Insurance  Company,  positions which he will assume
effective  May, 1, 1999  following  his  retirement  from GPU Service,  Inc. Mr.
Graham is  currently an Executive  Vice  President of GPU Service,  Inc. and was
Senior Vice President and Chief  Financial  Officer of GPU, Inc., a domestic and
international  electric utility and independent  power  generation  company from
1987 to December  1998.  Mr.  Graham was  employed by GPU in various  capacities
since 1976 and has held his current  position since 1987. From 1970 to 1976, Mr.
Graham was a Partner in the law firm of Ruprecht and Graham, Newark, New Jersey.
From 1993 to 1997,  Mr.  Graham  served as a Director  and Chairman of the Audit
Committee  of Edisto  Resources,  Inc.,  which was  engaged in the  exploration,
production  and marketing of natural gas and oil. Mr. Graham has been elected as
the President and Chief Operating Officer of Utilities Mutual Insurance Company,
positions  which he will assume  effective May 1, 1999  following his retirement
from GPU Service, Inc.

          PAUL G. PIZZANI.  Mr. Pizzani has served as a director of Viatel since
April 1996. Mr. Pizzani is currently a Managing Director of Wasserstein  Perella
Emerging  Markets L.P. where he has been employed since November 1997.  Prior to
November  1997,  Mr.  Pizzani was  associated  with COMSAT  Corporation  and its
subsidiaries  in various  capacities  from November  1985 to October 1997,  most
recently as Treasurer.

SENIOR MANAGEMENT

         FRED HUGHES.  Mr. Hughes has served as Vice  President,  Engineering of
Viatel since December 1997. From July 1994 to December 1997, Mr. Hughes was Vice
President,  Operations-Europe  of Viatel.  From  August  1993 to July 1994,  Mr.
Hughes  served as Director of Telephony  of Viatel.  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.

         PAUL K. HEUN.  Mr. Heun has been Vice  President,  Operations of Viatel
since  January  1998.  Prior to joining  Viatel,  Mr.  Heun was Vice  President,
Network Services of Primus Telecommunications Group from October 1997 to January
1998.  From April 1996 to October  1997,  Mr. Heun was Vice  President,  Network
Services of  Telepassport,  Inc.  From January 1995 to April 1996,  Mr. Heun was
employed by AT&T as Manager,  Customer Connectivity.  From April 1989 to January
1995,  Mr. Heun was employed by MCI,  most recently as Senior  Manager,  Network
Operations.

         WAYNE  MYERS.  Mr.  Myers has been Vice  President,  European  Sales of
Viatel since January 1999. Prior to becoming Vice President, European Sales, Mr.
Myers was  General  Manager,  European  Sales of the  company  from July 1997 to
January  1999.  From  February  1996 to June 1997,  Mr. Myers was Channel  Sales
Director of PSI Net. From November 1994 to February  1996, Mr. Myers was a Sales
Director  for  LDDS/WorldCom.  From June 1993 to November  1994,  Mr.  Myers was
President of the Gold Club, a direct mail  Company.  From  February 1988 to June
1993, Mr. Myers was employed by Cable & Wireless Communications, Inc. in various
capacities most recent as a National Account Director.

                                       66
<PAGE>

         JAN C. PIAZZA.  Ms.  Piazza has been Vice  President,  Carrier Sales of
Viatel since January 1999. Prior to becoming Vice President,  Carrier Sales, Mr.
Piazza served as Viatel's  General  Manager,  Carrier Sales from January 1998 to
January 1999. Prior to joining Viatel, Ms. Piazza was a Vice President of Primus
Telecommunications Group from October 1997 to December 1997. From September 1995
to  October  1997,  Ms.  Piazza was a Vice  President,  Sales and  Marketing  of
Telepassport,  Inc.  From 1987 to August  1995,  Ms.  Piazza  served in  various
positions at a  predecessor  of  WorldCom,  most  recently as Vice  President of
Product  Development  and Carrier  Sales.  From 1983 until 1987,  Ms. Piazza was
Director of Sales Administration and Customer Service for Argo Communications.

         ELLEN S.  RUDIN.  Ms.  Rudin has  served as Vice  President  and Deputy
General Counsel of Viatel since September 1998 and as Assistant  Secretary since
September 1997. Prior to becoming Vice President and Deputy General Counsel, Ms.
Rudin served as Vice President and Assistant  General  Counsel from October 1997
to  September  1998,  as Counsel  from March 1997 to October 1997 and as a staff
attorney  for Viatel  from August 1996 to March  1997.  From  September  1987 to
August  1996,  Ms.  Rudin  was  associated  with the law firm of Wien,  Malkin &
Bettex.

          CHARLES T. FIELD. Mr. Field has served as Vice President and Treasurer
of Viatel since September 1998.  Prior to becoming Vice President and Treasurer,
Mr.  Field  served as  Treasurer  from April 1998 to  September  1998.  Prior to
joining  Viatel,  Mr.  Field was  employed  by  Horsehead  Industries,  Inc.,  a
diversified  manufacturing company, from August 1995 to April 1998. From October
1987 to  August  1995,  Mr.  Field  was  employed  by  Deloitte  &  Touche  LLP,
Independent Certified Public Accountants, most recently as Manager. Mr. Field is
a Certified  Public  Accountant and a member of the American  Institute,  United
Kingdom Society and Illinois Society of Certified Public Accountants.

          DEREK  FOXWELL.  Mr.  Foxwell has served as Viatel's Vice President of
Infrastructure  Programs since January 1999. Prior to becoming Vice President of
Infrastructure  Programs,  Mr.  Foxwell  served as  Director  of  Infrastructure
Programs  from May 1998 to January 1999.  From  December  1997 to May 1998,  Mr.
Foxwell  served  as a  consultant  to  Viatel  providing  advice  to  Viatel  in
connection with the development of the Circe Network. Prior to joining Viatel as
a consultant,  Mr.  Foxwell was a consultant to Nynex  Network  Service  (Flag,-
Ltd.) where he chaired the Flag Assignment,  Routing & Restoration  Subcommittee
and Sprint  International  (PTAT) and acted as the  operations  and  maintenance
manager for PTAT systems. From 1972 to 1991, Mr. Foxwell was employed by British
Telecom,   most  recently  as   Transmission   Engineering   Planning   Manager,
International Cable Network; International and National Elements. Mr. Foxwell is
a chartered  engineer  with more than 25 years of  experience  in  international
telecommunications networks.

          GLENN K. DAVIDSON. Mr. Davidson has served as Viatel's Vice President,
Corporate  Communications  since  August  1998.  Prior to  joining  Viatel,  Mr.
Davidson was employed by the Computer & Communications  Industry  Association as
Executive Vice President,  Chief Operating Officer and Corporate  Secretary from
September 1995 to July 1998.  From November 1994 to September 1995, Mr. Davidson
was an independent consultant.  From May 1994 to November 1994, Mr. Davidson was
the Campaign  Manager for Douglas Wilder's bid for election to the United States
Senate.  From August 1991 to January  1994,  Mr.  Davidson  was  employed by the
Office of Governor,  Commonwealth of Virginia,  most recently as Chief of Staff.
From January 1990 to August 1991, Mr.  Davidson was the Director of the Virginia
Liaison Office,  Commonwealth  of Virginia.  From 1985 to 1990, Mr. Davidson was
employed  by  Computer  &   Communications   Industry   Association  in  various
capacities, most recently as Vice President and Chief of Staff.

          EVAN  MILLER.  Mr.  Miller has served as Vice  President  of  Business
Development of Viatel since February 1999.  Prior to joining Viatel,  Mr. Miller
was Director,  Equity  Research at Credit Suisse First Boston from March 1995 to
December 1998 and was Director, Equity Research at Lehman Brothers from December
1990 to February 1995. From April 1988 to November 1990, Mr. Miller was a member
of the Senior Management Group, Corporate Strategy at British Telecom.

          PETER STEPHENS.  Mr.  Stephens has been Vice  President,  Operations -
Europe  of  Viatel  since  January  1999.  Prior  to  becoming  Vice  President,
Operations  - Europe,  Mr.  Stephens  served  as  Technical  Director  for MCI's
operations  in Europe,  the Middle East and Africa from January 1993 to December
1998.  Prior to January  1993,  Mr.  Stephens was employed by Reuters in various
capacities for approximately 19 years,  most recently as Communications  Quality
Director.

                                       67
<PAGE>

          STEPHEN GRIST.  Mr. Grist has served as European  Finance  Director of
Viatel since February 1998.  Prior to joining Viatel,  Mr. Grist was employed by
Mincom Pty Ltd., a privately held  Australian  software and consulting  company,
from October  1994 to February  1998,  most  recently as  U.K./Europe  Financial
Controller.  From January 1989 to July 1994, Mr. Grist was employed by Coopers &
Lybrand,  Independent  Certified Public  Accountants,  most recently as a Senior
Audit  Manager.  Mr.  Grist  has been a member  of the  Institute  of  Chartered
Accountants in England and Wales.

         Our Board of Directors is comprised of seven directorship, two of which
are currently vacant. The Board consists of three classes:  Class A, Class B and
Class C. One of the three  classes,  comprising  approximately  one-third of the
directors,  is  elected  each year to  succeed  the  directors  whose  terms are
expiring.  Directors  hold office until the annual meeting for the year in which
their terms expire and until their successors are elected and qualified  unless,
prior to that date,  they have resigned,  retired or otherwise  left office.  In
accordance with our Amended and Restated  Certificate of Incorporation,  Class C
directors are to be elected at the 1999 Annual Meeting of Stockholders,  Class A
directors are to be elected at the 2000 Annual Meeting of Stockholders and Class
B directors are to be elected at the 2001 Annual Meeting of Stockholders.

         The Board of Directors has established three committees, a Compensation
Committee, an Audit Committee and a Directors Committee.  The current members of
the Compensation Committee are Messrs.  Mahoney, Graham and Pizzani, the current
members of the Audit  Committee  are Messrs.  Graham and Pizzani and the current
members of the Directors Committee are Messrs.  Mahoney, Graham and Pizzani. The
Compensation  Committee  reviews general policy matters relating to compensation
and benefits of our employees and officers and  administers  the Stock Incentive
Plan. The Audit Committee recommends to the Board the firm of independent public
accountants to audit our financial  statement,  reviews with  management and the
independent  accountants our interim and year-end operating  results,  considers
the adequacy of our internal  controls and our audit  procedures and reviews the
nonaudit services to be performed by the independent accountants.  The Directors
Committee   searches   for   and   interviews   prospective   directors,   makes
recommendations  to the Board  regarding the size of the Board and candidates to
fill  vacancies  on the  Board,  including  vacancies  created  by  reason of an
increase in the size of the Board and nominates  candidates  for election to the
Board.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section  16(a) of the  Exchange Act  requires  our  directors,  certain
officers and persons  holding more than 10% of a registered  class of our equity
securities to file reports of ownership and reports of changes in ownership with
the  Securities  and  Exchange  Commission  (the  "Commission")  and the  Nasdaq
National Market.  Directors,  certain officers and greater than 10% stockholders
are also  required by  Commission  regulations  to furnish us with copies of all
such  reports  that they  file.  Based on our  review  of  copies of such  forms
provided  to us, we believe  that all filing  requirements  were  complied  with
during the fiscal year ended December 31, 1998.


                                       68
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

         The following table sets forth information concerning  compensation for
services in all  capacities  awarded to, earned by or paid to, any person acting
as our  Chief  Executive  Officer  during  1998,  regardless  of the  amount  of
compensation  paid,  and the  other of our  most  highly  compensated  executive
officers,  whose  aggregate  cash  and  cash  equivalent  compensation  exceeded
$100,000 (the "Named Executives").


<TABLE>
<CAPTION>
                                                   ANNUAL COMPENSATION         LONG TERM COMPENSATION
                                                   -------------------         ----------------------
                                                                    OTHER                                                 
                                                                    ANNUAL     RESTRICTED   SECURITIES                     
                                                                 COMPENSATION   STOCK      UNDERLYING       ALL OTHER
NAME AND PRINCIPAL POSITION      YEAR    SALARY($)    BONUS($)      ($)(1)      AWARDS ($)   OPTIONS(#)    COMPENSATION(2)
---------------------------      ----    ---------    --------   ------------ ------------ ------------   ---------------
<S>                              <C>      <C>         <C>      <C>         <C>            <C>              <C>    
Michael J. Mahoney(3)........    1998     $289,583    $260,000 $    --     $    --         360,771         $10,000
  President and Chief                                                                                     
  Executive Officer              1997      212,500     125,000     --          --            --              9,500
                                 1996      166,458     183,129     102,825   299,977(4)    253,333              --
                                                                                                          
Allan L. Shaw................    1998      172,917     107,500     --          --          195,019          10,000
  Senior Vice President,                                                                                  
  Finance                        1997      140,000      60,000     --          --           60,666           8,400
  and Chief Financial Officer                                                                             
                                 1996      108,333     115,000     --          --           43,333              --
                                                                                                          
Lawrence G. Malone...........    1998      155,833     110,000     --          --          138,140           9,350
  Senior Vice President                                                                                   
  Global Sales and Marketing     1997      141,750      35,588     --          --           73,533           8,505
                                 1996       98,333      88,147     --          --               --              --
                                                                                                          
Sheldon M. Goldman(5)........    1998      182,917     112,000     --          --          162,500          10,000
  Senior Vice President,         
  Business Affairs               1997      143,750      60,000     --          --           40,200           9,000
  and General Counsel            1996       86,354     100,000     --          --           20,000            --
                                                                                                          
Francis J. Mount(6)..........    1998      175,000     107,500     --          --          122,500          10,000
  Senior Vice President,                                                                               
  Engineering and
  Network Operations
</TABLE>

-----------

(1)  The amount  reflected for Mr. Mahoney  includes $32,416 of tax equalization
     payments,  $28,227 of relocation expense reimbursement  associated with Mr.
     Mahoney's repatriation from London to New York and $9,263 of tax gross ups.
     
(2)  Represents matching contributions under our 401(k) plan.

(3)  Mr. Mahoney was appointed as Chief Executive Officer in September 1997.

(4)  Calculated  based on a value of $9.00 per share,  the fair market  value of
     the Common Stock on December 31, 1996.

(5)  Mr. Goldman began his employment with us in March 1996.

(6)  Mr. Mount began his employment with us in December 1997.

                                       69
<PAGE>

STOCK OPTION GRANTS

         The following table sets forth information  regarding grants of options
to purchase  Common  Stock made by us during the fiscal year ended  December 31,
1998 to each of the Named Executives. No stock appreciation rights ("SARs") were
granted during 1998.

<TABLE>
<CAPTION>
                                                      OPTION GRANTS IN 1998
                                                         INDIVIDUAL GRANTS
                                      -----------------------------------------------------
                                                                                               POTENTIAL REALIZABLE
                                      NUMBER OF      PERCENT OF                               VALUE AT ASSUMED ANNUAL
                                      SECURITIES   TOTAL OPTIONS                               RATES OF STOCK PRICE
                                      UNDERLYING     GRANTED TO     EXERCISE                     APPRECIATION FOR
                                       OPTIONS      EMPLOYEES IN     PRICE      EXPIRATION        OPTION TERM (3)
  NAME                                GRANTED (#)      1998 (1)    ($/SHARE)(2)    DATE           (5%)        (10%)
  ----                                -----------   -------------- ------------ ------------  ----------------------
<S>                                   <C>       <C>      <C>         <C>        <C>   <C>      <C>          <C>     
 Michael J. Mahoney..............     90,000(4) (5)      5.0%        $5.00      01/01/2008     $282,600     $717,300
                                      90,000(4) (6)      5.0          5.50      01/01/2008      311,400      789,300
                                     180,771(4) (7)     10.1         10.25      09/18/2008    1,165,973    2,953,798

 Allan L. Shaw...................     60,000(4) (5)      3.3          5.00      01/01/2008      188,400      478,200
                                      60,000(4) (6)      3.3          5.50      01/01/2008      207,600      526,200
                                      75,019(4) (7)      4.2         10.25      09/18/2008      483,873    1,225,815

 Lawrence G. Malone..............     27,000(4) (5)      1.5          5.00      01/01/2008       84,780      215,190
                                      60,000(4) (6)      3.3          5.50      01/01/2008      207,600      526,200
                                      51,140(4) (7)      2.9         10.25      09/18/2008      329,853      835,628

 Sheldon M. Goldman..............     60,000(4) (5)      3.3          5.00      01/01/2008      188,400      478,200
                                      60,000(4) (6)      3.3          5.50      01/01/2008      207,600      526,200
                                      42,500(4) (7)      2.4         10.25      09/18/2008      274,125      694,450

 Francis J. Mount................     40,000(4) (5)      2.2          5.00      01/01/2008      125,600      318,800
                                      60,000(4) (6)      3.3          5.50      01/01/2008      207,600      526,200
                                      22,500(4) (7)      1.3         10.25      09/18/2008      145,125      367,650
</TABLE>
-----------

(1)  We granted options to purchase a total of 1,793,736  shares of common stock
     during 1998.

(2)  The  exercise  price was equal to the fair  market  value of the  shares of
     common stock underlying the options on the grant date. 

(3)  Amounts  reported in these columns  represent  amounts that may be realized
     upon exercise of options  immediately prior to the expiration of their term
     assuming the specified compounded rates of appreciation (5% and 10%) on the
     common stock over the term of the options.  These  assumptions are based on
     rules  promulgated  by the  Commission  and do not reflect our  estimate of
     future stock price appreciation.  Actual gains, if any, on the stock option
     exercises  and common stock  holdings  are  dependent on the timing of such
     exercise and the future  performance  of the common stock.  There can be no
     assurance  that the  rates of  appreciation  assumed  in this  table can be
     achieved  or that the  amounts  reflected  will be  received  by the option
     holder.

(4)  In the event of certain Corporate  Transactions (as defined)  involving us,
     all unvested  stock options  become fully vested.  See "-- Stock  Incentive
     Plan." The options granted to the Named  Executives also vest upon a change
     of control.

(5)  Options to purchase shares of common stock vested and became exercisable as
     to 33.34% of these options on January 1, 1999 and the  remainder  will vest
     and become  exercisable on each successive  anniversary  date thereafter to
     the extent of 33.33% of these options.

(6)  Options vested and became  exercisable as to 25% on January 1, 1999 and the
     remainder will vest and become  exercisable on each successive  anniversary
     date thereafter to the extent of 25% of these options.

                                       70
<PAGE>

(7)  Options to purchase shares of common stock will vest and become exercisable
     as to 33.34% of these options on September 18, 1999 and the remainder  will
     vest and become exercisable on each successive  anniversary date thereafter
     to the extent of 33.33% of these options.


         On January 1, 1999,  Viatel granted the following stock options with an
exercise  price of  $22.875  per  share,  to the Named  Executives:  Michael  J.
Mahoney,  52,278 options;  Allan L. Shaw,  38,519  options;  Lawrence G. Malone,
38,519 options; Sheldon M. Goldman, 38,519 options; and Francis J. Mount, 38,519
options.

YEAR-END OPTION VALUES

         The  following  table sets forth  information  regarding the number and
year end value of  unexercised  options held at December 31, 1998 by each of the
Named  Executives.  No stock  appreciation  rights were  exercised  by the Named
Executives during fiscal 1998.

                       FISCAL 1998 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                        NUMBER OF                                     
                                                                        SECURITIES                 VALUE OF
                                                                        UNDERLYING                UNEXERCISED
                                                                       UNEXERCISED              "IN-THE-MONEY"
                                                                        OPTIONS AT                OPTIONS AT
                                 SHARES                                   FISCAL                    FISCAL
                                ACQUIRED                               YEAR-END (#)              YEAR-END ($)
                                   ON               VALUE              EXERCISABLE/              EXERCISABLE/
NAME                          EXERCISE (#)      REALIZED ($)          UNEXERCISABLE            UNEXERCISABLE (1)
----                          ------------      ------------          -------------            -----------------
<S>                              <C>             <C>                 <C>                     <C>                  
Michael J. Mahoney........       46,666          $662,891(2)         217,820/368,265         $3,372,766/$5,179,939

Allan L. Shaw.............         -                  -              132,116/180,235          2,144,123/2,724,471

Lawrence G. Malone........         -                  -              105,249/149,757          1,713,119/2,298,995

Sheldon M. Goldman........         -                  -               81,805/179,414          1,330,560/2,219,277

Francis J. Mount..........         -                  -               28,360/94,140            499,435/1,542,128
</TABLE>

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

(1)      Options are  "in-the-money"  if the fair market value of the underlying
         securities  exceeds the exercise price of the options.  The amounts set
         forth  represent the  difference  between  $22.875 per share,  the fair
         market value of the common stock  issuable  upon exercise of options at
         December 31, 1998 and the exercise  price of the option,  multiplied by
         the applicable number of options.

(2)      The amounts  set forth  represent  the  difference  between  $19.00 per
         share, the fair market value of the common stock issuable upon exercise
         of options at July 27,  1998,  and the  exercise  price of the  option,
         multiplied by the applicable number of options.

EMPLOYMENT AGREEMENTS

         We have executed employment  agreements with Messrs.  Mahoney, Shaw and
Goldman,  each dated April 1, 1998,  pursuant to which Mr. Mahoney serves as our
President and Chief Executive Officer, Mr. Shaw serves as Senior Vice President,
Finance and Chief  Financial  Officer and Mr.  Goldman serves as our Senior Vice
President,  Business Affairs and General Counsel (collectively,  the "Employment
Agreements").  The term of the Mahoney Employment Agreement extends for a period
of three years and the term of the Shaw and Goldman Employment Agreements extend
for a period of two years, in each case unless earlier  terminated in accordance
with the terms thereof.  Pursuant to the respective  Employment  Agreement,  Mr.
Mahoney is entitled to receive an annual base salary


                                       71
<PAGE>

of  $300,000  (subject  to  inflationary  adjustments),  Mr. Shaw is entitled to
receive an annual base salary of $175,000 and Mr. Goldman is entitled to receive
an annual base salary of $185,000,  subject, in each case, to increases approved
from time to time by the Board. In addition,  Mr. Mahoney's Employment Agreement
provides  for an  annual  cash  bonus  payment  equal to 70% of his base  salary
multiplied by a bonus multiple  ranging from 0.6 to 2.0 determined  based upon a
comparison of actual  versus  projected  EBITDA and revenue  figures and each of
Messrs.  Shaw's and Goldman's  Employment  Agreement provides for an annual cash
bonus payment equal to 50% of their base salary  multiplied by a bonus  multiple
ranging  from 0.6 to 2.0  determined  based upon a comparison  of actual  versus
projected  EBITDA and revenue  figures.  Each of the Employment  Agreements also
provides that the executive  will be entitled to receive  annual grants of stock
options  or  restricted  stock  in  amounts  to be  determined  by the  Board of
Directors in its sole and absolute  discretion  and  provides  that  following a
change  of  control  (as  defined  therein),  we  will be  obligated  to pay the
executive an amount equal to the  Severance  Amount (as defined  therein) if the
executive  chooses to terminate  his  employment  and include a  non-competition
covenant.  Each of the Employment  Agreements also contains a prohibition on the
solicitation of our employees.

         For  purposes  of the  Employment  Agreement,  "change of  control"  is
defined to mean such time as (i) a "person"  or "group"  (within  the meaning of
Sections  13(d)  and  14(d)(2)  of  the  Exchange  Act),  becomes  the  ultimate
"beneficial  owner" (as defined in Rule 13d-3 of the Exchange  Act) of more than
50% of the total voting power of the then outstanding  voting stock of Viatel on
a fully diluted basis or (ii)  individuals who at the beginning of any period of
two  consecutive  calendar years  constituted  the Board  (together with any new
directors  whose  election by the Board or whose  nomination for election by our
stockholders was approved by a vote of at least two-thirds of the members of the
Board then still in office who either were members of the Board at the beginning
of such period or whose  election or nomination  for election was  previously so
approved)  cease for any reason to  constitute  a majority of the members of the
Board then in office.

STOCK INCENTIVE PLAN

         We have adopted the Amended Stock Incentive Plan (the "Stock  Incentive
Plan") under which  "non-qualified"  stock  options to acquire  shares of common
stock may be granted to our employees, directors and consultants and "incentive"
stock  options to acquire  shares of common  stock may be granted to  employees,
including  employee-directors.  The Stock  Incentive  Plan also provides for the
grant of stock appreciation  rights and shares of restricted common stock to our
employees, directors and consultants.

         The Stock  Incentive  Plan provides for the issuance of up to a maximum
of  4,166,666  shares  of  common  stock and is  currently  administered  by the
Compensation  Committee of the Board. Under the Stock Incentive Plan, the option
price of any  incentive  stock option 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 a  non-qualified  stock option may be less than the fair market
value on the date the  non-qualified  stock  option is  granted  if the Board of
Directors so determines.  An incentive stock option may not be granted to a "ten
percent  stockholder"  (as such term is  defined  in  Section  422A of the Code)
unless the  exercise  price is at least  110.0% 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.  Each option granted pursuant to the Stock Incentive Plan is evidenced
by a written agreement executed by us and the grantee, which contains the terms,
provisions  and  conditions  of the grant.  Stock options may not be assigned or
transferred  during the lifetime of the holder  except as may be required by law
or pursuant to a qualified domestic  relations order.  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.

         For options to qualify as incentive  stock options,  the aggregate fair
market  value,  determined  on the date of grant,  of the shares with respect to
which the  incentive  stock  option  are  exercisable  for the first time by the
grantee  during any  calendar  year may not exceed  $100,000.  Payment by option
holders  upon  exercise of an option may be made in cash or, with the consent of
the Board of  Directors,  in whole or in part,  (1) with shares of common stock,
(2) by irrevocable direction to an approved securities broker to sell shares and
deliver all or a portion of the  proceeds to us, (3) by delivery of a promissory
note with such  provisions as the Board of Directors  determines  appropriate or
(4) in any combination of the foregoing. In addition, the Board of Directors, in
its sole  discretion,  may authorize the surrender by an optionee of all or part
of an unexercised stock option and authorize a payment in consideration  thereof

                                       72
<PAGE>
of an amount equal to the difference  between the aggregate fair market value of
the shares of common stock subject to such stock option and the aggregate option
price per share of such common  stock.  In the Board of  Directors'  discretion,
such  payment  may be made in cash,  shares of common  stock with a fair  market
value on the date of surrender  equal to the payment amount or some  combination
thereof.

         The Stock Incentive Plan provides that outstanding options,  restricted
shares of common stock or stock  appreciation  rights vest in their entirety and
become  exercisable,  or with respect to  restricted  stock,  are released  from
restrictions  on transfer and  repurchase  rights,  in the event of a "Corporate
Transaction." For purposes of the Stock Incentive Plan, a Corporate  Transaction
includes any of the following stockholder-approved  transactions to which we are
a party: (1) a merger or consolidation in which we are not the surviving entity,
other than a transaction  the principal  purpose of which is to change the state
of our  incorporation,  or a transaction in which our  stockholders  immediately
prior to such merger or consolidation hold (by virtue of securities  received in
exchange for their shares in us) securities of the surviving entity representing
more than 50.0% of the total voting power of such entity  immediately after such
transaction; (2) the sale, transfer or other disposition of all or substantially
all of the assets of Viatel unless our  stockholders  immediately  prior to such
sale,  transfer or other  disposition hold (by virtue of securities  received in
exchange for their shares in us) securities of the purchaser or other transferee
representing  more  than  50.0%  of  the  total  voting  power  of  such  entity
immediately  after such  transaction;  or (3) any reverse merger in which we are
the surviving  entity but in which our  stockholders  immediately  prior to such
merger do not hold (by virtue of their shares in Viatel held  immediately  prior
to such transaction)  securities in our company  representing more than 50.0% of
the total voting power of us immediately after such transaction.

         We have filed with the Commission a Registration  Statement on Form S-8
covering the shares of common stock  underlying  options granted under the Stock
Incentive Plan.

COMPENSATION OF DIRECTORS

         Effective  June 1998, we increased the annual fee paid to  non-employee
directors   from  $12,000  to  $30,000  (paid  $15,000  in  cash,  in  quarterly
installments,  and $15,000 paid in options to purchase common stock),  increased
from $1,000 to $1,200 the meeting fee paid to directors  for every board meeting
attended and held  separately  and  increased  from $500 to $600 the fee paid to
directors  for each  Board  meeting  or  committee  meeting  participated  in by
telephone.  Directors  who are  also  employees  of  Viatel  are not  separately
compensated  for  serving  on  the  Board.  All  directors  are  reimbursed  for
out-of-pocket expenses incurred in attending Board and committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During 1998,  the members of the  Compensation  Committee  were Messrs.
Graham,  Pizzani  and  Mahoney.  Mr.  Mahoney is  Viatel's  President  and Chief
Executive  Officer.  None  of our  executive  officers  currently  serve  on the
compensation  committee of another entity or any other committee of the board of
directors of another entity  performing  functions  similar to the  Compensation
Committee. No interlocking relationships exist between our Board of Directors or
its Compensation  Committee and the board of directors or compensation committee
of any other company.

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

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of the common  stock,  as of March 15,  1999,  by (1) each
person known to us to own beneficially more than 5% of our outstanding shares of
common stock, (2) each director of the company (3) each of the Named Executives,
and (4) all executive  officers and directors of us, as a group. All information
with respect to beneficial  ownership has been furnished to us by our respective
stockholders.

                                       73
<PAGE>

<TABLE>
<CAPTION>
                                                                        AMOUNT AND NATURE       PERCENTAGE
                                                                          OF BENEFICIAL             OF
NAME AND ADDRESS                                                          OWNERSHIP (1)           CLASS
<S>                                                                         <C>                    <C>  
Martin Varsavsky                                                                                       
  Parque Empresarial Edificio 2,                                                                       
  c/o Beatriz De Bobadilla                                                                             
  14,5(degree)Ofic. B                                                                                  
  Madrid, Spain.....................................................        3,596,666              15.5%

The Capital Guardian Trust Co.                                                                         
  11100 Santa Monica Boulevard                                                                         
  Los Angeles, CA 90025-3384(2).....................................        2,695,700              11.6

Michael J. Mahoney(3)...............................................          318,819               1.4

Allan L. Shaw(3)....................................................          153,116               *

Lawrence G. Malone(3)...............................................          121,249               *

Sheldon M. Goldman(3)(4)............................................          105,805               *

Francis J. Mount(3).................................................           44,336               *

John G. Graham(3)...................................................            1,732               *

Paul G. Pizzani(3)..................................................              732               *

All directors and executive                                                                                     
     officers as a group (7 persons)(5).............................          745,789               3.4%
</TABLE>

-----------

*    Represents  beneficial  ownership of less than 1% of the outstanding shares
     of common stock.

(1)      Beneficial  ownership is determined in accordance with the rules of the
         Commission.  In computing the number of shares  beneficially owned by a
         person and the  percentage  ownership of that person,  shares of common
         stock  subject to options  and  warrants  held by that  person that are
         currently  exercisable or exercisable  within 60 days of March 15, 1999
         are  deemed  outstanding.   Such  shares,   however,   are  not  deemed
         outstanding  for the purpose of computing the  percentage  ownership of
         any other  person.  Except as indicated in the footnotes to this table,
         the stockholder named in the table has sole voting and investment power
         with respect to the shares set forth opposite such stockholder's name.

(2)      The amount reported reflects shares held by a subsidiary of The Capital
         Guardian  Trust  Co.  solely  as  the  investment  manager  of  various
         institutional  accounts.  The Capital  Guardian Trust Co. does not have
         investment power or voting power over any of these shares.
(3)      Includes shares of common stock which these  individuals have the right
         to acquire  through the exercise of options within 60 days of March 15,
         1999, as follows:  Michael J. Mahoney  217,820;  Allan L. Shaw 132,116;
         Lawrence G. Malone 105,249;  Sheldon M. Goldman 81,805;  and Francis J.
         Mount 28,336; John G. Graham, 732; and Paul G. Pizzani, 732.
(4)      Includes  1,000  shares  owned  by  Mr.  Goldman's  wife.  Mr.  Goldman
         disclaims  "beneficial  ownership" of such shares within the meaning of
         Rule 13d-3 under the Exchange Act.

(5)     Includes  vested  and  exercisable  options to  purchase  566,814 shares
        of common stock which were granted pursuant to the Stock Incentive Plan.


                                       74
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         On June 3, 1998, we entered into a Mutual  Cooperation  Agreement  with
Martin  Varsavsky,  a greater than ten percent  stockholder of the company,  and
Jazz  Telecom  S.A.,  pursuant  to which the  parties  made  certain  agreements
including  the  following:  (1) subject to Jazz Telecom  S.A.  completing a high
yield  offering  with net proceeds to Jazz Telecom S.A. of at least $100 million
(the "Offering Condition"),  we and Jazz Telecom S.A. agreed to use commercially
reasonable efforts to execute and deliver a construction agreement no later than
January 1, 1999 to construct a fiber optic  submarine cable system between Spain
and the United  Kingdom,  (2)  subject to the  Offering  Condition  we agreed to
purchase  $6.0 million of Jazz Telecom S.A.  common  stock,  (3) Viatel and Jazz
Telecom  S.A.  agreed  to the  purchase  from the other  international  switched
minutes and to  transmit at least  one-third  of our Spanish  domestic  switched
minute traffic over Jazz Telecom S.A.'s network,  assuming the prices charged by
Jazz Telecom S.A. are  competitive,  (4) we and Jazz Telecom S.A. agreed to sell
capacity to each other for fixed prices, (5) Mr. Varsavsky agreed to lock-up his
Viatel shares for a specified  period,  (6) we agreed to release any past claims
which we had against either Jazz Telecom S.A. and Mr.  Varsavsky in exchange for
their  respective  release of any claims against us and (7) Mr. Varsavsky agreed
to pay to us liquidated damages in the event that he violates certain provisions
of the  agreement.  Viatel and Jazz Telecom S.A.  are  currently in  discussions
concerning  certain  modifications  to  the  terms  of  the  Mutual  Corporation
Agreement.

         On November 13, 1998, Mr. Varsavsky entered into an additional  lock-up
agreement with us pursuant to which Mr. Varsavsky agreed that he would not sell,
contract to sell,  announce an intentional to sell,  pledge or otherwise dispose
of his shares of our common stock,  either  directly or indirectly,  without the
prior written consent from us until after August 12, 1999.



                                     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 1998.

(C) INDEX TO EXHIBITS.

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


                                       75
<PAGE>
                                                            
EXHIBIT NO.           DESCRIPTION OF DOCUMENTS              
-----------           ------------------------              

3(i)*      - 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(i)(a)    - Certificate  of  Amendment  to the  Company's  Amended and Restated
             Certificate of Incorporation  (incorporated  herein by reference to
             Exhibit 4.9 of the Company's  Quarterly Report on From 10-Q for the
             quarter ended September 30, 1998, File No. 000-21261).*

3(i)(b)    - Certificate of Designations, Preferences and Rights of 10% Series A
             Redeemable    Convertible   Preferred   Stock,   $.01   par   value
             (incorporated  herein  by  reference  to  Exhibit  3(i)(b)  to  the
             Company's  Registration Statement on From S-4, filed July 10, 1998,
             Registration Statement No. 58921 (the "Company's 1998 Form S-4")).

3(ii)*     - Second  Amended and Restated  By-laws of the Company  (incorporated
             herein by reference to Exhibit  3.1(ii) of the Company's  Form 10-Q
             for  the  fiscal  quarter  ended   September  30,  1997,  File  No.
             000-21261).

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 1995 Form S-4").

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

4.3*       - 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).

4.4*       - Indenture,  dated as of April 8, 1998,  between the Company and The
             Bank of New York,  as Trustee,  relating to Viatel,  Inc.'s  12.50%
             Senior  Discount  Notes Due 2008  (including  from of 12.50% Senior
             Discount Note) (incorporated  herein by reference to Exhibit 4.1 to
             the Company's 1998 From S-4).

4.5*       - Indenture,  dated as of April 8, 1998  between  the Company and The
             Bank of New York,  as Trustee,  relating to Viatel,  Inc.'s  11.25%
             Senior  Notes  Due 2008  (including  form of  11.25%  Senior  Note)
             (incorporated  herein by reference to Exhibit 4.2 to the  Company's
             1998 Form S-4).

4.6*       - Indenture,  dated as of April 8, 1998, among the Company,  The Bank
             of New York, as Trustee, and Deutsche Bank, Aktiengesellschaft,  as
             German  Paying Agent and  Co-Registrar,  relating to the  Company's
             12.40% Senior  Discount  Notes Due 2008  (including  form of 12.40%
             Senior Discount Note) (incorporated  herein by reference to Exhibit
             4.3 to the Company's 1998 Form S-4).

4.7*       - Indenture,  dated as of April 8, 1998, among the Company,  The Bank
             of New York, as Trustee, and Deutsche Bank, Aktiengesellschaft,  as
             German  Paying Agent and  Co-Registrar,  relating to the  Company's
             11.15% Senior Notes Due 2008 (including form of 11.15% Senior Note)
             (incorporated  herein by reference to Exhibit 4.4 to the  Company's
             1998 Form S-4).

4.8*       - Indenture,  dated as of April 8, 1998, among the Company,  The Bank
             of New York, as Trustee, and Deutsche Bank, Aktiengesellschaft,  as
             German Paying Agent and Co-Registrar, relating to the Company's 10%
             Subordinated Convertible Debentures Due 2011 (including form of 10%
             Subordinated   Convertible   Debenture)   (incorporated  herein  by
             reference to Exhibit 4.5 to the Company's 1998 Form S-4).

                                       76
<PAGE>

4.9*       - Conversion Shares  Registration  Rights  Agreement,  dated April 3,
             1998, among the Company, Morgan Stanley & Co. Incorporated,  Morgan
             Stanley  Bank  AG,   Salomon   Brothers  Inc.,  ING  Baring  (U.S.)
             Securities,   Inc.  and  NationsBanc   Montgomery   Securities  LLC
             (incorporated herein by reference to Exhibit 4.7 the Company's 1998
             Form S-4).

10.1*      - 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
             1995 Form S-4).

10.2*      - 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
             1995 Form S-4).

10.3*      - 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
             1995 Form S-4).

10.4*      - 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
             1995 Form S-4).

10.5*      - 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 1995 Form S-4).

10.6*      - 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
             1995 Form S-4).

10.7*      - 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  1995 Form
             S-4).

10.8*      - 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 1995 Form S-4).

10.9*      - 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
             1995 Form S-4).

10.10*     - 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 1995 Form S-4).

10.11*+    - Employment  Agreement  between the  Company and Michael J.  Mahoney
             (incorporated herein by reference to Exhibit 10.12 to the Company's
             Annual  Report on Form 10-K for the year ended  December  31,  1997
             (the "Company's 1997 Form 10K)).

                                       77
<PAGE>

10.12*+    - Amended Stock Incentive Plan  (incorporated  herein by reference to
             Exhibit  4.10 to the  Company's  Form 10-Q for the  fiscal  quarter
             ended September 30, 1998, File No. 000-21261).

10.13*+    - Employment   Agreement  between  the  Company  and  Allan  L.  Shaw
             (incorporated herein by reference to Exhibit 10.14 to the Company's
             1997 Form 10-K).

10.14*+    - Employment  Agreement  between the  Company and Sheldon M.  Goldman
             (incorporated herein by reference to Exhibit 10.15 to the Company's
             1997 Form 10-K).

10.15*     - Mutual Cooperation  Agreement,  dated as of June 3, 1998, among the
             Company,  Martin  Varsavsky  and Jazz  Telecom  S.A.  (incorporated
             herein by  reference  to  Exhibit  10.16 to the  Company's  Current
             Report on Form 8-K, dated June 8, 1998, File No. 000-21261).

10.16*     - Equipment  Purchase  Agreement,  dated June 29,  1998,  between the
             Company and Nortel PLC (incorporated herein by reference to Exhibit
             10.16 to the Company's 1998 Form S-4).

10.17*     - Agreement of Lease,  dated June 24, 1998,  between 685  Acquisition
             and the Company,  as amended by a letter agreement,  dated July 27,
             1998  (incorporated  herein by  reference  to Exhibit  10.17 to the
             Company's 1998 Form S-4).

10.18*     - Lease,  dated June 23, 1998,  between VC Associates  and Viatel New
             Jersey, Inc.  (incorporated herein by reference to Exhibit 10.18 to
             the Company's 1998 Form S-4).

10.19**    - Software  License  Agreement,  dated October 22, 1998,  between the
             Company and Lucent Technologies Inc.

10.20**    - Engineering,  Procurement and  Construction  Contract,  dated as of
             November 10, 1998, between Viatel Global  Communications,  Inc. and
             Alcatel Submarine Network S.A.

10.21**    - Equipment Purchase Agreement,  dated December 31, 1998, between the
             Company and Nortel plc.

21.1       - Subsidiaries of the Company.

23.1       - Consent of KPMG 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.
** Filed herewith. Confidential treatment requested as to certain portions.


                                       78
<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 31st day of March, 1999.

                              VIATEL, INC.


                              By: /S/ MICHAEL J. MAHONEY 
                                 -------------------------- 
                                 Michael J. Mahoney
                                 President and Chief Executive Officer


         KNOWN BY ALL MEN BY THESE  PRESENTS,  that each person whose  signature
appears below  constitutes and appoints Allan L. 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 31st day of March, 1999.


        SIGNATURE                                           TITLE(S)

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


 /S/ ALLAN L. SHAW                    Senior Vice President, Finance, Chief
----------------------                Financial Officer and Director
   Allan L. Shaw                      



 /S/ FRANCIS J. MOUNT                 Director
----------------------
 Francis J. Mount


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


 /S/ JOHN G. GRAHAM                   Director
----------------------
  John G. Graham


                                       79
<PAGE>

                                  EXHIBIT INDEX


                                                                    SEQUENTIALLY
                                                                       NUMBERED
EXHIBIT NO.               DESCRIPTION OF DOCUMENTS                      PAGE
-----------               ------------------------                  ------------

3(i)*     - 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(i)(a)   - Certificate   of  Amendment  to  the   Company's
            Amended    and    Restated     Certificate    of
            Incorporation  (incorporated herein by reference
            to Exhibit 4.9 of the Company's Quarterly Report
            on From 10-Q for the quarter ended September 30,
            1998, File No. 000-21261).*

3(i)(b)   - Certificate  of  Designations,  Preferences  and
            Rights of 10%  Series A  Redeemable  Convertible
            Preferred  Stock,  $.01 par value  (incorporated
            herein by  reference  to Exhibit  3(i)(b) to the
            Company's  Registration  Statement  on From S-4,
            filed July 10, 1998,  Registration Statement No.
            58921 (the "Company's 1998 Form S-4")).

3(ii)*    - Second  Amended  and  Restated  By-laws  of  the
            Company  (incorporated  herein by  reference  to
            Exhibit  3.1(ii) of the Company's  Form 10-Q for
            the fiscal  quarter  ended  September  30, 1997,
            File No. 000-21261).

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

4.3*      - 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).

4.4*      - Indenture,  dated as of April 8,  1998,  between
            the  Company  and  The  Bank  of  New  York,  as
            Trustee,   relating  to  Viatel,  Inc.'s  12.50%
            Senior  Discount Notes Due 2008  (including from
            of 12.50% Senior  Discount  Note)  (incorporated
            herein  by  reference  to  Exhibit  4.1  to  the
            Company's 1998 From S-4).

4.5*      - Indenture, dated as of April 8, 1998 between the
            Company  and The Bank of New York,  as  Trustee,
            relating to Viatel,  Inc.'s  11.25% Senior Notes
            Due 2008  (including form of 11.25% Senior Note)
            (incorporated herein by reference to Exhibit 4.2
            to the Company's 1998 Form S-4).

                                       80
<PAGE>

4.6*      - Indenture,  dated as of April 8, 1998, among the
            Company,  The Bank of New York, as Trustee,  and
            Deutsche  Bank,  Aktiengesellschaft,  as  German
            Paying Agent and  Co-Registrar,  relating to the
            Company's  12.40% Senior Discount Notes Due 2008
            (including  form of 12.40% Senior Discount Note)
            (incorporated herein by reference to Exhibit 4.3
            to the Company's 1998 Form S-4).

4.7*      - Indenture,  dated as of April 8, 1998, among the
            Company,  The Bank of New York, as Trustee,  and
            Deutsche  Bank,  Aktiengesellschaft,  as  German
            Paying Agent and  Co-Registrar,  relating to the
            Company's   11.15%   Senior   Notes   Due   2008
            (including   form   of   11.15%   Senior   Note)
            (incorporated herein by reference to Exhibit 4.4
            to the Company's 1998 Form S-4)

4.8*      - Indenture,  dated as of April 8, 1998, among the
            Company,  The Bank of New York, as Trustee,  and
            Deutsche  Bank,  Aktiengesellschaft,  as  German
            Paying Agent and  Co-Registrar,  relating to the
            Company's    10%    Subordinated     Convertible
            Debentures  Due  2011  (including  form  of  10%
            Subordinated        Convertible       Debenture)
            (incorporated herein by reference to Exhibit 4.5
            to the Company's 1998 Form S-4).

4.9*      - Conversion Shares Registration Rights Agreement,
            dated April 3, 1998,  among the Company,  Morgan
            Stanley & Co. Incorporated,  Morgan Stanley Bank
            AG,  Salomon  Brothers  Inc.,  ING Baring (U.S.)
            Securities,   Inc.  and  NationsBanc  Montgomery
            Securities LLC (incorporated herein by reference
            to Exhibit 4.7 the Company's 1998 Form S-4).

10.1*     - 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 1995 Form S-4).

10.2*     - 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  1995
            Form S-4).

10.3*     - 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 1995 Form S-4).

10.4*     - 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 1995 Form S-4).

10.5*     - 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 1995
            Form S-4).


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<PAGE>

10.6*     - 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 1995 Form S-4).

10.7*     - 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 1995
            Form S-4).

10.8*     - 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 1995 Form S-4).

10.9*     - 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 1995 Form S-4).

10.10*    - 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 1995 Form S-4).

10.11*+   - Employment  Agreement  between  the  Company and
            Michael  J.  Mahoney   (incorporated  herein  by
            reference  to  Exhibit  10.12  to the  Company's
            Annual  Report on Form  10-K for the year  ended
            December  31,  1997  (the  "Company's  1997 Form
            10-K")).

10.12*+   - Amended  Stock   Incentive  Plan   (incorporated
            herein  by  reference  to  Exhibit  4.10  to the
            Company's Form 10-Q for the fiscal quarter ended
            September 30, 1998, File No. 000-21261).

10.13*+   - Employment  Agreement  between  the  Company and
            Allan L. Shaw (incorporated  herein by reference
            to  Exhibit  10.14 to the  Company's  1997  Form
            10-K).

10.14*+   - Employment  Agreement  between  the  Company and
            Sheldon  M.  Goldman   (incorporated  herein  by
            reference to Exhibit 10.15 to the Company's 1997
            Form 10-K).

10.15*    - Mutual Cooperation  Agreement,  dated as of June
            3, 1998, among the Company, Martin Varsavsky and
            Jazz  Telecom  S.A.   (incorporated   herein  by
            reference  to  Exhibit  10.16  to the  Company's
            Current  Report on Form 8-K, dated June 8, 1998,
            File No. 000-21261).

10.16*    - Equipment  Purchase  Agreement,  dated  June 29,
            1998,   between   the  Company  and  Nortel  PLC
            (incorporated  herein by  reference  to  Exhibit
            10.16 to the Company's 1998 Form S-4).

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<PAGE>

10.17*    - Agreement of Lease, dated June 24, 1998, between
            685 Acquisition and the Company, as amended by a
            letter   agreement,    dated   July   27,   1998
            (incorporated  herein by  reference  to  Exhibit
            10.17 to the Company's 1998 Form S-4).

10.18*    - Lease,   dated   June  23,   1998,   between  VC
            Associates   and   Viatel   New   Jersey,   Inc.
            (incorporated  herein by  reference  to  Exhibit
            10.18 to the Company's 1998 Form S-4).

10.19**   - Software  License  Agreement,  dated October 22,
            1998,    between    the   Company   and   Lucent
            Technologies Inc.

10.20**   - Engineering,    Procurement   and   Construction
            Contract, dated as of November 10, 1998, between
            Viatel Global  Communications,  Inc. and Alcatel
            Submarine Network S.A.

10.21**   - Equipment  Purchase  Agreement,  dated  December
            31,1998, between the Company and Nortel plc.

21.1      - Subsidiaries of the Company.

23.1      - Consent of KPMG 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.
** Filed herewith. Confidential treatment requested as to certain portions.




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