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

                                   FORM 10-K

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

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

                        COMMISSION FILE NUMBER: 0-23717

                         GLOBAL TELESYSTEMS GROUP, INC.
             (Exact name of registrant as specified in its charter)

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<S>                                             <C>
                  DELAWARE                                       94-3068423
          (State of incorporation)                  (I.R.S. Employer Identification No.)
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                          4121 WILSON BLVD., 8TH FLOOR
                           ARLINGTON, VIRGINIA 22203
                    (Address of principal executive offices)

                                 (703) 236-3100
                        (Registrant's telephone number)

          Securities Registered Pursuant to Section 12(b) of the Act:

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             TITLE OF EACH CLASS                  NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                  -----------------------------------------
<S>                                             <C>
   Common Stock, par value $0.10 per share                 New York Stock Exchange
       Preferred Share Purchase Rights                     New York Stock Exchange
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     Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

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

     The aggregate market value of the voting stock of Global TeleSystems Group,
Inc. held by non-affiliates on December 31, 1999 was approximately
$5,613,527,024. On January 31, 2000, there were outstanding approximately
184,892,309 shares of Common Stock of Global TeleSystems Group, Inc.

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              ITEM OF FORM 10-K                      DOCUMENTS INCORPORATED BY REFERENCE
              -----------------                      -----------------------------------
<S>                                             <C>
             Part IV, Item 14(c)                                  Exhibits
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                         GLOBAL TELESYSTEMS GROUP, INC.

                                   FORM 10-K
                          YEAR ENDED DECEMBER 31, 1999

                               TABLE OF CONTENTS

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                                   PART I
ITEM 1.   Business....................................................
ITEM 2.   Properties..................................................
ITEM 3.   Legal Proceedings...........................................
ITEM 4.   Submission of Matters to a Vote of Security Holders.........

                                   PART II

ITEM 5.   Market for the Company's Common Equity and Related
            Stockholder Matters.......................................
ITEM 6.   Selected Financial Data.....................................
ITEM 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................
ITEM 8.   Consolidated Financial Statements and Supplementary
            Information for the Company...............................
ITEM 9.   Changes In and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................

                                  PART III

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

                                   PART IV

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form
            8-K.......................................................
SIGNATURES............................................................
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                                     PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW AND STRATEGY

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

     - our pan-European broadband fiber optic network, which is the largest in
       Europe;

     - our pan-European Tier 1 Internet protocol backbone;

     - our position as a leading pan-European supplier of communications
       services to approximately 100,000 small-and medium- sized business
       customers, with a sales and distribution network spanning 79 European
       cities in 18 countries; and

     - a large base of carrier and Internet service provider customers, which
       comprise a sizable percentage of European's total Internet and broadband
       traffic.

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

  Expand our services portfolio to support the communications and e-business
  activities of our customers

     We intend to capitalize on the trend of companies seeking to outsource
critical business applications and to integrate Web-based services and products
into their operations by aggressively marketing value-added data, Internet and
e-business enabling services to our existing and future business customers in
addition to the voice services we already offer in our target markets.

     We already provide in certain of our target markets a range of data and
Internet services, which we are currently introducing in other countries in
which we operate. Additionally, we are planning to complement our existing
service offerings with new services that will support the e-business initiatives
of our customers, including, for example, enabling our customers to manage
on-line transactions and creating a fulfillment and procurement infrastructure
for supply chain management. These services may be developed internally or, when
speed-to-market is critical, developed and/or marketed in partnerships. We
intend to continue to develop and market advanced networking solutions, such as
outsourced infrastructure and network management to our carrier, Internet
service provider and Web-centric customers.

  Leverage our distribution network to further penetrate our existing customer
  base and reach new customers

     Through our acquisitions of Global TeleSystems (Europe) Limited ("GTS
(Europe) Ltd."), formerly Esprit Telecom Group plc NetSource, Omnicom and
InTouch and the growth of our Central European operations, we have built a
unified pan-European sales and distribution network covering customers in 79
cities in 18 countries. As of December 31, 1999, our sales force consisted of
approximately 660 direct sales personnel. We believe that our highly qualified
sales personnel, who understand our philosophy, services and systems and are
well-trained in local languages and telecommunications business practices,
provide us with a competitive advantage. We will continue to invest in training
programs to equip our sales personnel with the skills necessary to market more
advanced, value-added services to our business customers as their
telecommunications needs evolve from basic Internet connectivity to full
utilization of the Internet, corporate intranets and virtual private networks
for more advanced, mission-critical applications. In this way, we intend to
leverage the strengths of our pan-European sales and distribution network to
capture additional revenues from our existing customer base and reach new
customers.

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

     Since we began offering service on our fiber optic network in November
1996, we have developed a significant customer base encompassing over 180
telecommunications carriers, Internet service providers and other
bandwidth-intensive customers. As a result of being first in the market, we have
gained significant experience in developing service innovations and tailoring
our service offerings to meet our customers' rapidly evolving needs. We intend
to build on our success in delivering broadband service to carriers by
increasingly focusing on emerging Web- and data-centric companies that require
large amounts of bandwidth to service their end-user customers. These types of
customers include broadband multimedia providers, content providers, such as
motion picture studios and broadcasters, Internet applications service
providers, such as portals and electronic commerce companies, and emerging data
transmission providers, such as wireless operators. By providing
mission-critical, value added solutions to our customers, we seek to establish
ourselves as their strategic partner.

  Continue to invest in the reach and capacity of our fiber optic network

     We will continue to invest in our network to expand its geographic reach
and capacity in order to ensure that we can accommodate our customers' future
capacity requirements. We are continuing to build our network by extending its
coverage to include approximately 25,000 kilometers across Europe by the end of
2000. We are continuing to deploy dense wavelength division multiplexing
technology that will permit significant future enhancement of our network's
transmission capacity and will allow us to upgrade the capacity, reliability and
efficiency of the network in the future. The capacity of our network is
currently 40 wavelengths per fiber optic pair, each wavelength with a capacity
of 2.5 gigabits per second, or a total capacity of 100 gigabits per second on
the majority of our routes. We intend to install additional upgrades to further
increase our network's capacity in 2000. When introduced, these upgrades are
expected to increase the capacity of a single fiber pair to 96 wavelengths per
fiber optic pair, each wavelength with a capacity of 10 gigabits per second, or
a total capacity of 960 gigabits per second. In addition, we intend to develop
an additional ring on our network connecting the core cities of London, Paris,
Amsterdam, Frankfurt, Dusseldorf, and Brussels. We also plan to install
transmission equipment on a second, currently installed fiber pair on a number
of routes in our network to expand the transmission capacity of those routes.

  Build infrastructure and extend our network closer to our customers

     - Develop City Enterprise Networks. In order to offer true end-to-end
       transmission services to our carrier, business and other
       bandwidth-intensive customers, we intend to build intracity fiber
       networks, or City Enterprise Networks, in major European cities. We
       currently operate five such networks in Paris, Budapest, Prague, Berlin
       and Geneva. In addition, we expect to have City Enterprise Networks
       deployed in eight additional cities by year end 2000. Each City
       Enterprise Network will be designed to connect, within a city, its major
       Internet and telecommunications transmission centers, including points of
       presence on our network, telehouses, Internet exchange points and, where
       economically feasible, our existing customers' points of presence in that
       city. This will allow us to reach our customers without relying on
       third-party local access providers. We expect to improve service quality
       and realize higher margins as we manage more traffic end-to-end over our
       network.

     - Expand and enhance the transatlantic capacity of our network. We believe
       that a large portion of our market growth will come in the form of
       Internet protocol-based data and voice services. We currently lease
       transatlantic capacity from third parties. Because a majority of Internet
       protocol traffic originates in the United States, we have invested in our
       own transatlantic capacity infrastructure through the acquisition of a
       dedicated fiber pair on the FLAG Atlantic-1 transatlantic fiber optic
       link. (FLAG Atlantic is a 50/50 joint venture between GTS and Flag
       Telecom.) By owning this fiber pair, we will acquire capacity of 70
       gigabits per second upgradeable up to a maximum of 400 gigabits per
       second of fully protected capacity from the New York City area directly
       to our European network. We believe that owning a large volume of
       transatlantic capacity to and from the United States will enhance our
       competitive low cost position in Europe while extending our network to
       the U.S. at favorable prices. In
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November 1999, we entered into a memorandum of understanding with GlobeNet
Communications Group Limited, which is building a high capacity subsea cable
linking key cities in North and South America. The agreement will enable us to
      sell managed bandwidth services from a variety of European cities to Latin
      America and GlobeNet to sell similar services between Latin America and
      Europe. In addition, in order to maintain and reinforce our strong market
      position in the increasingly global carriers' carrier and data- centric
      markets, we may enter into arrangements to obtain network capacity
      connecting several key U.S. markets by the end of 2000.

     - Build or deploy data and Web-hosting centers to support Web-based
       services. We intend to develop data- and Web-hosting centers on our
       network near key public Internet exchange points to strengthen our
       portfolio of Web-based services. This will provide us with the necessary
       facilities to undertake secure co-location, data- and Web-hosting
       services and facilitate our ability to offer a range of e-commerce and
       e-business solutions. By mid-2000, we expect to establish data- and
       Web-hosting capability in London, Amsterdam, Frankfurt and Paris. We
       intend to deploy up to nine additional data-and Web-hosting centers
       during the next two years. These centers are a natural extension of our
       strategy to meet the end-to-end needs of the Web- and media-centric
       content and application providers who are leading the rapid growth of the
       Internet- and multimedia-related segments of our target markets. In
       addition to carrying these customers' international traffic on our
       network, we will be able to host and distribute their applications,
       support their e-business and e-commerce activities and provide peering
       arrangements.

  Enhance Brand Name Recognition

     In the first quarter of 2000, we launched a major marketing program to
develop and enhance the pan-European unified GTS brand name. Our branding
program will include the select use of television commercials, print ads and
direct mailings. Through our branding program we will seek to expand our market
share, increase customer loyalty and develop brand recognition in the European
broadband data, Internet and voice services market.

OUR EUROPEAN OPERATIONS

  Overview

     We offer a portfolio of bundled voice, data and Internet services to
small-to-medium sized enterprises, pan-European companies and select residential
end-users in 18 European countries. At December 31, 1999, we had approximately
100,000 business customers. We expect that our customer base will increasingly
include large companies with complex communications needs. We are also one of
the leading European providers of managed bandwidth and related communications
services to carriers, Internet service providers and other bandwidth-intensive
customers. We have the largest centrally managed fiber optic network in Europe
and a Tier 1 Internet backbone network. At December 31, 1999, the customers of
these services were contractually obligated to pay us an aggregate of
approximately $635.0 million for future services, provided we perform in
accordance with contractual specifications. This amount increased from $450.3
million at March 31, 1999, $498.7 million at June 30, 1999 and $548.2 million at
September 30, 1999. Such amounts are inclusive of amounts included in deferred
revenue.

     We seek to capitalize on the increasing demand in Europe for e-business
services and products, in which businesses use the Internet to perform key
business communications processes. We believe that a wide variety of businesses,
both large and small, will increasingly use the Internet to communicate, improve
operating efficiencies and transact commerce in secure, reliable and
cost-effective ways. We currently provide these customers with a range of voice
and data services, including, in selected European countries, dial-up and
dedicated Internet access and virtual private network services. As we develop
and expand our suite of e-business services to include, among others,
Web-hosting, co-location, messaging and remote access services, we expect to
realize an increasing proportion of our revenue from businesses that rely on
Web-based applications to communicate with customers, suppliers and employees as
well as from new customer segments, such as e-business application service
providers and other Web-centric companies.

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

     Customers of our broadband services include:

     - European incumbent telecommunications operators

     - Alternative carriers

     - Voice resellers

     - International carriers

     - Internet service providers

     - Value added network service providers

     - Web-centric and media-centric companies

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

  Voice, Data and Internet-related Services

     We currently offer national and international direct and indirect access
services for voice communications as well as enhanced voice, data and e-business
services. We continue to expand our service offerings to provide our customers
with a full range of tailored telecommunications services.

     Voice Services. The largest share of the European business and corporate
retail market is currently international voice and fax transmission services. We
believe that customers have selected us as a provider on the basis of
competitive pricing, network quality, responsive account management and
customized services.

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

     Our indirect access retail clients access our services by dialing an access
code, generally either using an auto dialer or via a code programmed directly
into their own switches so that it is transparent to the user or their
applicable carrier through a carrier pre-select arrangement. These customers
generally consist of small and medium-size businesses whose telecommunication
requirements do not warrant the costs associated with the dedicated leased lines
of direct access service. Contracts for both direct and indirect access are
typically for a period of one year.

     Enhanced Voice Services. We have also focused on developing new voice
services which address the specific needs of our customer base, including
pre-and post-paid calling cards, national and international toll-

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free service, which we target to organizations that require their customers or
employees to be able to simply and cost-effectively call them from other
countries. We have introduced or plan on introducing additional services,
including conferencing services, pre-paid mobile phone services, and virtual
private networks. In several countries, we resell mobile services which we
bundle with our existing voice services and bill on a single integrated bill.

     Data, e-Business and Other Services. We currently offer dial-up and
dedicated Internet access and international private leased circuits in selected
target markets. By the end of 2000, we expect to offer these services in all the
countries where we operate. We also plan to complement these services with a
full range of value-added services including co-location, Web-hosting, messaging
and remote access. We will actively market these new services to our existing
customer base and to other European companies that view the Internet as critical
to their expansion plans. Specifically, we plan to extend our data-and
Web-hosting services to enable customers in developing market segments such as
application service providers to distribute applications from our data- and
Web-hosting centers.

     We are a leading alternative provider of data, Internet access and voice
services in the Czech Republic, Hungary, Poland, Romania and Slovakia. The
majority of our revenue in the region is derived from Very Small Aperture
Terminals (VSATs), leased lines and Internet access services. We provide these
services on a diverse set of infrastructure assets including City Enterprise
Networks, which we operate in Prague and Budapest, VSATs deployed in the Czech
Republic, Hungary and Romania, a national microwave network in Hungary, and
leased and owned dark fiber, which we expect will connect our City Enterprise
Networks to our pan-European fiber optic network in the second quarter of 2000.
We have acquired several Internet service providers in the region. In the last
24 months, we have acquired two Internet service providers in Poland, two in the
Czech Republic, one in Hungary and one in Slovakia. By year-end 2000, we expect
their networks will be integrated with our network.

  Broadband Services

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

     Our broadband services have the following competitive advantages:

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

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

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

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

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

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

     We tailor our services to meet the diverse requirements of various customer
segments which require two classes of outsourcing levels:

     - Our unprotected ring service provides diversely routed paths on which
       customers deploy their own termination equipment and perform their own
       protection schemes. These customers tend to be medium to large carriers
       and operators that prefer to have control over the physical configuration
       of their networks. Through its own termination equipment, and using our
       network capacity, the customer has full control of its different traffic
       flows. This gives the customer the opportunity to optimize its usage of
       the available ring bandwidth based on the volume requirements of its
       individual applications.

     - Our protected services provide domestic and international self-healing
       point-to-point links managed end-to-end by us. As a result, the customer
       avoids having to provide for the redundancy of its traffic. We offer
       customers service level agreements with service guarantees appropriate
       for mission-critical applications. These guarantees cover on-time service
       delivery and service availability.

     Depending on the customer's bandwidth and application requirements, these
two classes of bandwidth services run on two underlying technologies: either
synchronous digital hierarchy technology over dense wavelength division
multiplexing (for speeds ranging from 2 megabits per second to 155 megabits per
second) or directly on dense wavelength division multiplexing (for speeds
ranging from 155 megabits per second to 2.5 gigabits per second, which is
expected to be upgraded to 10 gigabits per second in 2000).

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

     Through our GTS Ebone brand name, we offer to Internet service providers,
value added network service providers, multimedia application providers and
Web-hosting companies a carrier-grade Internet access service. Ebone Global
Carrier Services provides general purpose, congestion free access to the
worldwide Internet and Ebone Europe Carrier Services provides low delay, high
performance access to the European domain of the worldwide Internet.

     In addition, we are using optical Internet protocol technology to offer in
Europe real-time Internet protocol performance that is needed by Internet
protocol operators and by voice, fax and video over Internet protocol providers.
GTS Ebone Europe Services is the first of a series of future services to fully
benefit from the performance offered by optical Internet technology.

     Wholesale Services. We offer competitively priced international switching
and transit services, primarily to the "wholesale" international gateway and
carrier-to-carrier portion of the international calling market, such as public
telecommunications companies, new operators, global alliances and regional
telephone companies, global alliances; regional telephone companies, mobile
carriers, Internet service providers and second carriers or resellers. Resales
of wholesale traffic will enable us to benefit from greater purchasing power

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and higher network utilization. Our wholesale services include the provision of
international call termination in three main areas:

     - Off-net (third party carriers' carrier traffic)

     - On-net (third party carriers' carrier traffic terminating on our network)

     - Mobile (termination of fixed-to-mobile and mobile-to-fixed traffic)

     Although we have contracts with our wholesale customers, these contracts
generally do not include minimum usage levels and our wholesale customers
generally maintain relationships with a number of telecommunications providers.
In several cases, we will also purchase minutes from our wholesale customers as
suppliers for termination of our off-network calls. We believe that success in
the wholesale business is predicated on high network quality at a low cost base.
As we continue to increase the capacity of our fiber optic network, we
anticipate that the decrease in our cost base will enable us to price these
services more competitively and therefore increase the volume of these services.

  Sales and Marketing

     Voice, Data and Internet Services

     Managing directors in each country are responsible for sales and marketing
activities in that country, local business origination, local regulatory
compliance and licensing requirements, and the relationship with the local
telecommunications companies. The marketing organization in each country is
responsible for executing market initiatives, driving product development,
market research and analysis, and promotion and advertising.

     Direct sales constitute our principal sales method in the majority of our
countries of operation. We support our direct sales effort by telemarketing and
telesales, and complement it to a lesser extent by independent sales
intermediaries and resellers. In certain markets we market some of our services
principally through sales agents. In addition, because we are increasingly
focusing on specific industry groups, such as financial institutions, hotels,
travel service organizations and transport companies, we have assigned
specialists to particular industries. We also have been providing intensive
training to enable our sales force to aggressively market e-business services.

     The sales operation in each European country for our voice, data and
e-business services is responsible for originating and managing business in its
respective local market, and is staffed with employees who understand our
philosophy, services and systems and local languages and telecommunications
business practices. As of December 31, 1999, we had approximately 435 direct
sales people and 73 full-time equivalent telemarketing employees in Western
Europe for these services. We have 69 sales offices in 67 cities in the
following countries: The United Kingdom, Germany, The Netherlands, Sweden,
Norway, Denmark, Spain, France, Belgium, Italy, Ireland, Luxembourg and
Switzerland. As of December 31, 1999, we had approximately 125 direct sales
personnel in our Central European operations. We have 12 sales offices in 12
cities in the Czech Republic, Hungary, Poland, Romania and Slovakia.

     Broadband Services

     The term of a typical customer agreement for our broadband services
currently ranges from one to ten years. Throughout 1999, a number of existing
customers have converted from short- to long-term contracts, including 10-year
contracts in which revenues are recognized ratably over the life of the
contract. We expect that this trend will continue in 2000. In addition, we offer
ten year leases which require an up-front payment and produce recurring
operation and maintenance charges. Our customer agrees to purchase, and we agree
to provide, transmission services. In general our customer agrees to pay certain
nonrecurring charges up-front and recurring charges on an annual basis, payable
in twelve monthly installments. If a customer terminates a service order prior
to the end of the contract term, the customer is generally required to pay us a
cancellation charge equal to three months of service for each of the twelve
months remaining in the contract term. We typically guarantee transmission
services to a specified service level. If such levels are not met or we fail to
deliver service by the committed delivery date, the customer is eligible for a
credit against charges otherwise

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payable in respect of the relevant link. Our low cost basis is due to, among
other things, our network's use of advanced fiber optic cable and electronic
equipment permitting high capacity transmission over longer distances between
regeneration/amplifier facilities than legacy networks.

PRODUCT DEVELOPMENT

     We seek to develop a wide range of premium quality and innovative
value-added services that both meet our customers' current demands and
anticipate their future requirements. Our strategy is to develop services that
will allow us to further penetrate our existing customer base and to attract new
customers with sophisticated international communications and e-business
requirements and to capitalize on the combined strength of our pan-European
broadband fiber optic network and sales and distribution channels.

     We analyze the market by industry and customer size to address individual
customer needs both now and in the future. We develop our services to provide a
balanced portfolio that can address the needs of all of our target customers,
and, accordingly, our services range from standard telephony services to very
high bandwidth solutions for medium, large and multi-national corporations.
Additionally, our country managers tailor products to meet the needs of the
local customer base.

     We focus on developing services in the fastest-growing segments of the
business telecommunications market, such as enhanced voice and data services,
corporate network services, Web- and application-hosting and e-business
services. Our development efforts will rely on both internal initiatives as well
as partnerships with third parties. The partnerships may take the form of joint
development, joint marketing and/or reselling agreements. We have already
entered into such agreements with leading providers of business-to-business
Internet messaging solutions for businesses, Internet service providers and
hosting companies. As a way to speed our entry into Web-based services, we are
currently exploring several partnerships of the same type with international
leaders in their respective fields.

OUR NETWORK INFRASTRUCTURE

  Overview

     Our network infrastructure consists of our pan-European network, our City
Enterprise Networks, our interest in the FLAG Atlantic-1 transatlantic fiber
optic cable project, our data-and Web-hosting centers and our operations system
and support functions. In Europe, our network has 58 carrier points of presence
in 30 cities, 18 Internet protocol nodes in 17 cities and 46 switches in 38
cities. The fiber optic network spans approximately 17,000 kilometers and 12
countries. In addition, five intra-city fiber networks are currently
operational.

  Network Design

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

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

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

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division multiplexing technology, we are able to derive up to 40 wavelengths per
fiber optic pair, each wavelength with a capacity of 2.5 gigabits per second,
for a total capacity of 100 gigabits per second over a single fiber optic pair.
We will start to deploy on our core network routes, by the second quarter of
2000 and dependant upon traffic demand, a new generation of wavelength division
multiplexing systems scalable up to a minimum of 960 gigabits per second.

     Transmission Layer. We are using synchronous digital hierarchy (SDH) time
division multiplexing equipment to consolidate, groom and add or drop low and
high order traffic coming from our various network components and to support the
provision of synchronous digital hierarchy leased line services to customers at
data transmission rates ranging from 2 megabits per second to 155 megabits per
second. The synchronous digital hierarchy layer of our pan-European fiber optic
network runs via dense wavelength division multiplexing channels in our network
with a multilayered architecture consisting of multiple synchronous digital
hierarchy rings optimized for different traffic characteristics.

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

     Internet Protocol Layer. Backbone links interconnect core pan-European
fiber optic network nodes at data transmission rates of 2.5 gigabits per second,
providing high quality, seamless Internet protocol connections throughout
Europe. Core network routers are deployed in a redundant configuration to ensure
maximum reliability. Since we design and operate directly both the optical
network layer and the Internet protocol layer, a further optimization of the
resulting network architecture is achieved. The Internet application implemented
on top of the gigabit Internet protocol platform places us among the prominent
Tier 1 Internet service providers in Europe, with direct connections to the
other major European Internet backbone providers. For a direct interconnection
with major U.S. Internet backbones, two network nodes are deployed in the United
States, with high speed connections to the European gigabit backbone. The high
performance core Internet protocol network is designed to support a flexible
introduction of Internet protocol based value added services at the edge of our
network.

     Network Management. We control our pan-European fiber optic network through
our main network operations center, located in Brussels. The network operations
center can pinpoint potential service problems and can deal with service
rerouting, if required, much more effectively than in networks controlled by
multiple operators in different countries. Our advanced operational support
systems also allow us to manage the large number of network components and local
repair organizations required in an extensive international network of this
size, as well as for advanced customer care in managing customer operational
activities. Our backup paths and management components enable us to recover from
individual failures at the optical, synchronous digital hierarchy and Internet
protocol layers. Our resilient approach provides for a high level of network
performance and reliability. As a result, we are able to enter into strong
performance commitments with our customers, and services on most routes of our
network have performed at or above 99.9% availability.

     We own substantially all of our network equipment as well as some segments
of the fiber optic cable. A substantial part of the fiber is leased on a
long-term basis. Long-term leases for fiber are advantageous to us because they
reduce the burden of building large quantities of capacity before they can be
used. When we lease dark fiber, the infrastructure provider will generally be
responsible for maintaining the fiber optic cable. We have entered into
agreements with equipment vendors, infrastructure providers and other third
parties to supply and/or maintain the equipment for the network.

     Switched Layer. The switched layer of the network consists of 46 voice
switches in 38 different cities. We currently have interconnect agreements in
eleven countries in Western Europe. We continually evaluate developments in
switching technology and products offered by other companies, and will add
different platforms which are complementary and beneficial to our service
network. We maintain our switches with up-to-date software and ensure their
compatibility with the large number of signaling systems in use in the European
and United States markets. Using least-cost routing technologies, each switch is
programmed to
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select the most cost-efficient route or carrier for the required destination. We
also employ dynamic compression equipment to improve utilization of our most
costly transmission lines.

  Network Capacity

     Our pan-European fiber optic network includes Ciena 40 dense wavelength
division multiplexing systems on a substantial majority of our routes. By
mid-2000, we expect that all our routes will be dense wavelength division
multiplexing based with a data transmission rate of at least 100 gigabits per
second per fiber pair. This 100 gigabits per second allows for synchronous
digital hierarchy and Internet protocol systems of 2.5 gigabits per second to be
installed only when required, thus providing for efficient management of capital
investment.

     We will deploy on our core pan-European fiber optic network routes, during
2000 and dependent upon traffic demand, per core route a new generation of
wavelength division multiplexing systems scalable up to a minimum of 960
gigabits per second. These systems will be able to handle wavelengths at 2.5 and
10 gigabits per second allowing us to increase the amount of bandwidth carried
per fiber pair as well as to reduce interface prices in both wavelength division
multiplexing and client layer equipment. We plan to extend capacity in the core
portion of our network by developing an additional ring connecting London,
Paris, Amsterdam, Frankfurt, Dusseldorf and Brussels with cable duct
accommodating up to 144 fibers. We also plan to install transmission equipment
on a second, currently installed fiber pair on a number of routes in our network
to expand the transmission capacity of those routes.

  Network Agreements

     We have entered into agreements and letters of intent with various
infrastructure providers for construction and/or leasing of dark fiber for
portions of our pan-European fiber optic network. Our agreements for leases of
portions of our pan-European fiber optic network typically require the
infrastructure provider to provide a certain number of pairs of dark fiber and
in some cases facilities along the network route commencing on dates we provide.
The term of a lease agreement generally ranges from 10 to 18 years. An agreement
typically contains optical specification standards for the fiber and methods of
testing. We are allowed to use the cable for the transmission of messages and
other purposes, including increasing capacity. The infrastructure provider is
responsible for maintenance of the cable facilities. The infrastructure provider
may also provide space for the location of our equipment and related
maintenance. The agreements typically provide for termination by the parties
only for material breach, but allow the breaching party 90 days to cure the
breach. The agreements typically contain a transition period after termination
of the agreement to allow us to continue to serve our customers until we can
reach agreement with an alternative infrastructure provider. In certain areas of
our network where it is not possible to lease dark fiber (which we do not expect
to exceed more than 10 percent of our network), we have signed agreements or
letters of intent for the right to use managed bandwidth. The terms of these
agreements typically range from 10 to 25 years.

     We are also deploying our pan-European fiber optic network along the
rights-of-way of a variety of alternative sources, including railways,
motorways, waterways, pipelines and utilities. We constantly evaluate multiple
alternative infrastructure suppliers in order to maximize our flexibility. Many
portions of our pan-European fiber optic network utilize long term rights-of-way
agreements with landowners.

  City Enterprise Networks

     We currently operate five City Enterprise Networks in Paris, Budapest,
Prague, Berlin and Geneva. We expect to have intracity fiber networks deployed
in the following eight additional cities by year end 2000: Frankfurt, London,
Madrid, Amsterdam, Stockholm, Milan, Zurich and Vienna. We are also evaluating
construction of City Enterprise Networks in the following additional cities:
Brussels, Munich, Barcelona, Stuttgart and Dusseldorf.

     Each City Enterprise Network will be designed to connect, within a city,
its major telecommunications transmission centers, including points of presence
on our pan-European fiber optic network, our other points of presence in such
city, telehouses, Internet exchange points and, where economically feasible, our
existing customers' points of presence in that city.
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     Relying on our own local infrastructure in key cities through our City
Enterprise Networks will allow us to reduce operating expenses (by avoiding or
reducing our payments to local access providers) and to enhance the robustness
of our network (through end-to-end network management and compatibility of the
City Enterprise Networks with our existing network). Such fully integrated
networks of intracity and intercity connectivity will, we believe, appeal to our
customers in need of managed bandwidth services. We also plan to introduce
wavelength services, also known as optical subnetworks, during the buildout of
our City Enterprise Networks. In addition, we plan to add fiber "subrings" to
the core of our City Enterprise Networks to extend our geographic reach. We will
also connect our data and Web-hosting centers to the initial core rings. By
offering co-location and data and Web-hosting capabilities as a bundled service
with our broadband network capabilities, we intend to attract Web-centric and
media-centric companies to our network without procuring expensive services from
local access providers.

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

  The Transatlantic Expansion of our Fiber Optic Network

     We currently provide connectivity from Europe to the United States through
capacity leased from third parties. In January 1999, through a subsidiary, we
entered into an agreement with FLAG Telecom to establish a 50/50 joint venture
to build and operate the world's first transatlantic dual cable system designed
to carry voice, high speed data and video traffic at data transmission rates of
up to 2.4 terabits per second. The joint venture has announced that this high
capacity fiber optic link between Europe and the United States, which is called
FLAG Atlantic-1, is expected to begin offering unprotected services in the first
quarter of 2001 and fully protected services in the second quarter of 2001. The
joint venture plans to offer a direct link between the New York City area,
London and Paris.

     On October 13, 1999, we announced that we had committed to purchase one
dedicated fiber pair on FLAG Atlantic-1. By owning this fiber pair, we will
acquire capacity of 70 gigabits per second upgradeable to a maximum capacity of
400 gigabits per second of fully protected capacity (or 800 gigabits per second
of unprotected capacity) from the New York City area directly to our network in
Europe. This supply of capacity will allow us to accommodate the growing volume
of transatlantic traffic at a competitive low cost base. We expect to commence
service on our fiber pair at the same time that FLAG Atlantic-1 begins offering
services. Finally, we have identified the need to be able to offer services
beyond the New York City area, our current point of presence in the United
States. We therefore expect to lease substantial network capacity connecting
several key U.S. markets by the end of 2000.

  Data- and Web-Hosting Centers

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

     By mid-2000, we expect to establish data and Web-hosting capability in
London, Frankfurt, Paris and Amsterdam. We intend to construct, or arrange for
capacity at, up to nine additional data and Web-hosting centers during the next
two years. These facilities will be specifically designed to offer high speed
access to our network and provide co-location, dedicated and shared data- and
Web-hosting services.

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

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

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

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

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

  Operations, Systems and Support

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

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

     We have, or are in the process of, integrating the various legacy operating
and support systems which we have inherited through our recent acquisitions in
order to form a single, uniform, centralized billing platform that will enable
us to execute our business plan. This platform is being installed in two phases.
The first phase was completed in December 1999 and completion of the second
phase is expected in June 2000.

OUR OPERATIONS IN RUSSIA AND OTHER COUNTRIES OF THE CIS -- GOLDEN TELECOM

     Through our majority owned subsidiary, Golden Telecom, Inc., we provide
telecommunications services to business customers and telecommunications
operators in Moscow, Kiev, St. Petersburg and other major population centers
throughout Russia and other countries of the CIS. The services that Golden
Telecom provides include international long distance services, domestic long
distance services, cellular services, high speed data transmission, Internet
access and local access services. Dedicated and leased capacity supplements our
own infrastructure, allowing us to bypass the severely congested and poorly
maintained local, domestic and long distance circuits of the Russian and
Ukrainian carriers.

     Golden Telecom seeks to integrate and co-market the service offerings of
its subsidiaries, utilizing TeleRoss as the long distance and local access
provider as well as the data communications and Internet access network for
business applications and on-line services, Sovintel as the international
gateway, and Golden Telecom's Mobile Services for additional local access. This
integrated marketing approach enables Golden Telecom to provide comprehensive
telecommunications solutions to multinational corporations operating throughout
Russia and other independent countries of the CIS. In addition, in February
2000,
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Golden Telecom entered into a fifteen-year lease with Sonera Corporation for
broadband fiber optic capacity from Moscow to Stockholm. Golden expects this
link will be operational during the first quarter of 2000. This link will
provide Golden Telecom and its customers with access to complementary broadband
and data networks in Europe and beyond, including our network.

COMPETITION

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

     The markets for managed bandwidth services, local and long distance
telecommunications services, Internet connectivity and related services are
extremely competitive. We anticipate that competition will continue to intensify
as the use of the Internet grows. The tremendous growth and potential market
size of these markets, particularly the e-business services market, has
attracted many new start-ups as well as established businesses from different
industries. We compete primarily on the basis of the pan-European coverage of
our network, the range and quality of services offered, customer service and
price. Competitors may force us to lower our prices or modify our service
offerings to remain competitive.

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

     For our broadband customers, we compete with various telecommunications
companies, including MCI WorldCom, Inc., Viatel, Inc., KPN Qwest B.V., COLT
Telecom Group plc, Level 3 Communications, Inc., Carrier1 International S.A.,
Deutsche Telekom AG, France Telecom S.A., Global Crossing Ltd. and British
Telecommunications plc. Some of these entities have announced plans to
construct, have begun to construct or are operating high bandwidth fiber optic
networks across various European countries and in several European metropolitan
markets and in some cases, provide transatlantic connectivity, in competition
with our network and our planned City Enterprise Networks.

HISTORICAL OVERVIEW

     We were founded in 1983 as a not-for-profit company under the name San
Francisco/Moscow Teleport, Inc. We incorporated as a for-profit corporation in
1986, and reincorporated in Delaware in 1993 and changed our name to Global
TeleSystems Group, Inc. in February 1995. Our principal business office is
located at 4121 Wilson Boulevard, 8th floor, Arlington, Virginia 22203, United
States, and our telephone number is (703) 236-3100.

     From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and
Central Europe and (2) establishing and developing Global TeleSystems Europe
B.V. ("GTS Europe B.V"), formerly known as Hermes Europe Railtel B.V., our
subsidiary which deployed the first high speed fiber optic network across
Western Europe and provides a range of bandwidth and internet protocol services
to traditional and emerging communications companies.
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     After our initial public offering in February 1998, we adapted our strategy
to address the effects of the economic crisis in emerging markets, particularly
Russia, the emergence of the Internet Protocol as a widely accepted transport
protocol and the deregulation of the provision of telecommunications services to
end-users in Western Europe. We sought to build on the success of our
pan-European fiber optic network by developing a plan to provide
telecommunications services directly to businesses and other end-users.
Accordingly, in late 1998 and in 1999, we acquired four companies that provided
such services to businesses and other high usage customers in Western Europe:
GTS (Europe) Ltd. (formerly Esprit Telecom Group plc), NetSource, Omnicom and
InTouch. In addition, in order to position ourselves as a Tier-1 Internet
service provider in Europe and target the higher growth European Internet
market, we acquired Ebone.

     The former Ebone, GTS (Europe) Ltd., NetSource, Omnicom and InTouch
businesses are included within our operations. These acquisitions have provided
us with a significant business customer base and sales and distribution network
across Western Europe, as well as switches, routers and other infrastructure,
and, combined with our Central European operations, position us to offer an
expanded service portfolio of data, Internet and other business applications to
our business customers.

     On September 30, 1999, we contributed all of our Russian and CIS operations
to a newly formed subsidiary, Golden Telecom, Inc., which effected an initial
public offering of its common stock on October 5, 1999. We currently own
approximately 62.6% of the common stock of Golden Telecom.

NETCOM ACQUISITION

     On February 18, 2000, GTS completed its acquisition of Netcom Internet
Limited ("Netcom") for purchase consideration of approximately $91.5 million in
the form of the issuance of our common stock. Netcom is an Internet service
provider in the United Kingdom, which provides dedicated and dial-up Internet
access, Web-hosting, server co-location, Internet protocol virtual private
networks and other services. Netcom currently serves over 3,600 Web-hosting
customers, approximately 600 dedicated and high-speed Internet access customers
and 14,000 subscription-based Internet dial-up Internet access customers. Netcom
had approximately $12 million in revenues in calendar year 1999.

                         LICENSES AND REGULATORY ISSUES

OVERVIEW OF EU TELECOMMUNICATIONS LAW AND POLICY

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

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

     In 1996, the EU adopted the Full Competition Directive, which requires EU
member states to permit the provision of telecommunications services, other than
reserved services, over (1) networks established by the provider of the
services, (2) network infrastructure provided by third parties or (3) by means
of sharing of networks from July 1996. Since then, there has been an increasing
supply of such capacity offered at attractive prices from such alternative
suppliers. The Full Competition Directive also established January 1, 1998 as
the

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date by which all EU member states must remove all remaining restrictions on the
provision of telecommunications services, including voice telephony. A number of
EU member states were granted a delay in implementing the Full Competition
Directive. The only EU member state that is still subject to the derogation is
Greece, whose derogation expires December 31, 2000.

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

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

     In April 1997, the EU adopted a directive on a common framework for general
authorizations and individual licenses in the field of telecommunications
services, including networks. Licenses must be awarded through open,
non-discriminatory and transparent procedures and applications are be required
to be dealt with in a timely fashion. The number of licenses may be restricted
only to the extent required to ensure the efficient use of scarce resources,
such as radio frequencies or numbers.

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

     In September 1998, the EU adopted amendments to its June 1997 directive on
interconnection mandating the introduction of number portability and carrier
preselection (or equal access) by incumbent telecommunications operators with
significant market power by January 1, 2000. In December 1999, the EU Commission
granted the UK a deferment of its obligation to introduce carrier preselection
until April 1, 2000.

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

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

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

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

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     As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services and deploy our network. Local laws and regulations and the
interpretation of such laws and regulations differ significantly among the
jurisdictions in which we operate. For a discussion of the regulatory risks we
face, see "-- Certain Considerations Generally Applicable to Our
Company -- Delays in liberalization of the EU telecommunications market may
adversely affect execution of our business strategy."

NETWORK AND SERVICE LICENSES

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

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

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

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

     Belgium. We have been granted licenses to build and operate our network and
provide managed bandwidth and related services in a zone which includes
approximately 92 population centers in Belgium. Extension of our network,
including deploying City Enterprise Networks, requires previous notification to
the Belgian regulatory authority in order to amend the geographical scope of our
licenses. We have also been granted licenses to provide telephony services
throughout Belgium. The licenses are valid for 15 years from the date of issue.

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

     Denmark. The Danish telecommunications market was fully liberalized in July
1997. Under Danish law, we do not require a telecommunications license to build
and operate our network in Denmark. In addition, we are registered as a provider
of public telecommunications services.

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

     France. The French telecommunications market was fully liberalized in
January 1998. We have licenses to build and operate our network, including City
Enterprises Networks, and provide managed bandwidth and related services in
France. We also have licenses that permit us to provide public telephony
services in France. In addition, we have been granted one of seven available one
digit carrier selection code by the French regulatory authority. In exchange for
the grant of the one digit code, certain network deployment obligations have
been imposed on us. We are now in the process of building out a national network
in France. The licenses are valid for a 15 year period from the date of issue.
Our joint venture Flag Atlantic-1 has applied for a separate license that will
allow it to build and operate its network in France. See "Legal Proceedings."

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

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

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

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

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

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

     Spain. The Spanish telecommunications market was fully liberalized in
December 1998. We have licenses to build and operate our network, including City
Enterprise Networks, and provide managed bandwidth and related services in
Spain. We also hold licenses that allow us to provide public telephony services
in Madrid, Barcelona, Bilbao, Gerona and Valencia. The licenses are valid for 20
years from the date of issue and can be renewed for a maximum of 50 years.

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

     Switzerland. A new Swiss Telecommunications Law entered into force in
January 1998. Although Switzerland is not a member state of the EU, the law
largely mirrors the EU telecommunications liberalization directives. From that
date, the existing voice telephony monopoly was abolished and the provision of
competing services fully liberalized. We have a concession to build and operate
our network, including City Enterprise Networks, and provide managed bandwidth
and related services in Switzerland. We also have a license that permits us to
provide public telephony services in Switzerland. The licenses are valid for 10
years from the date of issue.

     United Kingdom. Since the elimination in 1991 of the UK telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of OFTEL,the UK regulatory authority, to create a competitive
marketplace from which detailed regulation could eventually be withdrawn. The
United Kingdom telecommunications market is liberalized beyond the requirements
of the Full Competition Directive, and most restrictions on competition have
been removed in practice as well as in law. As noted above, the UK has been
granted a deferment of its obligation to introduce carrier preselection until
April 1, 2000. OFTEL is currently in consultation with British
Telecommunications and other interested parties on plans for the sharing of
costs of a temporary carrier preselection solution pending development of a
permanent solution to be phased in by 2001.

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<PAGE>   20

     We have been granted licenses to build and operate our network, including
City Enterprise Networks, and provide our services throughout the United
Kingdom. Our joint venture FLAG Atlantic Limited has received a license that
will allow it to build and operate its network in the United Kingdom. The
license is valid for 25 years from the date of issue.

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

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

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

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

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

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

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

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

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

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

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<PAGE>   21

     We do not require any authorization to provide state-to-state services
within the United States. We expect to be able to obtain any license that may be
required to be issued by a state regulatory commission to provide services
between points within a single state.

     We intend to file additional applications or license extensions authorizing
us to provide our services and deploy and operate our network in anticipation of
service launch in accordance with our network roll-out plan. With the exception
of countries that are members of the EU and whose laws must comply with EU
Directives, many countries have not liberalized their telecommunications sector.
We cannot assure you that they will do so in a timely manner or at all. In
addition, the terms and conditions of our licenses, authorizations or
registrations may limit or otherwise affect our scope of operations. We cannot
assure you that (1) we will be able to obtain, maintain or renew licenses,
authorizations or registrations to provide the services we currently provide and
plan to provide, (2) such licenses, authorizations or registrations will be
issued or renewed on terms or with fees that are commercially viable, or (3) the
licenses, authorizations or registrations required in the future can be obtained
by us. The loss of, or failure to obtain, these licenses, authorizations or
registrations or a substantial limitation upon the terms of these licenses,
authorizations or registrations could have a material adverse effect on us.

  Internet Protocol Transport

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

  Data- and Web-Hosting

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

GOLDEN TELECOM

     Telecommunications operators in Russia are regulated by the Russian
Ministry of Communications, and its subordinated bodies, Gossvyaznadzor and the
State Radio Frequency Commission. As a practical matter, these
telecommunications authorities generally regulate telecommunications operators
within the scope of their authority to issue licenses and permits and conduct
periodical compliance inspections.

     The Communications Law sets out a legal and regulatory framework for the
sector. It also sets forth general principles for the right to carry on
telecommunications activities, describes government involvement in
telecommunications regulation and operation, establishes the institutional
framework involved in regulation and administration of telecommunications, and
deals with various operational matters, such as ownership of networks,
protection of fair competition, interconnection, privacy and liability. Separate
legislation and administrative regulations implement this institutional
framework.

     The Communications Ministry issues licenses to provide telecommunications
services on the basis of a decision by its subordinated body, the Licensing
Commission. The Communications Ministry has generally issued no new licensing
regulations since the enactment of the Communications Law, and in practice the
Communications Ministry continues to issue licenses based on general regulations
applicable to any licensing activity in Russia, except to the extent such
regulations have been modified by licensing regulations with
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<PAGE>   22

respect to cellular services. According to the general licensing regulations,
licenses for rendering telecommunications services may be issued and renewed for
periods which range from 3 to 10 years and several different licenses may be
issued to one person. Under the subsequently adopted cellular licensing
regulations, licenses for rendering cellular services may be issued only on the
basis of a competitive tender for longer periods ranging from five to 15 years.
Once the licenses are received, the licensee is required to register its right
to hold and operate under the license with Gossvyaznadzor, the national
authority responsible for monitoring compliance with regulatory and technical
norms. Renewals may be obtained upon application to the Communications Ministry
and verification by appropriate government authorities that the licensee has
conducted its activities in accordance with the licenses. Officials of the
Communications Ministry have broad discretion with respect to both the issuance
and renewal procedures. The Communications Law and general licensing regulations
provide that a license may not be transferred or assigned to another holder.
Cellular service licenses obtained through competitive tender are freely
assignable.

     Regional authorities also exercise influence in the issuance of AMPS
licenses, partly because AMPS has been designated a "regional standard." In
August 1995, the Russian government created Svyazinvest, a holding company, to
hold the federal government's interests in the majority of Russian local
telecommunications operators. In addition, entities such as Svyazinvest at the
federal level, as well as other entities in Moscow and St. Petersburg and other
administrative regions within Russia, exercise significant control over their
respective local telephone networks and may therefore affect the licensing
process.

     Telecommunications laws and regulations in Ukraine, while relatively less
developed and less comprehensive, are similar in many respects to those of
Russia, but are subject to greater risks and uncertainties. Regulations
currently prohibit foreign entities from directly owning more than 49% of any
telecommunications operating company. Our Ukrainian joint venture agreements
provide Golden Telecom with the option of purchasing an additional 1% of the
cellular network if these rules are liberalized. The Ukrainian government has
imposed substantial frequency permit fees in connection with providing GSM
service in Ukraine, and Golden Telecom (Ukraine) has paid a one-time $2.9
million frequency license fee on Golden Telecom (Ukraine)'s license. We cannot
assure you that additional fees will not be imposed in the future upon the
reissuance and/or renewal of such license or for the continued use of assigned
frequencies, nor that the increase in fees will not be implemented again.
Ukrainian international operators are also required to make yearly investments
into PTSN as a condition of their international licenses. For a comprehensive
discussion of these regulatory risks, see also "Certain Considerations Generally
Applicable to Our Company -- Considerations Related to Golden Telecom -- Turmoil
in Russia and the CIS creates significant uncertainty for Golden Telecom's
operations."

EMPLOYEES

     On December 31, 1999, we had approximately 2,900 employees, excluding
approximately 1,800 persons employed by Golden Telecom. We believe our relations
with our employees are good.

CERTAIN CONSIDERATIONS GENERALLY APPLICABLE TO OUR COMPANY

  Competitors with greater resources may adversely affect our revenues

     The markets for managed bandwidth services, local and long distance
telecommunications services, Internet connectivity and related services are
extremely competitive. The ongoing liberalization of the European
telecommunications market has coincided with technological innovation to create
an increasingly competitive market, characterized by still-dominant incumbent
telecommunications operators as well as an increasing number of new market
entrants. We anticipate that competition will continue to intensify as the use
of the Internet grows. The tremendous growth and potential market size of these
markets, particularly the IP services market, has attracted many new start-ups
as well as established businesses from different industries. We compete
primarily on the basis of the pan-European coverage of our network, the range
and quality of services offered, customer service and price. Competitors have
forced us, and may continue to force us, to lower our prices or modify our
service offerings to remain competitive. We cannot assure you that we will be
able to effectively market our expanded service offerings, keep prices at a
profitable level or attract and

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<PAGE>   23

retain customers. Specifically, prices for domestic and international long
distance calls have decreased substantially over the last few years in most of
our current and potential markets. We anticipate continued pricing reductions by
our competitors, and, accordingly, expect the prices for our bandwidth services
and voice services to continue to decrease for the foreseeable future. Many
competitors have established customer bases and extensive brand name recognition
and have greater financial, management and other resources.

  Competition for customers of our voice, data and Internet services

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

     In the area of e-business services, our current and prospective competitors
include the public telephone operators, other national, regional and local
Internet service providers, long distance and local exchange telecommunications
companies, cable television, direct broadcast satellite, wireless communications
providers and on-line service providers. In addition, several major European
cable companies have announced that they are exploring the possibility of
offering Internet connectivity, relying on innovative technologies to upgrade
their networks. Several announcements have also recently been made by other
alternative service companies approaching the Internet connectivity market with
various wireless terrestrial and satellite-based service technologies.

     Recently, there have also been several announcements regarding the planned
deployment of broadband services for high speed Internet access by
telecommunications companies, including KPN Qwest B.V. and others. These
services would include new technologies such as digital subscriber lines. These
providers have initially targeted the residential consumer. However, it is
likely that their target markets will expand to encompass business customers,
which is our target market. This expansion could adversely affect the pricing of
our service offerings. Moreover, a number of free ISP services have recently
been introduced and some Internet service providers are offering free personal
computers to their subscribers. These trends could have a material adverse
effect on our business, financial condition and results of operations.

  Competition for customers of our broadband services

     With respect to our broadband services, we compete with various
telecommunications companies, including MCI WorldCom, Inc., Viatel, Inc., KPN
Qwest B.V., COLT Telecom Group plc, Level 3 Communications, Inc., Carrier1
International S.A., Deutsche Telekom AG, France Telecom S.A., Global Crossing
Ltd. and British Telecommunications plc. Some of these entities have announced
plans to construct, have begun to construct or are already operating high
bandwidth fiber optic networks across various European countries and in several
European metropolitan markets and in some cases, provide transatlantic
connectivity. These existing and future networks do or will compete with our
network and our planned intracity fiber networks.

OUR COMPETITIVE POSITION AND ABILITY TO PROVIDE SERVICES MAY BE COMPROMISED BY
OUR DEPENDENCE ON OTHER TELECOMMUNICATIONS SERVICE PROVIDERS

     We need to enter into interconnection agreements with large established
national carriers operating in our target markets. We also rely on local service
providers to provide local access services to enable our customers to link to
our fiber optic network. We may also need to enter into agreements which permit
us to place our equipment at the facilities of such third parties and/or lease
telecommunications transport capacity from such third parties. Failure to enter
into interconnection and other agreements which provide satisfactory pricing and
other terms could affect our ability to compete in a targeted market. In
addition, we have experienced delays

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<PAGE>   24

in provisioning of local access services to enable our customers to connect to
our network. We continue to experience provisioning delays that will delay our
ability to provide services contracted for by the customer and therefore defer
our recognition of revenue to later periods.

WE MAY EXPERIENCE A POTENTIAL LACK OF CUSTOMER DEMAND

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

EUROPEAN USE OF THE INTERNET, ELECTRONIC COMMERCE, DATA TRANSMISSION SERVICES,
MULTIMEDIA AND OTHER BANDWIDTH INTENSIVE APPLICATIONS MAY NOT INCREASE AS WE
EXPECT

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

SUBSTANTIAL ADDITIONAL CAPITAL IS REQUIRED TO EXPAND OUR NETWORK

     We will require significant amounts of capital to develop and expand our
network. We expect to incur between $900 million and $950 million through 2000
in additional capital expenditures, including capital lease obligations, to
expand the reach and capacity of our network, construct intracity fiber
networks, deploy data-and Web-hosting centers in our target metropolitan
markets, expand our e-business services offering, and purchase equipment to
upgrade the capacity of the dedicated fiber pair we have purchased on the FLAG
Atlantic-1 transatlantic fiber link. However, the actual amount and timing of
our future capital requirements may differ from our estimates. Thus, additional
financing may be needed to expand the reach and capacity of our network, to
construct our intracity fiber networks, deploy data- and Web-hosting centers,
fund initiatives related to our e-business services offering, to purchase
equipment to upgrade the capacity of the dedicated fiber pair we have purchased
on the FLAG Atlantic-1 transatlantic fiber link and for general working capital
purposes. We cannot assure you that such additional financing will be available
on terms acceptable to us or at all. If we fail to obtain this financing, we
might have to delay or abandon our plans for expanding the reach and capacity of
our network, constructing our intracity fiber networks, deploying data- and
Web-hosting centers, expanding our e-business services offering, and purchasing
equipment to upgrade the capacity of the dedicated fiber pair that we have
purchased on the FLAG Atlantic-1 transatlantic fiber link. Delaying or
abandoning these plans could have a material adverse effect on our financial
condition.

OUR ACTUAL COSTS AND REVENUES MAY VARY FROM WHAT WE EXPECT THEM TO BE

     Our revenues and the costs of expanding the reach and capacity of our
network, constructing our intracity fiber networks, deploying data- and
Web-hosting centers, expanding our e-business services offering, purchasing
equipment to upgrade the transmission capacity of the dedicated fiber pair we
have purchased on the FLAG Atlantic-1 transatlantic fiber link and operating our
business depend upon a variety of factors, including our ability to:

     - Efficiently manage the enhancement of our network and operations;

     - Access markets and attract a sufficient number of customers;

     - Negotiate favorable contracts with suppliers;

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

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

     - Effectively manage our billing and information systems.

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<PAGE>   25

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

     - Regulatory changes;

     - Changes in technology;

     - Increased competition;

     - Strikes;

     - Weather; and

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

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

WE MAY FACE DIFFICULTIES IN INTEGRATING, MANAGING AND OPERATING NEW TECHNOLOGIES

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

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

     If our network is not able to meet its design specifications or if it is
unable to keep pace with technological changes in the telecommunications
industry, our network could become obsolete. Our network utilizes dense
wavelength division multiplexing and synchronous digital hierarchy technology,
another digital transmission standard that facilitates the compatibility of
dissimilar equipment from different vendors. While the currently operational
portion of our network has performed at or above design specifications since
November 1996, our network may not achieve the technical specifications for
which we designed it. Additionally, we may be unable to allocate the funds
necessary to upgrade our network as technological improvements in
telecommunications equipment are introduced. This could harm our competitive
position relative to other more technologically advanced networks.

INTEGRATION OF ACQUISITIONS

     Although we have integrated the management of companies that we acquired
during 1999, GTS (Europe) Ltd. (formerly Esprit Telecom Group plc), NetSource,
Omnicom, and InTouch, we are still in the process of realizing the synergies
that we expected from these acquisitions. There can be no assurance that we will
realize such synergies.

WE MAY ENCOUNTER DELAYS IN IMPLEMENTING KEY ELEMENTS OF OUR BUSINESS STRATEGY

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

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

     - Our plan to construct intracity fiber networks in up to sixteen major
       European cities by year-end 2001;

     - Our plan to establish data- and Web-hosting centers in up to thirteen
       major European cities by year-end 2001;

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<PAGE>   26

     - Our plan to construct an additional ring connecting London, Paris,
       Amsterdam, Frankfurt, Dusseldorf and Brussels;

     - Our plan to expand our offering of e-business services;

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

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

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

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

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

OUR INABILITY TO IDENTIFY FUTURE ACQUISITION OPPORTUNITIES OR ACQUIRE THE
FINANCIAL AND MANAGEMENT RESOURCES TO PURSUE SUCH OPPORTUNITIES MAY HINDER OUR
ABILITY TO EXECUTE OUR BUSINESS PLAN

     Our inability to successfully implement our acquisition strategy may hinder
the expansion of our business and make our services less attractive to customers
seeking a geographically broader network. We believe that additional attractive
acquisition opportunities currently exist in Western and Central Europe and the
United States. We continuously evaluate attractive acquisition opportunities
and, at any given time, may be engaged in discussions with respect to possible
material acquisitions or other business combinations. Although we have
discussions with other companies to assess opportunities on an ongoing basis, we
do not currently have a definitive agreement with respect to any material
acquisition or joint venture. We may be unable to identify, finance and
complete, on acceptable terms, suitable acquisitions, transactions or business
combinations. Furthermore, we may not be able to raise the additional capital
necessary to fund such acquisitions and may have to divert management's
attention and our financial and other resources from other areas.

WE MAY CONTINUE TO HAVE SUBSTANTIAL NET LOSSES INDEFINITELY WHICH MAY MAKE IT
DIFFICULT TO FUND OUR OPERATIONS

     We have historically sustained substantial operating and net losses. If we
do not become profitable in the future, the value of our common stock may fall
and we could have difficulty obtaining funds to continue our operations. We
expect to continue incurring significant operating losses during the next
several years while we expand our operations, infrastructure, service offerings
and customer base in our target markets. In particular, we expect to have
negative cash flow for the 2000 fiscal year.

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

     We are converting the existing billing systems in the various businesses we
have acquired to a new billing system that we believe will provide the
capability and flexibility to support our anticipated growth. If our new billing
and management information systems are not effectively implemented, our call
details may not be accurately recorded and customer bills may not be generated
promptly and accurately. This would adversely impact on our business since we
would not be able to promptly invoice and collect on customer balances due to
us. See "-- Our Network Infrastructure -- Operations, Systems and Support."

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<PAGE>   27

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

     Our success depends on the seamless uninterrupted operation of our network
and on the management of traffic volumes and route preferences over our network.
Furthermore, as we continue to expand our network to increase both its capacity
and reach, and as traffic volume continues to increase, we will face increasing
demands and challenges in managing our circuit capacity and traffic management
systems. Our network is vulnerable to damage or cessation of operations from:

     - Fire;

     - Earthquakes;

     - Severe storms;

     - Power loss;

     - Natural disasters;

     - Damage from human error and tampering;

     - Software defects;

     - Capacity limitations;

     - Breaches of security;

     - Physical break-ins;

     - Intentional acts of vandalism;

     - Telecommunications failures; and

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

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

ALTHOUGH WE HAVE IMPLEMENTED NETWORK SECURITY MEASURES, OUR NETWORK MAY BE
SUSCEPTIBLE TO VIRUSES, BREAK-INS OR DISRUPTIONS

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

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

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

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available, the security and privacy concerns of existing and potential customers
may inhibit the growth of the Internet service industry and our customer base
and revenues.

OUR BUSINESS WILL SUFFER IF WE LOSE KEY PERSONNEL OR FAIL TO ATTRACT AND RETAIN
OTHER QUALIFIED PERSONNEL

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

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

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

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

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

     As of December 31, 1999, we had net operating loss carry forwards for U.S.
federal tax purposes of approximately $183.8 million expiring in 2004 through
2019. We cannot assure you that U.S. tax authorities will allow us to apply
these loss carryforwards, in part or full, to reduce taxes on our future income.
Because of the change in ownership provisions of the Tax Reform Act of 1986, our
ability to use the tax benefits from our net operating loss carryforwards may be
subject to an annual limit.

OUR INFRASTRUCTURE MAY NOT KEEP PACE WITH OUR RAPID GROWTH

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

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

     The revenues generated by transporting traffic in our leased fiber routes
may vary with traffic volumes and prices. Accordingly, if we do not carry enough
traffic volume over the particular route or are unable to charge
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<PAGE>   29

an appropriate price for such traffic, we could fail to generate revenue
sufficient to cover our lease costs, and would therefore incur operating losses
on the particular route or routes. For a more comprehensive discussion of our
network agreements, see "-- Our Network Infrastructure -- Network Agreements."

RISKS ASSOCIATED WITH REGULATORY MATTERS

  Delays in liberalization of the EU telecommunications market may adversely
  affect execution of our business strategy

     A substantial portion of our strategy depends on the timely implementation
of regulatory liberalization of the EU telecommunications market. We may
implement our business plan and make capital expenditures in a given country in
anticipation of regulatory liberalization which may not occur. This
liberalization is occurring in accordance with existing European Commission
directives. Even if an EU member state promptly adopts liberalization measures
in a timely fashion, established national or regional telecommunications
operators, regulators, trade unions and other sources may resist implementing
such measures. Further, our provision of services in Europe and the
implementation of our business plan may be materially adversely affected if any
EU member state imposes greater restrictions on international services between
the EU member state and non-EU countries.

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

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

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

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

     The EU Commission has prepared a proposal for a directive on certain legal
aspects of electronic commerce, which, if adopted by the European Parliament and
Council, would require member states to make certain changes to national laws.
The proposed directive would apply to us and other service providers established
in the EU and aims to establish a consistent legal framework for electronic
commerce within the EU.

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

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<PAGE>   30

     The proposed directive is still under review with member states and it is
impossible to predict whether it will eventually be adopted and, if so, in what
form. Decisions, laws, regulations and other activities regarding regulation and
content liability may adversely affect the development and profitability of
companies offering Internet access services, including us.

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

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

     In October 1999, the EU adopted a directive on data protection which
establishes minimum levels of protection for personal information and imposes
limits on the collection, processing, storage and dissemination of such data
without the subject's consent. The directive is being implemented in EU member
states in various stages. Certain functions that we and our carrier customers
perform (such as storage of routing and billing information) are subject to the
directive. The directive forbids the transfer of personal information collected
in the EU to countries that lack "adequate" privacy protection. At the moment,
the United States is not judged to have "adequate" privacy protection. The EU
and U.S. authorities are currently holding discussions aimed at resolving this
issue and enabling the free circulation of personal information between the EU
and the United States. However, if these discussions are not successful, there
is a possibility that the movement of certain types of telecommunications
traffic from the EU to the United States could be disrupted, with consequent
impact on our revenues.

FLUCTUATIONS IN FOREIGN CURRENCIES MAY HAVE AN ADVERSE IMPACT ON OUR FINANCIAL
RESULTS AND MAY MAKE IT MORE COSTLY FOR US TO PAY OUR U.S. DOLLAR-DENOMINATED
DEBT

     Although we report our results in U.S. dollars, a substantial portion of
our sales and some of our costs, assets and liabilities are denominated in
Euros, pounds sterling and other currencies. Changes in foreign currency
exchange rates can reduce the value of our assets and revenues and increase our
liabilities and costs. The weakening of the Euro against the U.S. dollar during
1999 has had the effect of decreasing reported revenues denominated in such
currency when translated into U.S. dollars.

     We have substantial debt denominated in U.S. dollars. However, most of our
revenues are denominated in the Euro and other European currencies. Therefore,
our ability to pay interest and principal on such debt is dependent on the then
current exchange rates between U.S. dollars and the currencies in which our
revenues are denominated. We historically have not used hedging transactions to
limit our exposure to risks from doing business in foreign currencies. In April
1998, our subsidiary GTS Europe B.V. entered into a currency swap contract to
limit its exposure to some if its currency risks. We cannot assure you that
changes in currency exchange rates will not have a material adverse effect on
our business, financial condition and results of operations.

SUBSTANTIAL RESALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE

     We cannot predict what effect future sales of our common stock or the
availability of our common stock for sale would have on the market price for our
common stock. Sales of large numbers of shares of our common stock in the public
market pursuant to effective registration statements under the Securities Act,
or the perception that sales could occur, may have an adverse effect on the
market price for our common stock. We filed, and the SEC has declared effective,
five registration statements covering the resale of our common stock. One
registration statement covers the resale of our convertible bonds due 2000 and
the shares of common stock into which they are convertible. We expect that a
substantial portion of these bonds will be converted to an aggregate of
approximately 10.6 million shares of our common stock as a result of our call on
December 20, 1999 to redeem these bonds on March 20, 2000. An additional
approximately 57.5 million shares are subject to resale under the remaining four
registration statements. Additionally, three registration

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<PAGE>   31

statements on Form S-8 cover the resale of shares of common stock issued to
employees, officers and directors under our employee benefit plans. We are also
required under the Netcom acquisition agreement to file with the SEC and
maintain effective for a period of two years from the closing date of the Netcom
acquisition a registration statement covering approximately 4 million shares of
our common stock that will enable the sellers of Netcom to resell the GTS common
stock issued to them as consideration.

OUR STOCK PRICE HAS BEEN AND CONTINUES TO BE VOLATILE

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

     - Failure to realize projected benefits from our recent acquisitions or
       deliver on announced service innovations;

     - Acquisition-related announcements;

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

     - Changes in government regulations;

     - Fluctuations in our quarterly and annual operating results;

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

     - General market conditions.

WE MAY BE UNABLE TO MEET OUR SUBSTANTIAL DEBT OBLIGATIONS

     We have incurred substantial debt and may incur substantial additional debt
to implement our business plans. Our ability to make principal and interest
payments on our debt, will depend upon, among other things, our future operating
performance. Our future operating performance depends on a variety of factors,
many of which are beyond our control. Because of this uncertainty, we cannot
assure you that we will generate sufficient cash flow to make payments on our
debt. Insufficient future cash flow could impair our ability to raise additional
equity or debt financing to expand the reach and capacity of our network. Our
cash flow could also be insufficient to make principal and interest payments on
our debt. If this happens, we may be required to renegotiate the terms of, or to
refinance, our long-term debt. We cannot assure you that we would be able to
refinance or renegotiate the terms of our debt when required.

     As a result of our current high level of debt, we:

     - Will need significant cash to service our debt, which will reduce funds
       available for operations, future business opportunities and investments
       in new or developing technologies and make us more vulnerable to adverse
       economic conditions;

     - May be more vulnerable to general adverse economic and industry
       conditions;

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

     - May not be able to refinance our existing debt or raise additional
       financing to fund future working capital, capital expenditures, debt
       service requirements, acquisitions or other general corporate
       requirements;

     - May be less flexible in planning for, or reacting to, changes in our
       business and in the telecommunications industry that affect how we
       implement our financing, construction or operating plans; and

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

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<PAGE>   32

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

COVENANTS IN OUR DEBT AGREEMENTS RESTRICT OUR OPERATIONS

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

     - Incurrence of additional debt;

     - Payment of dividends or make certain other restricted payments;

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

     - Disposition of our assets;

     - Entrance into transactions with affiliates; or

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

OUR MANAGEMENT, LEGAL AND FINANCIAL CONTROLS MAY HAVE BEEN INADEQUATE TO ENSURE
THAT WE COMPLIED WITH APPLICABLE LAWS

     Our reporting and control standards may have been insufficient in emerging
markets to ensure that certain practices complied with all applicable laws. If
we or any of our ventures were found to have been involved in unlawful
practices, we or our ventures could be exposed, among other things, to
significant fines, the risk of prosecution and the loss of its licenses. Russia
and the other independent countries of the CIS in which we operate lack
corporate management and financial reporting legal requirements, and have
underdeveloped banking, computer and other internal control systems.
Additionally, we have had difficulty hiring and retaining qualified employees in
these markets. As a result, we have had difficulty in emerging markets:

     - Establishing internal management, legal and financial controls;

     - Collecting financial data;

     - Preparing financial statements, books of account and corporate records;
       and

     - Instituting business practices that meet Western standards.

     In light of these circumstances, in the second half of 1996 we increased
our efforts to improve our management and financial controls and business
practices. In early 1997, we retained special outside counsel to conduct a
thorough review of our business practices in the emerging markets in which we
operate. In addition, in June 1999, our special counsel completed an update of
the 1997 review in Russia and Ukraine. Neither the review nor the update
identified any violations of law that we believe would have a material adverse
effect on our or Golden Telecom's financial condition. However, we cannot ensure
that all potential deficiencies have been properly identified or that
governmental authorities will not disagree with our assessment. If our or Golden
Telecom's control procedures and compliance programs are not effective or if
governmental authorities determine that we or Golden Telecom have violated any
law, depending on the penalties assessed and the timing of any unfavorable
resolution, our or Golden Telecom's future results of operations and cash flows
could be materially adversely affected.

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<PAGE>   33

CERTAIN CONSIDERATIONS RELATED TO GOLDEN TELECOM

  Turmoil in Russia and the CIS creates significant uncertainty for Golden
  Telecom's operations

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

  Continuing political instability in the countries where Golden Telecom
  operates could depress foreign and local investment and spending, which could
  adversely affect its results of operations

     Since the dissolution of the Soviet Union in December 1991, Russia and
Ukraine have been undergoing significant political and economic transformation,
the result of which is a generally unstable political climate characterized by
frequent changes in governments, political gridlock in the legislative process,
widespread corruption among government officials and a significant rise in
organized crime and other criminal activity.

     This political and economic instability in Russia, Ukraine and the other
countries where Golden Telecom operates could disrupt the direction and the pace
of political and economic reforms. Such a disruption could discourage foreign
and local investment and spending, in which case demand for Golden Telecom's
services could decrease and Golden Telecom's results of operations could
deteriorate. If this were to occur, then the value of our investment in Golden
Telecom could deteriorate and the market price of our stock could decrease.

     In addition, a dramatic change in government policies permitting foreign
investment or the privatization of the telecommunications industry could also
have a material adverse effect on Golden Telecom's operations.

  Economic instability in Russia and Ukraine could adversely affect the demand
  for Golden Telecom's services and its ability to collect on invoices

     Since August 1998, the Russian and Ukrainian economies have remained in a
depression that has been exacerbated by political instability. If the political
situations in these countries do not stabilize and their economies do not
strengthen, we expect that demand for Golden Telecom's services will remain
depressed. The failure of the Russian and Ukrainian economies has also weakened
the financial condition and the results of operations of many of Golden
Telecom's customers. As a result, some of these customers have been unable to
pay Golden Telecom's invoices, and Golden Telecom's revenues have suffered
accordingly.

  The Russian banking crisis could adversely affect Golden Telecom's ability to
  convert rubles to hard currency and manage cash flows

     The instability of the ruble and the institution of further restrictions on
certain foreign exchange payments could negatively affect our ability to convert
rubles into foreign currency and transfer foreign exchange payments out of
Russia. Through Golden Telecom, we have earned and continue to earn significant
revenue in Russia. The value of the ruble against the U.S. Dollar, however, has
steadily declined. As a result of the August 17, 1998 decision by the Russian
Government and the Central Bank of Russia to devalue the ruble and its
aftermath, the value of the ruble against the U.S. Dollar has fallen even more
significantly, negatively affecting Golden Telecom's financial performance.
During the quarter ended September 30, 1998, Golden Telecom recorded a $13.1
million pre-tax charge, the largest portion of which consisted of foreign
currency exchange losses on Golden Telecom's net monetary assets that are
denominated in rubles. Since the August 17th decision, the Russian authorities
have been unable to maintain a stable exchange rate. Thus, an additional
significant and sudden decline in the value of the ruble might occur which could
negatively affect Golden Telecom's financial performance and require Golden
Telecom and us to record another significant pre-tax charge.

     Golden Telecom's ability to hedge against further declines in the values of
the ruble by converting to other currencies is significantly limited. The ruble
is generally non-convertible outside Russia. Within Russia, the market for
converting rubles into other currencies is limited and is subject to rules that
restrict the purposes for which conversion and payment are allowed. This market
may become even more restricted or may cease to exist as a result of policies
the Russian government may implement.

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     The 90-day moratorium that the August 17th decision imposed on certain
foreign exchange payments delayed transfers of funds. Although the 90-day
moratorium has expired, it could be renewed or established in another form if
the Russian government and Central Bank anticipate further liquidity crises. Any
delay in converting rubles into foreign currency to make a payment or delay in
the transfer of such foreign currency could have a material adverse effect on
operations.

     Golden Telecom manages intercompany liquidity through a cash collateralized
debt facility offered through a Western bank operating under a Russian banking
licence. If Golden Telecom loses access to this or a similar hard currency
facility, its ability to manage its liquidity position and foreign exchange risk
may suffer.

  The reorganization of the Russian and Ukrainian telecommunications industries
  may create stronger competition for Golden Telecom

     Russia

     The Russian government has reorganized the telecommunications industry so
that one entity, Svyazinvest, controls Rostelecom, Golden Telecom's partner in
Sovintel, and most of Golden Telecom's other principal joint venture partners.
According to recent reports in the Russian business press, Rostelecom is
proposed to be merged with Svyazinvest. This reorganization could make it more
difficult for Golden Telecom to attract and retain customers because:

     - Rostelecom may exercise its influence in Svyazinvest to cause regional
       telephone companies to route domestic and international traffic
       originating in the regions through Rostelecom rather than through Golden
       Telecom;

     - Golden Telecom's business relationships with its joint venture partners,
       which make up a major component of our business strategy in Russia, may
       suffer; and

     - The effective consolidation of Rostelecom with Golden Telecom's joint
       venture partners would create greater competition for Sovintel and Golden
       Telecom's regional TeleRoss ventures.

     Ukraine

     In preparation for a large-scale privatization, the Ukrainian government
has reorganized the state telecommunications sector so that Ukrtelekom, the
state telecommunications operator, holds all the government's interests in the
telecommunications industry. Furthermore, the Ukrainian government has been
negotiating with the foreign partners of Utel, its joint venture which provides
international and domestic long distance services, to buy out their interests in
the company. It is anticipated that after the foreign partners are bought out,
Utel would then merge with Ukrtelekom.

     The emergence of a single powerful Ukrainian telecommunications provider
could make it more difficult for Golden Telecom to attract and retain customers
because:

     - A single Ukrainian operator with political connections would be more
       likely to be able to influence the Ukrainian government to create
       favorable market conditions for itself and cause unfavorable conditions
       for Golden Telecom;

     - The new company is likely to become a stronger competitor;

     - Golden Telecom's ability to negotiate reasonable interconnection rates
       may suffer; and

     - Any subsequent privatization of Ukrtelekom may bring in strong management
       and resources from a major Western telecommunications operator,
       increasing its competitive strengths.

  More restrictive Russian and Ukrainian telecommunications policies could
  constrain Golden Telecom's operations

     Russian and Ukrainian telecommunications regulations govern the issuance
and continuing validity of Golden Telecom's licenses and the terms and
conditions under which it provides services. Changes to these

                                       33
<PAGE>   35

regulations may make it prohibitively expensive for Golden Telecom to provide
services and could have a material adverse effect on Golden Telecom's results of
operations.

     Russia's parliament recently adopted legislation which, if implemented,
could restrict foreign ownership of telecommunications operators if necessary to
protect the social order and national security. Any change to current government
regulations or policies that negatively affects Golden Telecom's licenses or its
ability to obtain licenses in the future would restrict our operations in
Russia.

     Ukrainian regulatory authorities have established mandatory tariff
guidelines for wireline services. Golden Telecom's pricing structure in its
wireline business in Ukraine is in excess of the limits established in the
mandatory guidelines. Any enforcement action undertaken in regard to the pricing
guidelines by Ukrainian authority could result in fines or in the suspension or
revocation of its Ukrainian licenses.

     Ukrainian legislation prohibits the establishment and operation of
telecommunications ventures that are more than 49%-owned by foreign investors.
Golden Telecom does not believe that this prohibition extends to indirect
investment by a foreign entity through a wholly owned Ukrainian subsidiary.
Golden Telecom's investments in Golden Telecom (Ukraine) are made both directly
through a foreign company and indirectly through a wholly owned Ukrainian
subsidiary. In connection with the initial public offering of common stock of
Golden Telecom, its partner in Golden Telecom (Ukraine), an affiliate of ING
Barings, contributed to Golden Telecom its interest in Golden Telecom (Ukraine)
in exchange for approximately 420,000 newly issued shares of Golden Telecom. As
a result, Golden Telecom's direct and indirect investment in Golden Telecom
(Ukraine) has increased to 69%. If Ukrainian authorities determine that the
prohibition against foreign participation extends to indirect holdings, then
Golden Telecom would be in violation of this legislation. The consequences of
this violation are unpredictable and may include license suspension or
revocation, or an order to divest a portion of Golden Telecom's holdings. For a
more comprehensive discussion of regulatory issues in Russia and other
independent countries of the CIS, see "-- Licenses and Regulatory
Issues -- Golden Telecom."

  Golden Telecom may be unable to enforce its rights due to confusion in
  Russia's laws and legal structures

     The current confusion with the Russian and CIS legal structure makes it
difficult to know if Golden Telecom would be able to enforce its rights in
disputes with its joint venture partners or other parties, or if Golden Telecom
is in compliance with all applicable laws, rules and regulations. Furthermore,
the dispersion of regulatory power among a number of government agencies in
Russia and the other independent countries of the CIS has resulted in
inconsistent or contradictory regulations and unpredictable enforcement. The
Russian and other CIS governments have rapidly introduced laws and regulations
and have changed their legal structures in an effort to make their economies
more market-oriented, resulting in considerable legal confusion, especially in
areas of the law that directly affect Golden Telecom's operations. We cannot
assure you that local laws and regulations will become stable in the future.
Golden Telecom's ability to provide services in Russia and the other independent
countries of the CIS could be adversely affected by difficulties in protecting
and enforcing its rights and by future changes to local laws and regulations.

  Corruption and organized crime in Russia and Ukraine may adversely affect
  Golden Telecom's operations

     Russia and Ukraine are both plagued with widespread corruption and criminal
activity. High levels of corruption exist among government officials and among
commercial enterprises in which the state has an ownership interest. So long as
organized crime in Russia and Ukraine remains pervasive, we believe Golden
Telecom's employees may be subjected to threats of violence, or property may be
damaged, or both.

  Golden Telecom's Russian and Ukrainian tax burdens may be significantly
  greater than currently anticipated

     Russia

     It is possible that Golden Telecom's Russian taxes may be greater than the
estimated amount that Golden Telecom and we have expensed to date and accrued on
our balance sheets. The Russian tax system

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<PAGE>   36

has many uncertainties and Russian tax authorities have become increasingly
aggressive in their interpretation of the tax law, and in their enforcement and
collection activities. Any additional tax liability, as well as any unforeseen
changes in the tax law, could have a material adverse effect on the future
results of operations or cash flows of Golden Telecom's Russian operations in a
particular period. Russian tax authorities are conducting an examination of
Golden Telecom's potential tax liability in connection with some of its cellular
operations. We cannot assure you that this examination will not result in a fire
or a revocation, suspension or cancellation of Golden Telecom's licenses.

     Ukraine

     Ukrainian tax law is similarly unpredictable. Sudden shifts in tax law and
policy and retroactive legislation are common. Recent decisions by the tax
authorities may subject Golden Telecom to significantly higher tax liability
from Ukranian currency exchange gains.

  Russian and Ukrainian legislation may not adequately protect against
expropriation and nationalization

     The governments of Russia and Ukraine have enacted legislation to protect
foreign investment and other property against expropriation and nationalization.
In the event that such property is expropriated or nationalized, legislation
provides for fair compensation. However, we cannot assure you that such
protections would be enforced. This uncertainty is due to several factors,
including:

- the lack of state budgetary resources;

- the apparent lack of political will to enforce legislation to protect property
  against expropriation and nationalization;

- the lack of an independent judiciary and sufficient mechanisms to enforce
  judgments; and

- widespread corruption among government officials.

     Expropriation or nationalization of Golden Telecom's business would be
detrimental to our and Golden Telecom's operations.

  Broad discretion of Russian and Ukrainian regulators results in inconsistent
  legislation and unpredictable enforcement

     The dispersion of regulatory powers among a number of government agencies
in Russia and Ukraine has resulted in inconsistent or contradictory regulations
and unpredictable enforcement. This situation has made it difficult for Golden
Telecom to comply with all laws and regulations that appear to apply to Golden
Telecom and has resulted in unpredictable regulatory enforcement. For example,
pursuant to the Russian Communications Law, Goskomsvyaz, the State Committee for
Telecommunications, has authority to regulate and control the development of the
communications industry in Russia. However, there is additional legislation that
recognizes and defines the roles of other regulatory organs.

     The Russian Communications Law requires any entity that offers any
communications service to obtain the appropriate license in accordance with the
Communications Law and other applicable licensing regulations. A similar
licensing regime exists in Ukraine. However, neither the Communications Law nor
applicable regulations in Russia or Ukraine provide clear guidelines for the
issuance or extension of a license, and state agencies exercise broad discretion
when determining whether to approve a license application, as well as the terms
and conditions of any license. Such broad discretion in the issuance of licenses
may result in arbitrary decision making and may also give rise to opportunities
for corruption.

     The Ukrainian regulatory agency requires that the terms of international
licenses include provisions requiring licensees to pay unspecified annual
amounts into local network development. The required amount of investment may be
substantial, and we cannot predict whether failure to comply will lead to the
revocation of Golden Telecom's license.

  Golden Telecom's relationships with its joint venture partners limit its
  independence and flexibility

     Golden Telecom depends to a significant degree on local partners in its
joint ventures to provide it with interconnection with local networks,
regulatory and marketing expertise, and familiarity with the local

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business environment. They also help to facilitate the acquisition of necessary
licenses and permits. As a result, any significant disruption in Golden
Telecom's relationship with these parties could make it more difficult for it to
expand its operations and to maintain its existing services.

     Under the terms of some of Golden Telecom's joint venture agreements, it
has the right to nominate key employees, direct operations and determine
strategies for these joint ventures. However, its partners in some ventures,
particularly in its wireless operations, have the ability to frustrate its
exercise of these rights. Significant corporate decisions by most ventures, such
as approving budgets and business plans, declaring and paying dividends, and
entering into substantial transactions, effectively require the consent of
Golden Telecom's local partners. Moreover, Golden Telecom would prefer not to
take significant actions without the consent and support of its partners.
Accordingly, Golden Telecom does not have unilateral control over the operations
of its joint ventures.

     In addition, Ukrainian legislation restricts the level of foreign ownership
in the telecommunications industry. These regulations may restrict Golden
Telecom's ability to increase its holdings in ventures and increase its reliance
on local partners who may lack significant financial resources and may be unable
to meet capital calls at the level of their ownership interests. For a
discussion of these joint ventures, see "-- Our Operations in Russia and Other
Countries of the CIS-Golden Telecom."

  Government interaction with our or Golden Telecom's current or former partners
  could have adverse spillover effects on Golden Telecom

     The interactions between government authorities and our or Golden Telecom's
past or current partners may create problems for us and for Golden Telecom. For
example, we are aware that U.S. and Russian authorities may be reviewing the
activities of our former partners in GTS-Vox, the holding company which formerly
owned Golden Telecom's interest in TCM. We and certain of our and Golden
Telecom's employees have been requested by such governmental authorities to
provide information as part of those inquiries, including in connection with a
U.S. grand jury investigation. The authorities' inquiries have raised issues
about the formation of TCM and the sale of the interest in GTS-Vox to us,
including issues concerning Russian anti-monopoly and securities filings and the
commercial relationship between TCM and the local telephone network in Moscow.
Golden Telecom's involvement in the authorities' review of its former partners'
activities could result in a diversion of Golden Telecom's management's time and
resources or a deterioration in its relationship with our partners. In addition,
the review could lead to the imposition of administrative fines or other
penalties and forfeitures of assets or our ownership interest in TCM.

  Golden Telecom's partners are often also its competitors

     Notwithstanding Golden Telecom's agreements with its joint venture
partners, they sometimes compete directly with its joint ventures. Competition
with its joint venture partners in the same markets may create conflicts of
interest and may result in a loss of customers. For example, Golden Telecom's
partner in Sovintel, Rostelecom, is the dominant international and domestic long
distance carrier in Russia. Similarly, most of Golden Telecom's regional
partners across Russia offer local and long distance services in competition
with our local joint ventures and TeleRoss, and some of these partners also
offer mobile services in direct competition with some of Golden Telecom's mobile
operations. Golden Telecom's partners in its mobile ventures also sometimes
offer independent mobile services in direct competition with its joint ventures.

     Golden Telecom may consider acquiring some of its partners' interests in
certain joint ventures if it is able to do so within regulatory guidelines and
on commercially attractive terms. If Golden Telecom was to make such
acquisitions, we expect that Golden Telecom would continue to employ local
personnel in order to retain the benefit of their local expertise. After an
acquisition, however, Golden Telecom would be directly competing with a
powerful, formerly state-owned enterprise that had been its partner before
Golden Telecom acquired its interest. Golden Telecom would have to rely on this
partner-turned-competitor to gain access from its networks to customer sites
along the so-called "last mile". It is possible that this competitor would
attempt to create adverse operating conditions for Golden Telecom's business.

                                       36
<PAGE>   38

  Golden Telecom's targeted customers may not trust a privately owned, foreign
  controlled entity for their communications needs

     Prior to 1991, the telecommunications industry in the countries where
Golden Telecom operates was wholly owned and controlled by the state. After
1991, private companies, including foreign controlled companies, entered these
markets as telecommunications service providers. Many potential customers may be
unwilling to entrust their communications system to non-state controlled
companies, and, in particular, to private companies controlled by foreign
investors. Furthermore, state entities that require the types of services that
Golden Telecom offers, such as the Central Bank, may refuse to select a service
provider that is controlled by foreign investors. Because Golden Telecom is
controlled by foreign investors, Golden Telecom may in some instances be unable
to reach its targeted customers.

ITEM 2. PROPERTIES

     We lease office space to serve as sales office and/or administrative
facilities, including our approximately 35,000 square-foot corporate
headquarters in Arlington, Virginia with a ten-year lease expiring October 2009.
We maintain our operational headquarters in London in an approximately 52,000
square-foot facility under a twenty-one year lease expiring December 2020. We
have also entered into a fifteen-year lease for up to 26,000 square feet of
space in New York City to house a switch for our wholesale operations and a
technical operations center. We are initially occupying 15,000 square feet of
this facility, but have committed to lease an additional 11,000 square feet in
fall of 2000.

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

     Global TeleSystems (Europe) Ltd. (formerly Esprit Telecom Group plc) leases
its principal executive offices, located in Reading, United Kingdom, under
long-term leases, which expire 2008. The leases contain a tenant only option to
cancel in March 2003. In addition, it leases property at each of the locations
where it maintains sales offices.

     GTS Europe B.V. has its principal administrative offices and its Network
Operations Center in two adjacent buildings in Hoeilaart, Belgium, just outside
Brussels. The leases on both the buildings expire on June 30, 2005. One of the
buildings has an option to cancel on January 1, 2002 with a penalty of six
months rent. In addition, GTS Europe B.V. has short-term leases expiring on
February 28, 2000 in Rixensart, Belgium and on September 1, 2000 in Kraainem,
Belgium. GTS Europe B.V. has also entered into leases for two additional
buildings in the same complex as its principal offices. GTS Europe B.V.
commenced its occupancy of these buildings in January 2000. These leases run
through January 2009 but may be terminated after six years with six months
notice plus six months rental penalty.

     In addition to the offices in Belgium, GTS Europe B.V. has a leased office
space in Dublin, Ireland, which expires on October 2, 2022, in London, United
Kingdom, which expires in August 2002, in Frankfurt, Germany, which expires in
March 2004 and Madrid, Spain, which expires in January 2004. GTS Europe B.V. and
our various subsidiaries related to our Business Services operations lease
various offices on a short-term basis for regional sales and service personnel.

ITEM 3. LEGAL PROCEEDINGS

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

     In October 1999, Interactive Communications Services (ICS) brought a claim
against our wholly owned subsidiary GTS Carrier Services (Ireland) Limited for
damages alleged to exceed E2.9 million. Although a detailed claim has not yet
been served, ICS has obtained an initial injunction preventing GTS Carrier
Services (Ireland) Limited from suspending or terminating certain
telecommunications services provided to ICS. However, the injunction was
discharged on October 26, 1999 because ICS failed to pay L267,000 to
                                       37
<PAGE>   39

GTS Carrier Services (Ireland) Limited, which was a condition for the injunction
to remain in place. From evidence before the court in connection with that
injunction, it appears that ICS's damages claim relates to an alleged breach of
contract in GTS Carrier Services (Ireland) Limited not commissioning or
connecting telecommunications circuits as quickly as ICS claims GTS contracted
to do. We believe that ICS's claim is without merit.

     On March 26, 1999, we opposed the license fee imposed by the French
regulator as, among other things, contrary to Article 11 of EC Directive 97/13
which requires license fees to cover only the administrative cost of managing
the license. On September 23, 1999, the French regulator informed us that they
rejected our position. On November 24, 1999, we filed a complaint before the
French administrative tribunal opposing the license fee. Under French law, we
would not be required to pay the license fee and the French regulator does not
have the right to terminate our license until such time as a ruling by the
French administrative tribunal is issued. If our claim is rejected in a final
non-appealable judgment, we will be required to pay our license fee in France.
We do not believe that the outcome of this litigation will have a material
adverse effect upon our financial condition.

     In addition, we and our subsidiaries, GTS-Hungaro and GTS-Hungary, are
named as defendants in an action captioned USH Ventures and USH Telecom, L.L.C.
v. Global TeleSystems Group, Inc. and GTS-Hungaro, Inc., Civil Action No.
97C-08-86, commenced in August 1997, which is currently pending in the Superior
Court of the State of Delaware in and for New Castle County. The complaint
alleges breach of contract and tortious interference with a business
relationship. Trial is scheduled for May 2000. While it is not possible at this
time to make a meaningful assessment of the outcome of this litigation, based
upon information currently available and upon consultation with counsel, we do
not believe that the outcome of this litigation will have a material adverse
effect upon our financial condition.

     We and certain of our and Golden Telecom's employees have been requested by
Russian and U.S. governmental authorities to provide information apparently in
connection with inquiries into the activities of the former owners of GTS Vox,
which formerly owned Golden Telecom's interests in TCM, including in connection
with a U.S. grand jury investigation. Their inquiries have raised issues about
the formation of TCM and the sale of the interest in GTS-Vox to us. We have
cooperated and intend to continue to cooperate with any legitimate governmental
inquiries.

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

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None.

                                       38
<PAGE>   40

                                    PART II

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

     Our common stock traded on the Nasdaq National Market from February 5,
1998, the date our initial public offering, to October 25, 1999 under the symbol
"GTSG." Effective and since October 26, 1999, our common stock ceased trading on
the Nasdaq National Market and began trading on the New York Stock Exchange
under the symbol "GTS." The following table sets forth, for the periods
indicated, the high and low closing prices (on the New York Stock Exchange) and
high and low closing prices (on the Nasdaq National Market) of our common stock
as reported on the Nasdaq National Market and the New York Stock Exchange. The
trading prices in the table have been adjusted to reflect our July 1999 two for
one stock split.

<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
1999:
  Quarter ending March 31, 1999.............................  $33.31   $24.43
  Quarter ending June 30, 1999..............................   45.75    27.17
  Quarter ending September 30, 1999.........................   38.93    19.38
  Quarter ending December 31, 1999..........................   36.13    19.81
1998:
  Quarter ending March 31, 1998.............................  $24.50   $12.97
  Quarter ending June 30, 1998..............................   25.63    17.69
  Quarter ending September 30, 1998.........................   32.13    12.25
  Quarter ending December 31, 1998..........................   29.75    10.57
</TABLE>

As of December 31, 1999, there were approximately 421 holders of record of our
common stock.

     We have not paid any cash dividends on our common stock and do not intend
to pay cash dividends in the foreseeable future. In addition, the indenture
governing our 9 7/8% Senior Notes due 2005 currently prohibits the payment of
cash dividends. This indenture contains restrictions against making restricted
payments (in the form of the declaration or payment of certain dividends or
distributions, the purchase, redemption or other acquisition of any of our
capital stock, the voluntary prepayment of pari passu or subordinated
indebtedness and the making of certain investments, loans and advances) unless
no default or event of default exists, the Company's leverage ratio does not
exceed 6.0 to 1.0 and such restricted payments do not exceed certain amounts.

     On June 16, 1999 the Company's stockholders approved an increase in the
Company's authorized common stock from 135 million to 270 million shares. On
July 21, 1999, the Company effected a two-for-one split of its common stock
through the distribution of a stock dividend. All shares and per share amounts
have been restated to reflect the stock split.

     During the year ended December 31, 1999 we issued securities which were not
registered under the Securities Act of 1933, as amended (the "Securities Act")
as follows:

          On October 15, 1999, the Company entered into an exchange agreement
     with all of the minority interest holders of Global TeleSystems Europe
     B.V.'s ("GTS Europe B.V.") common shares and grantees of GTS Europe B.V.
     stock options that provides for the acquisition by the Company of their
     equity interest in GTS Europe B.V. The exchange will take place in up to
     three separate exchanges commencing on October 18, 1999. Pursuant to the
     agreement, the Company will acquire the respective minority interest
     holders' common shares in GTS Europe B.V. that have been held by them for a
     period greater than six months. Pursuant to this agreement, in October
     1999, the Company exchanged 5,985,930 of its common shares for 6,565 of GTS
     Europe B.V.'s common shares. The 5,985,930 shares of common stock were
     issued pursuant to the Regulation D and Regulation S exemptions from
     registration under the Securities Act. Further, minority interest holders
     of GTS Europe B.V. have additional beneficial ownership rights in GTS
     Europe B.V.'s common shares, and common share options, totaling 3,601
     common shares. As stated above, the Company will acquire these GTS Europe
     B.V. common

                                       39
<PAGE>   41

     shares in the future; however, future acquisitions will be based on fair
     values of GTS Europe B.V. and the Company.

          In August 1999, the Company acquired substantially all of the
     outstanding shares of common stock of InTouch Telecom B.V., a company
     organized under the laws of The Netherlands. The Company's purchase
     consideration was comprised of cash and the issuance of 313,868 common
     shares of the Company. The Company's common stock was issued in this
     transaction pursuant to the exemption under Regulation S from registration
     under the Securities Act.

          In June 1999, GTS increased its ownership of GTS Europe B.V. to 95.4%
     by acquiring the remaining shares held by NMBS/SNCB (the "Belgian
     Railway"). The Company issued 2,150,380 shares of its common stock in
     exchange for the Belgian Railway's interest in GTS Europe B.V. The
     Company's common stock was issued in this transaction pursuant to the
     Regulation S exemption from registration under the Securities Act.

          On April 26, 1999, GTS acquired a majority stake in Omnicom, a French
     company, and assumed operational control. On April 27, 1999, GTS initiated
     an offer for the remaining shares of Omnicom. The Company's purchase
     consideration was comprised of cash and the issuance of 3,706,572 common
     shares of the Company. The Company's common stock was issued in this
     transaction pursuant to the exemption under Regulation S from registration
     under the Securities Act.

          On April 19, 1999, we issued, pursuant to the exemptions under Rule
     144A and Regulation S from registration under the Securities Act, $500.0
     million of depositary shares (the "Shares"), each representing 1/100 of a
     share of 7.25% cumulative convertible preferred stock (the "Preferred
     Stock"). Each Share has a liquidation preference of $50 per share. Holders
     of the Shares are entitled to quarterly cash payments of $.90625 per Share
     commencing on June 15, 1999. We realized net proceeds, after underwriting
     discounts and commissions, of $485.0 million.

     During the year ended December 31, 1998 we issued securities which were not
registered under the Securities Act, as follows:

          In connection with the acquisition of NetSource Europe ASA, during the
     fourth quarter of 1998 and first quarter of 1999, we issued 7,868,166
     shares of our common stock to holders of NetSource stock who accepted our
     offer to purchase the NetSource stock owned by such holders. We received
     the NetSource shares tendered as consideration for our common shares. We
     issued the 7,868,166 shares of common stock pursuant to the exemption under
     Regulation S from registration under the Securities Act. Up to 206,834
     additional shares of our common stock may be issued pursuant to this
     transaction.

          During the second quarter of 1998, we issued 673,260 shares of our
     common stock to one of our partners in a business venture ("Seller"), in
     connection with fulfilling our obligations under a 1995 purchase agreement,
     as amended, with the Seller. During the third quarter of 1998, we issued an
     additional 253,718 shares of our common stock and paid $40 million to the
     Seller to purchase their remaining interest in the business venture. We
     issued these shares pursuant to the exemption under Regulation S from
     registration under the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

     The following is a summary of selected historical financial data of the
Company as of and for the five years ended December 31, 1999. The historical
financial data as of December 31, 1999 and 1998 and for the years ended December
31, 1999, 1998, and 1997 have been derived from the historical financial
statements of the Company, which financial statements have been audited by Ernst
& Young LLP, independent auditors, as indicated in their report included
elsewhere herein. The selected financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited Consolidated Financial Statements and
related notes thereto appearing elsewhere in this Report.

                                       40
<PAGE>   42

     The selected financial data presents the restatement of our historical
financial statements for 1998 and prior periods to reflect the business
combination with GTS (Europe) Ltd. (formerly Esprit Telecom Group plc), which
was accounted for as a pooling of interests.

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                               ------------------------------------------------
                                                 1999       1998      1997      1996      1995
                                               --------   --------   -------   -------   ------
                                                     (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                            <C>        <C>        <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
  Revenues...................................  $  852.2   $  372.4   $ 121.4   $  62.5   $ 30.5
  Operating loss.............................    (433.7)    (143.7)    (91.4)    (55.4)   (44.4)
  Loss before extraordinary loss.............    (616.7)    (243.1)   (134.8)    (76.2)   (44.2)
  Extraordinary loss.........................        --      (12.7)       --        --       --
  Net loss...................................    (616.7)    (255.8)   (134.8)    (76.2)   (44.2)
  Preferred Dividends........................      25.7         --        --        --       --
  Net loss applicable to common
     shareholders............................    (642.4)    (255.8)   (134.8)    (76.2)   (44.2)
  Loss per common share:
  Loss per common share before extraordinary
     loss....................................     (3.76)     (1.70)    (1.37)    (1.01)   (0.74)
  Extraordinary loss per share...............        --      (0.09)       --        --       --
  Net loss per common share..................     (3.76)     (1.79)    (1.37)    (1.01)   (0.74)
  Deficiencies of earnings available to cover
     fixed charges(1)........................    (598.8)    (235.3)   (132.3)    (74.8)   (44.2)
OTHER DATA:
  EBITDA(2)..................................  $  (78.4)  $  (64.9)  $ (72.9)  $ (45.7)  $(38.6)
  Net cash used in operating activities......    (330.8)    (120.9)    (52.3)    (42.8)    (5.6)
  Net cash used in investing activities......    (917.0)    (455.9)   (117.6)    (86.4)   (81.0)
  Net cash provided by financing
     activities..............................   1,352.3    1,032.4     468.4     179.0     74.9
BALANCE SHEET DATA (AT END OF PERIOD):
  Cash and cash equivalents..................  $1,082.9   $  998.5   $ 358.4   $  67.9   $ 17.8
  Property and equipment, net................   1,004.5      643.0     260.0      47.0     35.0
  Total assets...............................   4,001.8    2,614.6     876.6     275.1    136.1
  Total debt.................................   2,552.2    1,792.3     645.7      89.3     39.4
  Redeemable preferred stock.................     502.3         --        --        --       --
  Shareholders' equity.......................     128.3      349.9      77.6     128.3     63.9
</TABLE>

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

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

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

                                       41
<PAGE>   43

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

     The following discussion and analysis relates to our financial condition
and results of operations for the three years ended December 31, 1999. This
information should be read in conjunction with the "Selected Financial Data" and
our Consolidated Financial Statements and the notes related thereto appearing
elsewhere in the document.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

     Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Report
including, without limitation, those concerning (i) projected traffic volume,
(ii) future revenues and costs, (iii) heightened competition, (iv) rapid
technological and market change and (v) implementation of our business strategy,
contain forward-looking statements concerning our operations, economic
performance and financial condition. Because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements.

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

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

OVERVIEW

     From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and
Central Europe and (2) establishing and developing Global TeleSystems Europe
B.V. ("GTS Europe B.V."), formerly known as Hermes Europe Railtel B.V., our
subsidiary which deployed the first high speed fiber optic network across
Western Europe and provides a range of bandwidth and Internet Protocol services
to traditional and emerging communications companies.

     After our initial public offering in February 1998, we adapted our strategy
to address the effects of the economic crisis in emerging markets, particularly
Russia, the emergence of the Internet Protocol as a widely accepted transport
protocol and the deregulation of the provision of telecommunications services to
end-users in Western Europe. We sought to build on the success of our
pan-European fiber optic network by developing a plan to provide
telecommunications services directly to businesses and other end-users.
Accordingly, in late 1998 and in 1999, we acquired four companies that provided
such services to businesses and other high usage customers in Western Europe:
Global TeleSystems (Europe) Limited ("GTS (Europe) Ltd."), formerly
                                       42
<PAGE>   44

Esprit Telecom Group plc, NetSource, Omnicom and InTouch. In addition, in order
to position ourselves as a Tier-1 Internet service provider in Europe and target
the higher growth European Internet market, we acquired Ebone.

     The former Ebone, GTS (Europe) Ltd., NetSource, Omnicom and InTouch
businesses are now included in our operations. These acquisitions have provided
us with a significant business customer base and sales and distribution network
across Western Europe, as well as switches, routers and other infrastructure,
and, combined with our Central European operations, position us to offer an
expanded service portfolio of data, Internet and other business applications to
our business customers.

     On September 30, 1999, we contributed all of our Russian and CIS operations
to a newly formed subsidiary, Golden Telecom, Inc., which effected an initial
public offering of its common stock on October 5, 1999. We currently own
approximately 62.6% of the common stock of Golden Telecom.

BUSINESS STRATEGY

     Our goal is to become Europe's premier independent e-business services
provider and to maintain and enhance our position as a leading pan-European
provider of broadband, Internet, data and voice services to communications
carriers, Internet service providers and other high-usage customers. In order to
achieve this goal, we will build on the strengths of our pan-European broadband
fiber optic network, our pan-European IP backbone and our position as a leading
supplier of communications services to businesses, with a sales and distribution
network spanning 79 cities in 18 European countries. The key elements of our
strategy for achieving these goals are as follows:

     - Expand our services portfolio to support the communications and
       e-business activities of our customers;

     - Leverage our Business Services distribution network to further penetrate
       our existing customer base and reach new customers;

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

     - Continue to invest in the reach and capacity of our fiber optic network;

     - Build infrastructure and extend our network closer to our customers by;

      - Expanding and enhancing the transatlantic capacity of our network and

      - Build or deploy data and web-hosting centers to support Web-based
        services.

     - Enhance brand name recognition

GTS (EUROPE) LTD. -- BUSINESS COMBINATION

     The following discussion of our results of operations and liquidity and
capital resource requirements reflect the restatement of our financial results
for 1998 and prior periods as a result of the business combination with Global
TeleSystems (Europe) Limited ("GTS (Europe) Ltd."), formerly Esprit Telecom
Group plc, which we accounted for as a pooling of interests.

                                       43
<PAGE>   45

RESULTS OF OPERATIONS

     The following table sets forth our statement of operations as a percentage
of revenues:

<TABLE>
<CAPTION>
                                                                FOR THE YEAR ENDED
                                                                   DECEMBER 31,
                                                             ------------------------
                                                             1999     1998      1997
                                                             -----    -----    ------
<S>                                                          <C>      <C>      <C>
Revenues...................................................  100.0%   100.0%    100.0%
  Access and network services..............................   61.5     63.9      80.0
  Selling, general and administrative......................   47.7     53.5      80.0
  Depreciation and amortization............................   25.0     21.1      15.2
  Merger and restructuring costs...........................   16.7       --        --
                                                             -----    -----    ------
  Loss from operations.....................................  (50.9)   (38.5)    (75.2)
  Other income (expense):
  Interest, net............................................  (15.8)   (19.1)    (21.9)
  Other income (expense)...................................   (3.6)    (5.5)    (11.8)
                                                             -----    -----    ------
  Net loss before income taxes and extraordinary loss......  (70.3)   (63.1)   (108.9)
  Income taxes.............................................    2.1      2.1       2.1
                                                             -----    -----    ------
  Net loss before extraordinary loss.......................  (72.4)   (65.2)   (111.0)
  Extraordinary loss -- debt refinancing...................     --     (3.4)       --
                                                             -----    -----    ------
  Net loss.................................................  (72.4)%  (68.6)%  (111.0)%
                                                             =====    =====    ======
  Preferred dividend.......................................    3.0       --        --
                                                             -----    -----    ------
  Net loss applicable to common shareholders...............  (75.4)%  (68.6)%  (111.0)%
                                                             =====    =====    ======
</TABLE>

  Year Ended December 31, 1999 Compared To The Year Ended December 31, 1998

     The Company reported a net loss of $616.7 million for the year ended
December 31, 1999, compared to a net loss of $255.8 million in the same period
of the prior year.

     Revenue. Our consolidated revenue increased to $852.2 million for the year
ended December 31, 1999 as compared to $372.4 million for the year ended
December 31, 1998. Significant components of revenue for the year ended December
31, 1999 were Europe ($746.8 million) and Golden Telecom ($97.9 million).
Revenue for the year ended December 31, 1998 was primarily comprised of Europe
($286.6 million) and Golden Telecom ($86.1 million). The growth in revenue in
Europe was primarily attributable to the increase in our customer base, the
expansion of our network and the resulting increased traffic in all of our
operations and acquisitions completed during the year. Additional contributors
to the revenue growth in 1999 are as follows: within Golden Telecom, we followed
the consolidation method of accounting for certain business ventures, whereas in
the first half of 1998, these business ventures were accounted for following the
equity method of accounting.

     Access and Network Services. Our access and network costs consist of costs
associated with providing telecommunications services through our network and
the costs of leased capacity. During 1999 these costs increased to $523.7
million or 61.5% of revenues as compared to $238.1 million or 63.9% of revenues
for 1998. The slight decrease in these costs as a percentage of revenues in 1999
is attributable to the growth in our customer revenue which was partially offset
by increased settlement and interconnect costs paid to third parties and direct
network operating and maintenance costs. We are continuing to incur substantial
capital and operating costs related to the implementation of our business
strategy, including the expansion our network with which we expect to better
serve our customer needs. We expect that these investments will increase our
operating efficiency thereby lowering our unit costs going forward.

     Selling, General and Administrative. Selling, general and administrative
expenses for 1999 increased to $406.9 million or 47.7% of revenues as compared
to $199.2 million or 53.5% of revenues for 1998. The decrease in selling,
general and administrative expenses as a percentage of revenue is attributable
to the growth in our revenue base and our efforts to integrate our business
operations and eliminate redundant costs.

                                       44
<PAGE>   46

The increase in selling, general and administrative expenses in 1999 is
attributable to the following: additional expenses related to acquired entities;
increases in payroll, related costs from the recruitment and hiring of
additional staff associated with business growth; an increase in our sales and
marketing efforts; additional building rent expense related to the increased
office space due to growth in the Company's infrastructure; increased
administrative costs required for our increased customer base and the
development of the Company's new brand identity. We expect to establish sales
offices in additional European cities, which involves incurring substantial
start-up costs. However, we expect to improve our effectiveness and leverage
these expenses as a percentage of revenue.

     Depreciation and Amortization. Depreciation and amortization increased to
$212.8 million or 25.0% of revenues for the year ended December 31, 1999 as
compared to $78.8 million or 21.1% of revenues for the year ended December 31,
1998. The substantial increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of our network
infrastructure that we have undertaken over the past several years.
Additionally, we have experienced an increase in amortization expense associated
with goodwill that has resulted from our acquisition activities. The Company
expects that depreciation expense will continue to increase in subsequent
periods as the Company's network expansion efforts continue.

     Merger and Restructuring Costs. During 1999, we recorded a $142.5 million
charge to earnings attributable to merger and restructuring costs. Of the $142.5
million, $63.7 million, $19.8 million and $59.0 million was recorded in the
first quarter, third quarter and fourth quarter of 1999, respectively.

     The $63.7 million first quarter charge was attributable to the
transactional costs associated with the acquisition and integration of GTS
(Europe) Ltd. (formerly Esprit Telecom plc). Of the $63.7 million, $1.4 million
remains as an accrual at December 31, 1999.

     The $19.8 million third quarter charge was a result of our decision that
the allocation of sufficient resources to support certain of our cellular
ventures in Russia was not consistent with our current strategic plans.
Accordingly, we decided to abandon certain cellular ventures and decided to
cease to provide any further financial assistance to these ventures other than
the assumption of certain debt obligations. We are seeking to sell our ownership
interests in these assets in furtherance of our plan of abandonment. Of the
$19.8 million, $3.3 million remains as an accrual, at December 31, 1999, for
cash payments that we expect to incur as part of our plan of abandonment.

     The $59.0 million fourth quarter charge reflects a charge of $40.1 million
for the integration and rationalization of our switched-voice assets as well as
$18.9 million for certain employee reorganization and severance costs. These
charges were principally a result of the acquisitions and organizational
consolidations that we effected in 1999. Of the $59.0 million, $25.8 million
remains as an accrual, at December 31, 1999, for additional cash payments that
we expect to incur as part of our plan of restructuring.

     In 1998 we recorded a $12.7 million extraordinary charge to earnings
resulting from the early extinguishment of debt obligations. The nature of the
charge is comprised of the write-off of $11.6 million of unamortized debt
discount and $1.1 million of unamortized debt issuance costs that were deferred
as financing costs and were being amortized over the original maturity of the
debt obligations.

     Interest Expense. Interest expense increased to approximately $208.9
million in 1999 from $131.0 million in 1998. This significant increase in
interest expense is attributable to the substantial increase in our outstanding
debt obligations during 1999, (see "Liquidity and Capital Resources" below),
partially offset by an increase in capitalized interest resulting from the
construction of the Company's network. We had outstanding debt obligations of
$2.6 billion and $1.8 billion at December 31, 1999 and 1998, respectively.

     Interest Income. Interest income for 1999 increased to $74.3 million from
$60.0 million in 1998. This increase was due to the interest earned through our
short-term investment of the proceeds received from our financing activities.

     Foreign Currency Loss. We recognized foreign currency losses of $8.9
million in 1999 as compared to $23.2 million in 1998. The losses in 1999 are
primarily attributable to the impact of foreign currency fluctuations on our
unhedged debt obligations. The losses in 1998 were attributable to the
devaluation of the

                                       45
<PAGE>   47

Russian ruble and losses on several forward exchange contracts and the weakening
of the U.S. dollar versus European currencies in the third and fourth quarters
of 1998.

  Year Ended December 31, 1998 Compared To The Year Ended December 31, 1997

     Revenue. Our consolidated revenue increased to $372.4 million for the year
ended December 31, 1998 as compared to $121.4 million for the year ended
December 31, 1997. Significant components of revenue for the year ended December
31, 1998 were Europe ($286.6 million) and Golden Telecom ($86.1 million).
Revenue for the year ended December 31, 1997 was primarily comprised of Europe
($93.3 million) and Golden Telecom ($27.2 million). The growth in revenue was
primarily attributable to the increase in our customer base and resulting
traffic in all of our operations. An additional contributor to the revenue
growth in 1998 was that we followed the consolidation method of accounting for
certain business ventures during the second half of 1998, whereas in 1997, these
business ventures were accounted for following the equity method of accounting.

     Access and Network Services. Our access and network costs consist of costs
associated with providing telecommunications services through our network and
the costs of leased capacity. In 1998 these costs increased to $238.1 million or
63.9% of revenues as compared to $97.1 million or 80.0% of revenues for 1997.
The decrease in telecommunication services as a percentage of revenues in 1998
is attributable to the growth in our customer revenue offset by increased
settlement and interconnect costs paid to third parties and direct network
operating and maintenance costs.

     Selling, General and Administrative. Selling, general and administrative
expenses for 1998 increased to $199.2 million or 53.5% of revenues as compared
to $97.2 million or 80.0% of revenues for 1997. The decrease in selling, general
and administrative expenses as a percentage of revenues in 1998 is attributable
to growth in our customer revenue offset by increases in the number of staff
associated with business growth, as well as administrative and marketing costs
required for our increased customer base.

     Depreciation and Amortization. Depreciation and amortization increased to
$78.8 million or 21.1% of revenues for the year ended December 31, 1998 as
compared to $18.5 million or 15.2% of revenues for the year ended December 31,
1997. The substantial increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of our network
infrastructure that we have undertaken over the past several years.
Additionally, we experienced an increase in amortization expense associated with
goodwill that has arisen from our acquisition activities.

     Interest Expense. Interest expense increased to approximately $131.0
million in 1998 from $39.8 million in 1997. This significant increase in
interest expense is attributable to the substantial increase in our outstanding
debt obligations during 1998.

     Interest Income. Interest income for 1998 increased to $60.0 million from
$13.2 million in 1997. This increase was due to the interest we earned through
our short-term investments that has grown, due to the proceeds of our financing
activities.

     Foreign Currency Loss. We recognized foreign currency losses of $23.2
million in 1998 as compared to $3.4 million in 1997. The losses in 1998 were
attributable to the devaluation of the Russian ruble and losses on several
forward exchange contracts and the weakening of the U.S. dollar versus European
currencies in the third and fourth quarters of 1998.

                                       46
<PAGE>   48

                        LIQUIDITY AND CAPITAL RESOURCES

CORPORATE

     The telecommunications industry is capital intensive. In order for us to
successfully compete, we will require substantial capital to continue to develop
our telecommunications networks, implement our e*Business strategy and meet the
funding requirements of our operations, including losses from operations, as
well as to provide capital for our acquisition and business development
initiatives. We currently expect that during the year 2000, we will incur
between $900 million and $950 million in capital expenditures, including capital
lease obligations, to implement our current strategic capital expenditure plan,
including the transatlantic capacity participation discussed below.

     We are participating in the construction and operation of the FLAG
Atlantic-1 transoceanic cable through our 50% interest in the FLAG Atlantic
Limited joint venture. We have agreed pursuant to the terms of the joint venture
to (1) invest $100 million for our interest in the venture, which is to be paid
in October 2000 and (2) purchase capacity on the fiber cable for $200 million.
As of December 31, 1999 we had paid $60 million for this capacity and will pay
the remaining $140 million at a rate of $20 million per quarter from January
2000 to June 2001.

     In January 1999, GTS Europe B.V. issued $200 million aggregate principal
amount of 10.375% senior notes due 2009 and E85 million (approximately $100
million) aggregate principal amount of 10.375% senior notes due 2006. In
November 1999, GTS Europe B.V. issued E225 million aggregate principal amount of
10.50% senior notes due 2006 and E275 million 11.0% senior notes due 2009. These
new senior notes have substantially the same terms as the senior notes GTS
Europe B.V. issued in January 1999 and August 1997. A subsidiary of our
98.4%-held GTS Europe B.V. subsidiary, is currently engaged in negotiations for
a new credit facility (the "New Credit Facility") with one or more institutional
lenders in an aggregate amount of E500 million which we expect to close by the
end of the second quarter of 2000. Borrowings under the New Credit Facility
would be structurally senior to the senior notes sold in August 1997, January
1999 and November 1999 by GTS Europe B.V.

     We believe that the net proceeds from the issuance of the senior notes
mentioned above, and borrowings under the New Credit Facility, combined with our
existing cash balances and projected internally generated funds, should be
sufficient to fund our currently identified capital expenditures, at least
through December 31, 2000, including capital expenditures and payments on the
long-term fiber lease arrangements on our GTS Europe B.V. network. However, it
is possible that we will seek additional financing in the future. Additionally,
as our business strategy evolves, we continuously evaluate the optimal capital
structure to ensure that it meets our overall corporate strategy.

     The actual amount and timing of our future capital requirements may differ
materially from our estimates. In particular, the accuracy of our estimates is
subject to changes and fluctuations in our revenues, operating costs and
development expenses, which can be affected by our ability to (1) effectively
and efficiently manage the expansion of the GTS Europe B.V. network and
operations and the build-out of our City Enterprise Network infrastructure in
our targeted metropolitan markets, (2) implement our strategy to become a
leading provider of e-business services in Europe, (3) effectively and
efficiently manage the build-out of the FLAG Atlantic-1 transatlantic cable
through our participation in the FLAG Atlantic joint venture, (4) obtain
infrastructure contracts, rights-of-way, licenses, interconnection agreements
and other regulatory approvals necessary to complete and operate the GTS Europe
B.V. network, construct our City Enterprise Network infrastructure and implement
data and Web-hosting capability in London, Amsterdam, Frankfurt, Paris and other
European cities, (5) negotiate favorable contracts with suppliers, including
large volume discounts on purchases of capital equipment and (6) access markets,
attract sufficient numbers of customers and provide and develop services for
which customers will subscribe. Our revenues and costs are also dependent upon
factors that are not within our control such as political, economic and
regulatory changes, changes in technology, increased competition and various
factors such as strikes, weather, and performance by

                                       47
<PAGE>   49

third parties in connection with our operations. Due to the uncertainty of these
factors, actual revenues and costs may vary from expected amounts, possibly to a
material degree, and such variations are likely to affect our future capital
requirements. In addition, if we expand our operations at an accelerated rate or
consummate acquisitions, our funding needs will increase, possibly to a
significant degree, and we will expend our capital resources sooner than
currently expected. As a result of the foregoing, or if our capital resources
otherwise prove to be insufficient, we will need to raise additional capital to
execute our current business plan and to fund expected operating losses, as well
as to consummate future acquisitions and exploit opportunities to expand and
develop our businesses.

LIQUIDITY ANALYSIS

     We had cash and cash equivalents of $1.1 billion and $998.5 million as of
December 31, 1999 and 1998, respectively. We had restricted cash of $312.1
million and $143.4 million as of December 31, 1999 and 1998, respectively, that
represents amounts held in escrow for debt interest payments and amounts to be
paid in connection with the Flag Atlantic Limited joint venture.

     In 1999, 1998 and 1997, we used cash of $330.8 million, $120.9 million and
$52.3 million, respectively, for our operating activities. The significant
increase in cash spending for our operations in 1999 and 1998 is attributable to
the growth of our business operations which has resulted in higher operating
cash costs and accounts receivable carrying balances. We also used cash of
$917.0 million, $455.9 million and $117.6 million for our investing activities
in 1999, 1998 and 1997, respectively. Of the $917.0 million of 1999 investing
activities, $339.4 million of cash was spent on business acquisitions and $386.0
million of cash was spent primarily on building our telecommunications networks.
In 1998 investing activities included $257.4 million spent on business
acquisitions and $231.0 million spent on building our telecommunications network
as compared to $2.4 million and $58.2 million in 1997, respectively. We cannot
assure you that our operations will achieve or sustain profitability or positive
cash flow in the future. If we cannot achieve and sustain operating
profitability or positive cash flow from operations, we may not be able to meet
our debt service obligations or working capital requirements.

     Substantially all of our operations are in Western Europe and therefore our
consolidated financial results are subject to fluctuations in currency exchange
rates. Our operations transact their business in the following significant
currencies: British Pound Sterling, the Russian Ruble and the Euro. For those
operating companies that transact their business in currencies that are not
readily convertible, we attempt to minimize our exposure by indexing our
invoices and collections to the applicable dollar/foreign currency exchange rate
to the extent our costs (including interest expense, capital expenditures and
equity) are incurred in U.S. Dollars. Although we are attempting to match
revenues, costs, borrowing and repayments in terms of their respective
currencies, we have experienced, and may continue to experience, losses and a
resulting negative impact on earnings with respect to holdings solely as a
result of foreign currency exchange rate fluctuations, which include foreign
currency devaluations against the U.S. Dollar. Furthermore, certain of our
operations have notes payable and notes receivable which are denominated in a
currency other than their own functional currency or loans linked to the U.S.
Dollar. We may also experience economic loss and a negative impact on earnings
related to these monetary assets and liabilities.

     We have developed risk management policies that establish guidelines for
managing foreign exchange risk. We are currently evaluating the materiality of
foreign exchange exposures in different countries and the financial instruments
available to mitigate this exposure. Our ability to hedge our exposure is
limited since certain of our operations are located in countries whose
currencies are not easily convertible. Financial hedge instruments for these
countries are nonexistent or limited and also pricing of these instruments is
often volatile and not always efficient. We designed and implemented reporting
processes to monitor the potential exposure on an ongoing basis in 1998. We will
use the output of this process to execute financial hedges to cover foreign
exchange exposure when practical and economically justified.

     In April 1998, we consummated a foreign exchange swap transaction to
mitigate the foreign exchange exposure resulting from the issuance of $265
million senior notes issued by GTS Europe B.V.

                                       48
<PAGE>   50

YEAR 2000 COMPLIANCE

     We initiated a Year 2000 compliance program during 1998 to address the
risks associated with the Year 2000 issue and to avoid material loss or impact
to us or our customers due to these risks. We experienced no substantial
problems relating to the Year 2000 issues. We incurred approximately $4.0
million in costs, $2.8 million of which we incurred during 1999, to ensure that
business would continue without incident after December 31, 1999. We continue to
monitor all of our systems and have accrued a minimal amount to cover costs that
we expect during the first quarter of 2000. We believe that any and all
additional Year 2000 issues or concerns that may arise will be addressed and
corrected by March 31, 2000.

IMPACT OF THE EURO

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Our treasury function manages our funding, liquidity, and exposure to
interest rate and foreign exchange rate risks. Our treasury operations are
conducted within a framework of policies and guidelines authorized by our Board
of Directors. In accordance with our policy, we do not enter into any
transactions of a speculative nature.

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

     Our subsidiary, GTS Europe B.V., has entered into a foreign currency swap
agreement in order to mitigate our exposure on US dollar denominated debt. We
also attempt to mitigate this and other exposures
                                       49
<PAGE>   51

from debt obligations denominated in exposed currencies by maintaining assets in
the exposed currency wherever possible. We find it impractical to hedge all
foreign currency exposure and as a result will continue to experience foreign
currency gains and losses. The introduction of the Euro as a common currency for
members of the European Union occurred on January 1, 1999.

     The following table provides information about our debt obligations that
are sensitive to changes in interest rates.

<TABLE>
<CAPTION>
                                                                                           FAIR VALUE
                              2000    2001   2002   2003   2004    THEREAFTER    TOTAL      12/31/99
                              -----   ----   ----   ----   -----   ----------   --------   ----------
                                                           (IN MILLIONS)
<S>                           <C>     <C>    <C>    <C>    <C>     <C>          <C>        <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  Fixed rate................   93.7   $4.9   $3.7   $3.4   $ 3.0    $2,158.5    $2,267.2    $2,387.7
  Avg. interest rate........    8.1%   8.8%   8.8%   9.7%   11.2%        9.8%         --          --
  Variable rate.............     --   $0.5   $0.5   $0.5   $ 0.3          --    $    1.8    $    1.8
  Avg. interest rate........     --    7.1%   8.4%   8.3%    8.3%         --          --          --
</TABLE>

     The following tables provide information about our derivative financial
instruments and other financial instruments by functional currency and where
applicable, presents such information in US dollar equivalents. The tables
summarize information on instruments that are sensitive to foreign currency
exchange rates, including a foreign currency swap agreement and foreign currency
denominated debt obligations.

                    OPERATIONS WITH EURO FUNCTIONAL CURRENCY

<TABLE>
<CAPTION>
                                                                                         FAIR VALUE
                            2000    2001     2002    2003   2004   THEREAFTER   TOTAL     12/31/99
                            -----   -----   ------   ----   ----   ----------   ------   ----------
                                                         (IN MILLIONS)
<S>                         <C>     <C>     <C>      <C>    <C>    <C>          <C>      <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  US Dollars
     Fixed rate...........     --      --       --     --     --     $465.0     $465.0     $470.0
     Avg. interest rate...     --      --       --     --     --       11.0%        --         --
CURRENCY SWAP AGREEMENTS
RELATED TO LONG-TERM DEBT:
  Receipt of USD
     Notional amount......  $30.5   $30.5   $295.5     --     --         --     $356.5     $286.6
     Avg. contract rate...   1.82    1.82     1.82     --     --         --         --         --
</TABLE>

               OPERATIONS WITH BRITISH POUND FUNCTIONAL CURRENCY

<TABLE>
<CAPTION>
                                                                                            FAIR VALUE
                                   2000   2001   2002   2003   2004   THEREAFTER   TOTAL     12/31/99
                                   ----   ----   ----   ----   ----   ----------   ------   ----------
                                                              (IN MILLIONS)
<S>                                <C>    <C>    <C>    <C>    <C>    <C>          <C>      <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  US Dollars
     Fixed rate.................    --     --     --     --     --      $380.0     $380.0     $377.6
     Avg. interest rate.........    --     --     --     --     --        11.3%        --         --
  Euro
     Fixed rate.................    --     --     --     --     --      $142.4     $142.4     $142.3
     Avg. interest rate.........    --     --     --     --     --        11.2%        --         --
</TABLE>

                                       50
<PAGE>   52

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION FOR THE
COMPANY

                         GLOBAL TELESYSTEMS GROUP, INC.

                          CONSOLIDATED BALANCE SHEETS
                        (IN MILLIONS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1999        1998
                                                              ---------   --------
<S>                                                           <C>         <C>
CURRENT ASSETS
  Cash and cash equivalents.................................  $ 1,082.9   $  998.5
  Accounts receivable, net of allowance for doubtful
     accounts of $44.1 million and $9.5 million,
     respectively...........................................      286.4      174.4
  Restricted cash...........................................      258.5       82.0
  Prepaid expenses and other current assets.................       59.1       38.5
                                                              ---------   --------
          TOTAL CURRENT ASSETS..............................    1,686.9    1,293.4
  Property and equipment:
     Communications equipment...............................    1,025.7      632.2
     Construction in process................................      196.9      104.6
                                                              ---------   --------
                                                                1,222.6      736.8
  Accumulated depreciation..................................     (218.1)     (93.8)
                                                              ---------   --------
     Net property and equipment.............................    1,004.5      643.0
  Goodwill and intangible assets, net of accumulated
     amortization of $141.9 million and $52.5 million,
     respectively...........................................    1,172.9      543.5
  Other assets..............................................      137.5      134.7
                                                              ---------   --------
          TOTAL ASSETS......................................  $ 4,001.8   $2,614.6
                                                              =========   ========

                       LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable..........................................  $   198.6   $  172.9
  Debt and capital lease obligations maturing within one
     year...................................................      122.2       67.0
  Accrued telecommunications expense........................      116.0       25.1
  Other current liabilities.................................      265.9      146.1
                                                              ---------   --------
          TOTAL CURRENT LIABILITIES.........................      702.7      411.1
  Long-term debt and capital leases, less current portion...    2,430.0    1,725.3
  Deferred revenue and other liabilities....................      123.9       74.9
                                                              ---------   --------
          TOTAL LIABILITIES.................................    3,256.6    2,211.3
COMMITMENTS AND CONTINGENCIES
  Minority interest.........................................      114.6       53.4
  Redeemable preferred stock, $0.0001 par value (10,000,000
     shares authorized; 100,000 shares issued and
     outstanding)...........................................      502.3         --
SHAREHOLDERS' EQUITY
  Common stock, $0.10 par value (270,000,000, shares
     authorized; 184,472,884 and 161,466,744 shares issued
     and outstanding, respectively).........................       18.4       16.1
  Additional paid-in capital................................    1,280.8      877.6
  Notes receivable due from shareholder.....................      (10.4)        --
  Accumulated deficit.......................................   (1,160.5)    (543.8)
                                                              ---------   --------
          TOTAL SHAREHOLDER'S EQUITY........................      128.3      349.9
                                                              ---------   --------
          TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY........  $ 4,001.8   $2,614.6
                                                              =========   ========
</TABLE>

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

                                       51
<PAGE>   53

                         GLOBAL TELESYSTEMS GROUP, INC.

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                                1999      1998      1997
                                                              --------   -------   -------
<S>                                                           <C>        <C>       <C>
Revenues....................................................  $  852.2   $ 372.4   $ 121.4
Operating Expenses:
  Access and network services...............................     523.7     238.1      97.1
  Selling, general and administrative.......................     406.9     199.2      97.2
  Depreciation and amortization.............................     212.8      78.8      18.5
  Merger and restructuring costs............................     142.5        --        --
                                                              --------   -------   -------
          Total operating expenses..........................   1,285.9     516.1     212.8
                                                              --------   -------   -------
Loss from operations........................................    (433.7)   (143.7)    (91.4)
Other Income/(Expense):
  Interest, net.............................................    (134.6)    (71.0)    (26.6)
  Foreign currency losses...................................      (8.9)    (23.2)     (3.4)
  Other (expenses)/income...................................     (21.6)      2.6     (10.9)
                                                              --------   -------   -------
                                                                (165.1)    (91.6)    (40.9)
                                                              --------   -------   -------
Net loss before income taxes and extraordinary loss.........    (598.8)   (235.3)   (132.3)
Income taxes................................................      17.9       7.8       2.5
                                                              --------   -------   -------
Net loss before extraordinary loss..........................    (616.7)   (243.1)   (134.8)
Extraordinary loss -- debt refinancing......................        --     (12.7)       --
                                                              --------   -------   -------
Net loss....................................................    (616.7)   (255.8)   (134.8)
                                                              --------   -------   -------
Preferred dividends.........................................      25.7        --        --
                                                              --------   -------   -------
Net loss applicable to common shareholders..................  $ (642.4)  $(255.8)  $(134.8)
                                                              ========   =======   =======
Loss per common share:
  Net loss per share before extraordinary loss..............  $  (3.76)  $ (1.70)  $ (1.37)
  Net loss per share -- extraordinary loss..................        --     (0.09)       --
                                                              --------   -------   -------
  Net loss per share........................................  $  (3.76)  $ (1.79)  $ (1.37)
                                                              ========   =======   =======
Weighted average common shares outstanding..................     170.8     142.6      98.3
                                                              ========   =======   =======
</TABLE>

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

                                       52
<PAGE>   54

                         GLOBAL TELESYSTEMS GROUP, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                                1999      1998      1997
                                                              --------   -------   -------
<S>                                                           <C>        <C>       <C>
Operating Activities
  Net loss..................................................  $ (616.7)  $(255.8)  $(134.8)
Adjustments to Reconcile Net Loss to Net Cash Used in
  Operating Activities:
  Depreciation and amortization.............................     210.8      79.4      24.5
  Equity in losses of ventures, net of dividends received...      16.7       1.3      17.5
  Change in fair value of foreign exchange instruments......     (38.7)     28.7        --
  Merger and restructuring costs............................      83.6        --        --
  Other adjustments.........................................      (6.9)      2.1      20.3
  Changes in assets and liabilities:
     Accounts receivable....................................    (138.5)   (128.3)    (23.1)
     Accounts payable and accrued expenses..................     101.6     115.6      54.1
     Unearned revenue.......................................     112.7      68.7       1.4
     Other changes in assets and liabilities................     (55.4)    (32.6)    (12.2)
                                                              --------   -------   -------
       Net Cash Used in Operating Activities................    (330.8)   (120.9)    (52.3)
Investing Activities:
  Acquisitions, net of cash acquired........................    (339.4)   (257.4)     (2.4)
  Purchases of property and equipment.......................    (386.0)   (231.0)    (58.2)
  Restricted cash...........................................    (173.2)     32.0     (62.9)
  Other investing activities................................     (18.4)       .5       5.9
                                                              --------   -------   -------
       Net Cash Used in Investing Activities................    (917.0)   (455.9)   (117.6)
Financing Activities:
  Proceeds from debt, net of debt issuance costs............     818.3     787.9     384.9
  Net proceeds from issuance of stock and minority shares...     631.0     370.0      86.4
  Repayments of debt........................................     (97.0)   (116.1)      (.1)
  Other financing activities................................        --      (9.4)     (2.8)
                                                              --------   -------   -------
       Net Cash Provided by Financing Activities............   1,352.3   1,032.4     468.4
Effect of exchange rate changes on cash and cash
  equivalents...............................................     (20.1)      2.7      (8.0)
                                                              --------   -------   -------
Net increase in cash and cash equivalents...................      84.4     458.3     290.5
Cash and cash equivalents at beginning of year..............     998.5     540.2      67.9
                                                              --------   -------   -------
Cash and cash equivalents at end of year....................  $1,082.9   $ 998.5   $ 358.4
                                                              ========   =======   =======
Supplemental Disclosure of Cash Flow Information:
  Issuance of common shares or notes for interest in
     business ventures......................................  $  336.6   $  19.5   $   4.1
                                                              ========   =======   =======
  Capitalization of leases..................................  $  126.4   $ 149.4   $ 142.4
                                                              ========   =======   =======
  Conversion of bonds and notes into common shares..........  $   38.5   $  40.6   $   4.3
                                                              ========   =======   =======
</TABLE>

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

                                       53
<PAGE>   55

                         GLOBAL TELESYSTEMS GROUP, INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
                                 (IN MILLIONS)

<TABLE>
<CAPTION>
                                            COMMON STOCK     ADDITIONAL      NOTES                         TOTAL
                                          ----------------    PAID-IN     RECEIVABLE,    ACCUMULATED   SHAREHOLDERS'
                                          SHARES   AMOUNT     CAPITAL     COMMON STOCK     DEFICIT        EQUITY
                                          ------   -------   ----------   ------------   -----------   -------------
<S>                                       <C>      <C>       <C>          <C>            <C>           <C>
Balance at December 31, 1996............   89.9       9.0        264.9           --          (145.6)        128.3
  Proceeds from the sale of common
    stock, net of expenses of $9,850....   15.3       1.5         87.7           --              --          89.2
  Comprehensive Income..................     --        --         (5.7)          --              --          (5.7)
  Net loss..............................     --        --           --           --          (134.8)       (134.8)
                                                                                                          -------
        Total comprehensive income......                                                                   (140.5)
  Other.................................    1.0        .1           .5           --              --            .6
                                          ------   -------    --------      -------       ---------       -------
Balance at December 31, 1997............  106.2      10.6        347.4           --          (280.4)         77.6
  Changes in shareholders' equity for
    GTS (Europe) Ltd. for the three
    months ended December 31, 1997, not
    presented elsewhere.................     .4        --          1.6           --            (7.6)         (6.0)
                                          ------   -------    --------      -------       ---------       -------
Adjusted Balance at December 31, 1997...  106.6      10.6        349.0           --          (288.0)         71.6
  Proceeds from the sale of common
    stock, net of expenses of $22,805...   31.1       3.1        350.8           --              --         353.9
  Exercise of stock options and other
    transactions........................    5.8        .6         15.6           --              --          16.2
  Conversion of notes payable...........    4.1        .4         40.4           --              --          40.8
  Exercise of common stock warrants.....    5.1        .5          (.5)          --              --            --
  Issuance of common stock in connection
    with business combinations..........    8.7        .9        115.2           --              --         116.1
  Comprehensive Income..................     --        --          7.1           --              --           7.1
  Net loss..............................     --        --           --           --          (255.8)       (255.8)
                                                                                                          -------
        Total comprehensive income......                                                                   (248.7)
                                          ------   -------    --------      -------       ---------       -------
Balance at December 31, 1998............  161.4      16.1        877.6                       (543.8)        349.9
  Exercise of stock options and other
    transactions........................    5.0        .5         38.8           --              --          39.3
  Conversion of notes payable...........    3.8        .4         38.1           --              --          38.5
  Issuance of common stock in connection
    with business combinations and
    employment arrangements.............   13.6       1.3        344.9        (10.4)             --         335.8
  Issuance of common stock in connection
    with preferred dividends............     .7        .1         23.3           --              --          23.4
  Comprehensive Income..................     --        --        (41.9)          --              --         (41.9)
  Net loss..............................     --        --           --           --          (616.7)       (616.7)
                                                                                                          -------
        Total comprehensive income......                                                                   (658.6)
                                          ------   -------    --------      -------       ---------       -------
Balance at December 31, 1999............  184.5    $ 18.4     $1,280.8      $ (10.4)      $(1,160.5)      $ 128.3
                                          ======   =======    ========      =======       =========       =======
</TABLE>

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

                                       54
<PAGE>   56

                         GLOBAL TELESYSTEMS GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS OPERATIONS

     Global TeleSystems Group, Inc. ("GTS" or "the Company"), is a provider of
e*Business and borderless broadband services across Europe, serving businesses
and carriers in European countries with a range of broadband, Internet/IP and
voice services. As an industry leader in Europe, the Company operates cross-
border fiber-optic network and a Tier-1 IP backbone. Also, GTS is the majority
owner of Golden Telecom, which offers a variety of fixed-line and mobile
telecommunications services in Russia, Ukraine and other former Soviet nations.

     Effective March 4, 1999, the Company completed its business combination
with Global TeleSystems (Europe) Limited ("GTS (Europe) Ltd."), formerly Esprit
Telecom Group plc, which was accounted for as a pooling of interests.
Accordingly, these financial statements have been restated and are presented as
if the companies have been combined since inception (see Note 3, "Business
Combinations and Venture Transactions").

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     Wholly-owned subsidiaries and majority-owned ventures where the Company has
unilateral operating and financial control are consolidated. Those ventures
where the Company exercises significant influence, but does not exercise
unilateral operating and financial control are accounted for by the equity
method. The Company has certain majority-owned ventures that are accounted for
by the equity method as a result of minority shareholder rights, super majority
voting conditions or other governmentally imposed uncertainties so severe that
they prevent the Company from obtaining unilateral control of the venture. If
the Company has little ability to exercise significant influence over a venture,
the venture is accounted for by the cost method. All significant inter-company
accounts and transactions are eliminated upon consolidation.

     The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures where the Company bears all of the financial risk. When such ventures
become profitable, the Company recognizes 100% of the profits until such time as
the excess losses previously recognized have been recovered.

     Results of subsidiaries acquired and accounted for by the purchase method
have been included in operations from the relevant date of acquisition.

RECLASSIFICATIONS

     Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements in order to conform to the 1999 presentation.

CASH AND CASH EQUIVALENTS

     The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts, and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents. The Company had $312.1 million and $143.4
million of restricted cash at December 31, 1999 and 1998, respectively. The
restricted cash is primarily related to cash held in escrow for contractual
obligations and interest payments associated with the Company's debt
obligations.

                                       55
<PAGE>   57
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

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

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
34, "Capitalization of Interest Costs," the Company capitalizes material
interest costs associated with the construction of capital assets for business
operations and amortizes the costs over the assets' useful lives. The Company
has capitalized interest costs of $13.0 million and $4.9 million during the
years ended December 31, 1999 and 1998, respectively. Prior to 1998, the Company
had no capitalized interest.

GOODWILL AND INTANGIBLE ASSETS

     Goodwill represents the excess of acquisition costs over the fair market
value of the net assets of acquired businesses, and is being amortized on a
straight-line basis over their estimated useful lives, ranging from five to
twenty years. Intangible assets, principally telecommunications service
contracts, licenses and deferred financing costs, are amortized on a
straight-line basis over the lesser of their estimated useful lives, generally
three to fifteen years, or their contractual term. In accordance with Accounting
Principles Board ("APB") Opinion No. 17, "Intangible Assets," the Company
continues to evaluate the amortization period to determine whether events or
circumstances warrant revised amortization periods. Additionally, the Company
considers whether the carrying value of such assets should be reduced based on
the future benefits of its intangible assets.

LONG-LIVED ASSETS

     In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived
assets to be held and used by the Company are reviewed to determine whether an
event or change in circumstances indicates that the carrying amount of the asset
may not be recoverable. For long-lived assets to be held and used, the Company
bases its evaluation on such impairment indicators as the nature of the assets,
the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets at the lowest level for
which identifiable cash flows exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset. The fair value of the asset is measured using
discounted cash flow analysis or other valuation techniques. During 1997, the
Company recorded a write-down of certain long-lived assets. No impairment
expense was recognized in 1999 or 1998.

INCOME TAXES

     The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax basis of
assets and liabilities and the basis as reported in the consolidated financial
statements. The Company does not provide for deferred taxes on the undistributed
earnings of its foreign companies, as such earnings are intended to be
reinvested in those operations permanently.

                                       56
<PAGE>   58
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK SPLITS

     Effective July 21, 1999, outstanding shares of common stock split
two-for-one. All shares and per share amounts have been restated to reflect the
stock split.

FOREIGN CURRENCY TRANSLATION

     The Company follows a translation policy in accordance with SFAS No. 52,
"Foreign Currency Translation," (as amended by SFAS No. 130, "Reporting
Comprehensive Income"). In most instances, the local currency is considered the
functional currency for the Company's subsidiaries and ventures, except for
operations in the CIS, where the U.S. dollar has been designated as the
functional currency. Assets and liabilities of these subsidiaries and ventures
are translated at the rates of exchange at the balance sheet date. Income and
expense accounts are translated at average monthly rates of exchange. The
resultant translation adjustments are included in other comprehensive income, a
separate component of shareholders' equity. Gains and losses from foreign
currency transactions of these subsidiaries and ventures are included in the
operations of the subsidiary or venture.

     For those ventures operating in the CIS, the temporal method for
translating assets and liabilities is used. Accordingly, monetary assets and
liabilities are translated at current exchange rates while non-monetary assets
and liabilities are translated at their historical rates. Income and expense
accounts are translated at average monthly rates of exchange. The resultant
translation adjustments are included in the operations of the subsidiaries and
ventures.

REVENUE RECOGNITION

     The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic that will be neither billed nor collected.
Revenue from service contracts is accounted for when the services are provided.
Billings received in advance of service being performed are deferred and
recognized as revenue as the service is performed.

NET LOSS PER SHARE

     Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed on
the basis of the weighted average number of common shares outstanding plus the
effect of outstanding preferred shares using the "if-converted" method and
outstanding options using the "treasury stock" method. All of the items that
would normally effect diluted earnings would not be considered for dilution
purposes, when the company recognizes a loss for the period, as they are
anti-dilutive.

                                       57
<PAGE>   59
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of the
long-term debt is determined based on quoted market prices. At December 31, 1999
and 1998, the fair value of the Company's fixed rate debt is as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------
                                                       1999                    1998
                                               ---------------------   ---------------------
                                                            CARRYING                CARRYING
                                               FAIR VALUE    VALUE     FAIR VALUE    VALUE
                                               ----------   --------   ----------   --------
                                                               (IN MILLIONS)
<S>                                            <C>          <C>        <C>          <C>
Senior subordinated convertible debentures at
  interest rates ranging from 5.75% to
  8.75%......................................   $  864.4    $  546.0     $851.0      $584.5
Senior nonconvertible debentures at interest
  rates ranging from 9.875% to 11.5%.........    1,683.2     1,685.2      938.1       915.1
</TABLE>

     The recorded amounts for all other long-term debt of the Company
approximates fair value.

OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash and cash equivalents, most of which are
maintained in high-quality financial institutions. The Company extends credit to
various customers and establishes an allowance for doubtful accounts for
specific customers that it determines to have significant credit risk. The
Company provides allowances for potential credit losses when necessary.

     On August 17, 1998 the exchange rate of the Russian ruble, relative to
other currencies, declined significantly. The Company has taken and intends to
continue to take actions that may minimize the unfavorable effect of a continued
ruble devaluation.

DERIVATIVE FINANCIAL INSTRUMENTS

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

     The Company currently accounts for its existing derivatives under SFAS No.
52, "Foreign Currency Translation." In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes a reporting standard for derivative instruments which will require
the Company to record all derivatives as either assets or liabilities and
requires that those instruments are recorded at their fair value. During June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of SFAS No. 133." This
statement defers the effective date of SFAS 133 to 2001. The Company plans to
adopt SFAS No. 133 for fiscal year beginning January 1, 2001. The Company has
not yet determined the impact of the adoption of this statement.

     The Company enters into foreign currency forward contracts to minimize
foreign exchange risk. The Company utilizes foreign currency agreements that are
short term in duration (generally one week or less). As of December 31, 1999,
the Company had no outstanding forward contracts. Additionally, GTS Europe B.V.
maintains one foreign currency swap transaction agreement (see Note 6, "Foreign
Currency Transactions").

                                       58
<PAGE>   60
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK-BASED COMPENSATION

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

USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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

NOTE 3: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS

     During 1999 and 1998 the Company has acquired several businesses and has
also increased its ownership interest in several of its previously existing
ventures by either buying out or acquiring part of the minority shareholders'
interest in these ventures.

     The more significant business combinations and venture transactions are
identified below.

  1999 Business Combinations and Venture Transactions

     GTS Europe B.V.

     The Company increased its ownership in GTS Europe B.V. from 89.9% at
December 31, 1998 to 98.4% at December 31, 1999 by the following transactions:

     On October 15, 1999, the Company entered into an exchange agreement with
all of the minority interest holders of GTS Europe B.V.'s common shares and
grantees of GTS Europe B.V. stock options that provides for the acquisition by
the Company of their equity interest in GTS Europe B.V. The exchange will take
place in up to three separate exchanges commencing on October 18, 1999. Pursuant
to the agreement the Company will acquire the respective minority interest
holders' common shares in GTS Europe B.V. that have been held by them for a
period greater than six months. Pursuant to this agreement and effective October
15, 1999, the Company exchanged 5,985,930 of its common shares for 6,565 of GTS
Europe B.V.'s common shares. The excess of the purchase price paid over the fair
value of assets acquired has been calculated at approximately $133.0 million and
has been reflected as goodwill, which is being amortized over 20 years. Further,
minority interest holders of GTS Europe B.V. have additional beneficial
ownership rights in GTS Europe B.V.'s common shares, and common share options,
totaling 3,600 common shares. As stated above, the Company will acquire these
GTS Europe B.V. common shares in the future; however, future acquisitions will
be based on future market values of GTS Europe B.V. and the Company.

     In June 1999, GTS increased its ownership of GTS Europe B.V. by acquiring
the remaining shares held by NMBS/SNCB (the Belgian Railway). The Company issued
2,150,380 shares of its common stock in exchange for the Belgian Railway's
interest in GTS Europe B.V. The excess of the purchase price paid over the fair
value of assets acquired has been calculated at approximately $75.4 million and
has been reflected as goodwill, which is being amortized over 20 years.

                                       59
<PAGE>   61
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Omnicom

     In April 1999, GTS acquired Omnicom, a French company, for approximately
$320 million in cash and 3,706,572 shares of the Company's common stock. The
excess of the purchase price paid over the fair value of assets acquired has
been preliminarily calculated at approximately $453.4 and has been reflected as
goodwill, which is being amortized over 20 years.

     GTS (Europe) Ltd.

     On March 4, 1999, GTS acquired substantially all of the outstanding
ordinary shares and American Depositary Shares of GTS (Europe) Ltd. Upon
completion of the transaction, the number of shares issued for the outstanding
ordinary shares and American Depositary Shares of GTS (Europe) Ltd. was
32,055,024. The Company accounted for this combination as a pooling of
interests. Accordingly, the Company restated the accompanying financial
statements and financial data to represent the combined financial results of the
previously separate entities for all periods presented.

     GTS (Europe) Ltd. had a fiscal year-end of September 30. The GTS (Europe)
Ltd. statements of operations for the years ended September 30, 1997 and 1996
were combined with GTS's statements of operations for the calendar year ended
December 31, 1997. The three months of operations of GTS (Europe) Ltd. from
October 1, 1997 to December 31, 1997 are not included in any of the statements
of operations presented. Accordingly, an adjustment was made in the consolidated
statements of shareholders' equity for 1997 to include the net income and other
transactions of GTS (Europe) Ltd. for the three months ended December 31, 1997.
On September 24, 1999, GTS (Europe) Ltd. filed an 8-K declaring a fiscal year-
end change from September 30 to December 31.

     Golden Telecom

     On October 5, 1999 Golden Telecom, Inc. ("Golden Telecom"), a then wholly
owned subsidiary of GTS, completed an initial public offering of its common
stock. Golden Telecom was formed to hold GTS's interest in the businesses it
owns and operates in Russia and the CIS. Golden Telecom, through subsidiaries,
is a facilities-based provider of integrated telecommunications services in
Moscow, Kiev, St. Petersburg and other major population centers throughout
Russia, Ukraine and other countries of the CIS. Through the initial and a
secondary public offering, Golden Telecom raised over $50 million from public
investors and approximately $45 million from strategic investors, which was
recorded as minority interest. In addition, GTS contributed $50 million to
Golden Telecom. At December 31, 1999, GTS had a 62.6% ownership interest in
Golden Telecom.

  1998 Business Combinations

     During 1998, GTS acquired substantially all of the outstanding common stock
of Netsource Europe ASA, ("Netsource") and Thyssen Festnetz GmbH's Co. KG
(collectively "Plusnet"). The Company recorded combined goodwill of $318.0
million for these acquisitions.

     Further, in 1999 and 1998, the Company has acquired other less significant
telecommunications businesses offering similar or complementary services to
those offered by the Company. Such business combinations have been accomplished
through the purchase of the outstanding stock or assets of the acquired entity
for cash and shares of GTS stock. The cash portion of these transactions and
acquisitions has generally been financed through the Company's equity and debt
proceeds. The Company has accounted for these transactions and business
combinations following the purchase method of accounting, and as such, any
purchase price paid over net tangible assets acquired has been reflected as
goodwill.

                                       60
<PAGE>   62
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Unaudited pro forma results of operations for the acquisitions would not
have had a material impact on the Company's operating results for the years
ended December 31, 1999 and 1998, and therefore no pro forma information has
been disclosed herein.

     In conjunction with the 1999 and 1998 business combinations, assets
acquired, liabilities assumed and common stock issued were as follows (in
millions):

<TABLE>
<CAPTION>
                                                            1999        1998
                                                           -------     ------
<S>                                                        <C>         <C>
Fair value of assets acquired............................  $  50.6     $ 94.2
Goodwill.................................................    717.2      308.4
Fair value of liabilities assumed........................    (91.8)     (86.0)
Common stock issued......................................   (336.6)     (93.0)
                                                           -------     ------
Net cash paid............................................  $ 339.4     $223.6
                                                           =======     ======
</TABLE>

NOTE 4: COMPREHENSIVE INCOME

     The following table reflects the calculation of comprehensive income (loss)
for GTS:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                        ---------------------
                                                         1999          1998
                                                        -------       -------
                                                            (IN MILLIONS)
<S>                                                     <C>           <C>
Net loss..............................................  $(616.7)      $(255.8)
Other comprehensive income (loss):
  Preferred Dividends.................................    (25.7)           --
  Foreign currency translation adjustments............    (16.2)          7.1
                                                        -------       -------
                                                          (41.9)          7.1
                                                        -------       -------
Comprehensive loss....................................  $(658.6)      $(248.7)
                                                        =======       =======
</TABLE>

NOTE 5: DEBT OBLIGATIONS

     Company debt consists of:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         ---------------------
                                                           1999         1998
                                                         --------     --------
                                                             (IN MILLIONS)
<S>                                                      <C>          <C>
Senior nonconvertible debentures.......................  $1,685.2     $  915.1
Senior subordinated convertible debentures.............     546.0        584.5
Capital lease obligation...............................     283.2        261.2
Other financing agreements.............................      37.8         31.5
                                                         --------     --------
                                                          2,552.2      1,792.3
Less: debt and capital lease obligations maturing
  within one year......................................     122.2         67.0
                                                         --------     --------
          Total long-term debt and capital lease
            obligations................................  $2,430.0     $1,725.3
                                                         ========     ========
</TABLE>

     Debt Obligations of GTS (Parent Company)

     In July 1998, the Company issued aggregate principal amount of $466.9
million of 5.75% convertible senior subordinated debentures (the "Convertible
Debentures due 2010") that mature July 1, 2010. The Convertible Debentures due
2010 are redeemable on or after July 1, 2001 at our option, at redemption prices
ranging from 104.025% to 100.0% of the principal amount, plus accrued and unpaid
interest. The Convertible

                                       61
<PAGE>   63
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Debentures due 2010 are convertible into approximately 17.0 million common
shares at any time prior to maturity or redemption at a conversion price of
$27.525 per common share. Interest is payable semiannually in January and July.
The Convertible Debentures due 2010 are subordinated to all existing and future
senior indebtedness of the Company, except for the Convertible Bonds due 2000,
as defined below, with which they rank pari passu in right of payment.

     In February 1998, the Company issued $105.0 million aggregate principal
amount of 9.875% senior notes due February 15, 2005 (the "9.875% Senior Notes
due 2005"). Approximately $19.6 million of the net proceeds from the sale of
such notes were initially placed in escrow for the first four semiannual
interest payments, commencing August 15, 1998. Interest is payable semiannually
in February and August. The 9.875% Senior Notes due 2005 are senior in rank to
both the Convertible Debentures due 2010 and the Convertible Bonds due 2000.

     In July 1997, the Company issued $144.8 million aggregate principal amount
of convertible senior subordinated bonds ("the Convertible Bonds due 2000") that
mature on June 30, 2000. As a result of the completion of GTS's initial public
offering in February 1998 (the "Stock Offering"), see Note 7, "Shareholders'
Equity," the interest rate on the Convertible Bonds due 2000 will remain at
8.75% until maturity. The Convertible Bonds due 2000 are convertible into 14.5
million common shares at a conversion price of $10.00 per share. During the
twelve months ended December 31, 1999 and 1998, a total of $38.5 million and
$27.2 million, respectively, of the Convertible Bonds due 2000 were converted
into approximately 3.8 million and 2.7 million common shares, respectively of
the Company's common stock. The Bonds are subordinated to all existing and
future indebtedness of the Company, except for the Convertible Debentures due
2010, with which they rank pari passu in right of payment.

     On December 20, 1999, GTS called for redemption on March 20, 2000, all of
the outstanding Convertible Bonds due June 2000. The redemption price of such
bonds is $1,016 per $1,000 principal amount of such bonds, including accrued
interest to the redemption date. There were $79.1 million in aggregate principal
amount of such bonds outstanding at December 31, 1999.

     Debt Obligations of GTS Europe B.V. (formerly Hermes Europe Railtel B.V.)

     In November 1999, our 98.4%-held subsidiary Global TeleSystems Europe B.V.,
formerly Hermes Europe Railtel B.V. ("GTS Europe B.V.") issued E225.0 million
aggregate principal amount of 10.50% Senior Notes due January 15, 2006 (the
"10.5% Senior Notes due 2006") and E275.0 million aggregate principal amount of
11% Senior Notes due January 15, 2009 (the "11% Senior Notes due 2009").
Interest is payable semiannually in December and June. The 10.5% Senior Notes
due 2006 and 11% Senior Notes due 2009 notes were issued pursuant to two
indentures with terms that are substantially similar to the indentures governing
the 11.5% Senior Notes due 2007, which were issued by GTS Europe B.V. in August
1997, and the 10.375% Senior Notes due 2006 and the 10.375% Senior Notes due
2009, which were issued by GTS Europe B.V. in January 1999.

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

     In January 1999, GTS Europe B.V. issued $200 million aggregate principal
amount of 10.375% Senior Notes due January 15, 2009 (the "10.375% Senior Notes
due 2009") and E85 million (approximately

                                       62
<PAGE>   64
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$100 million) aggregate principal amount of Senior Notes due January 15, 2006
(the "10.375% Senior Notes due 2006" and together with the 10.375% Senior Notes
due 2009, the "10.375% Senior Notes due 2006 and 2009"). Interest is payable
semiannually in January and July, commencing July 15, 1999. The 10.375% Senior
Notes due 2009 are redeemable in whole or in part, at our option at any time on
or after January 15, 2004 at a price ranging from 105.188% to 100.0% of the
principal amount, plus accrued and unpaid interest. The 10.375% Senior Notes due
2006 are redeemable in whole or in part, at our option at any time on or after
January 15, 2003 at a price ranging from 105.188% to 100.0% of the principal
amount, plus accrued unpaid interest. GTS may also redeem up to one-third of the
principal amount of the 10.375% Senior Notes due 2006 and 2009 prior to January
15, 2002 at a redemption price equal to 110.375% of the principal amount of the
notes so redeemed, plus accrued and unpaid interest thereon, with the net cash
proceeds of one or more public equity offerings of GTS Europe B.V. or strategic
equity investments of at least $75.0 million, provided, however, that following
such redemption, at least two-thirds of the original principal amount of such
notes remains outstanding.

     In August 1997, GTS Europe B.V. issued $265.0 million aggregate principal
amount of senior notes due August 15, 2007 (the "Senior Notes"). The Senior
Notes pay interest semiannually in February and August at a rate of 11.5%.
Approximately $56.6 million of the net proceeds of the offering of the Senior
Notes was initially placed in escrow for the first four semiannual interest
payments commencing February 15, 1998. GTS may redeem the Senior Notes, in whole
or in part, any time on or after August 15, 2002 at a price ranging from 105.75%
to 100.0% of the principal amount, plus accrued and unpaid interest. GTS may
also redeem up to one-third of the principal amount of the Senior Notes at a
price equal to 111.5% of the principal amount prior to August 15, 2000 with net
cash proceeds of a public equity offering of GTS Europe B.V. or strategic equity
investments with gross proceeds of at least $75.0 million, provided, however,
that at least two-thirds of the principal amount of the Senior Notes originally
issued remain outstanding after each such redemption.

     The debt obligations of GTS Europe B.V. described above represent senior
obligations of GTS Europe B.V. and are structurally senior to the debt
obligations of GTS described above.

     Debt Obligations of GTS (Europe) Ltd. (formerly Esprit Telecom Group plc)

     In June 1998, our wholly owned subsidiary Global TeleSystems (Europe)
Limited, formerly Esprit Telecom Group plc, ("GTS (Europe) Ltd.") issued $150.0
million and DM 150.0 million aggregate principal amount of Senior Notes due June
15, 2008 (the "Senior Notes due 2008"). The Senior Notes due 2008 pay interest
semi-annually in June and December at a rate of 10.875% and 11.00% respectively.
GTS may redeem the Senior Notes due 2008, in whole or in part, any time on or
after June 15, 2003, at a price ranging from 105.438% to 100.0% of the principal
amount, plus accrued and unpaid interest. GTS may redeem, at our option, up to
35% of the principal amount of each series of the 11.5% Senior Notes due 2007,
defined below, and Senior Notes due 2008 prior to December 15, 2000 and June 15,
2001, respectively, at prices equal to 111.50% of the principal amount of the
11.5% Senior Notes due 2007, and 110.875% of the principal amount of the Senior
Notes due 2008, plus other amounts, with the net cash proceeds of public equity
offerings of GTS (Europe) Ltd. or strategic equity investments of at least $50
million, provided that following such redemption at least 65% of the principal
amount of the notes remain outstanding.

     In December 1997, GTS (Europe) Ltd. issued $230.0 million and DM 125.0
million aggregate principal amount of senior notes due December 15, 2007 (the
"11.5% Senior Notes due 2007"). The 11.5% Senior Notes due 2007 rank pari-passu
with ordinary creditors with interest payable semi-annually in June and December
at a rate of 11.5%. Approximately $72.0 million and DM 36.0 million of the net
proceeds of the offering of the 11.5% Senior Notes due 2007 was initially placed
in escrow for the first six semi-annual payments commencing June 15, 1998. GTS
may redeem the 11.5% Senior Notes due 2007, in whole or in part, any time on or
after December 15, 2002 at redemption prices ranging from 105.75% to 100.0% of
the principal amount, plus accrued and unpaid interest.

                                       63
<PAGE>   65
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The debt obligations of GTS (Europe) Ltd. described above represent senior
obligations of GTS (Europe) Ltd. and are structurally senior to the debt
obligations of GTS described above.

     Certain of the Company's consolidated ventures maintain credit facilities
for their local operations. Borrowings under such credit facilities bear
interest at the prevailing negotiated market rates. GTS (Europe) Ltd. has two
revolving credit lines with available funds of approximately $2.2 million that
were unused at December 31, 1999.

     Aggregate maturities of long-term debt, as of December 31, 1999, are as
follows: 2000 -- $93.7 million, 2001 -- $5.4 million, 2002 -- $4.2 million,
2003 -- $3.9 million, 2004 -- $3.3 million and $2,158.5 million thereafter.

     The Company paid interest of $186.9 million, $124.2 million and $2.2
million in 1999, 1998, and 1997, respectively.

NOTE 6: FOREIGN CURRENCY TRANSACTIONS

     On April 19, 1998, GTS Europe B.V. entered into a foreign currency swap
transaction agreement (the "Swap") with Rabobank International ("Rabo") in order
to minimize the foreign currency exposure resulting from the issuance in August
1997 of $265.0 million aggregate principal amount 11.5% Senior Notes due 2007
(the "Senior Notes"). GTS Europe B.V. remeasured the value of the swap as of
December 31, 1999 and 1998 and the resulting change in value of $39.5 million
and $27.8 million, respectively, has been recorded as a non-current liability on
the balance sheet and recognized as a foreign currency item in the statement of
operations. The foreign currency effect recognized on marking the Swap to its
remeasured value for the years ended December 31, 1999 and 1998 was offset in
the statement of operations by the revaluation of the Senior Notes.

NOTE 7: SHAREHOLDERS' EQUITY

COMMON STOCK

     On June 16, 1999 the GTS's stockholders approved an increase in the
Company's authorized common stock from 135 million to 270 million shares. In
June 1999, the Company's Board of Directors approved a two-for-one split of its
common stock. The stock split was effected by the distribution of a stock
dividend on July 21, 1999 to holders of the Company's common stock at the close
of business on July 1, 1999. All share and per share amounts have been restated.

     In July 1998, the Company completed a secondary public offering of 5.6
million shares of common stock at $22.75 per common share. Net proceeds from the
offering were $118.7 million. In addition, in conjunction with such offering,
shareholders of the Company sold 23.4 million shares of the Company's common
stock. The Company did not realize any of the proceeds of such sale.

     In February 1998, the Company completed an initial public offering of 25.6
million shares of common stock at $10.00 per common share (the "Stock
Offering"). The Stock Offering resulted in the Company's common stock being
listed in the United States on the Nasdaq National Market. Net proceeds from the
Stock Offering were $235.2 million. In October 1999, GTS began trading on the
New York Stock Exchange.

     In February 1999 and June 1998, pursuant to previously issued and redeemed
debt obligations, warrants to purchase 116,260 and 6,666,666 common shares,
respectively, were exercised using a cash-less exercise. In addition, warrants
to purchase 8,772,626 shares of the Company's common stock expire in the first
and second quarters of 2002.

     The Company does not intend to pay dividends on common stock in the
foreseeable future. In addition, certain of the Company's financing agreements
include covenant restrictions precluding the payment of dividends by the
Company.

                                       64
<PAGE>   66
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company has reserved 72,577,381 shares of common stock for issuance
upon conversion of the exercise of outstanding stock options, warrants,
convertible bonds and similar dilutive rights.

PREFERRED STOCK

     In April 1999, the Company issued, for gross proceeds of $500 million in a
private placement, ten million Depositary Shares, each representing 1/100th of a
share of a new series of 7.25% cumulative convertible preferred stock. Net
proceeds of this offering were $485 million, excluding certain transaction
costs. Holders of the Depositary Shares are entitled to a quarterly cash payment
of $0.90625 per Depositary Share (or 7.25% per year per depositary share)
payable on March 15, June 15, September 15 and December 15 of each year
commencing on June 15, 1999. Each Depositary Share will have a liquidation
preference of $50 per share and will be convertible into GTS common stock at
$34.50 per GTS common share. The preferred stock is convertible at any time into
1.45 shares of common stock. GTS may redeem the shares of the convertible
preferred stock, in whole or in part, at its option on or after March 15, 2002.
As of December 31, 1999 and 1998, there were 10,000,000 shares of $0.0001 par
value preferred stock authorized, with rights and preferences to be determined
by the Board of Directors.

NOTE 8: STOCK OPTION PLANS

     The Company applies the provisions of APB No. 25 in accounting for its
stock option incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss for
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss for the years ended December 31, 1999, 1998 and 1997 would have been
approximately $689.0 million, $269.8 million and $142.0 million, respectively.

     The Company maintains the 1992 Stock Option Plan, the Non-Employee
Directors Stock Option Plan and the GTS Equity Compensation Plan (the "Option
Plans"). As of December 31, 1999, the maximum number of shares of common stock
available for grant under the Option Plans was 43.1 million. Except for the
Company's performance based options granted under the 1992 stock option plan,
options granted under the Option Plans issued prior to June of 1999, generally
vest over a three to four-year period from the date of grant and expire ten
years from the date of grant. In 1996 and 1998, the Company had granted options
with vesting terms that provide for vesting within five and six years after the
date of grant, respectively, unless certain performance goals are met, in which
case vesting could occur over a shorter period of time. Effective June 1999,
options granted under the Option Plan generally vest over a three year term with
one-third vesting after one year and one thirty-sixth vesting each month
thereafter. Upon a change of control, as defined in the Option Plans, all
options would immediately vest.

     The fair value of options granted under the GTS plans during 1999, 1998 and
1997 is estimated to be between $1.20 and $38.05, $8.26 and $16.86 and $1.47 and
$3.68 per common share, respectively, on the date of grant using the Black
Scholes option pricing model with the following assumptions: dividend yield of
0% and expected life of three to five years for all periods presented, risk free
interest rates between 4.57% and 6.32% for 1999, between 4.19% and 5.64% for
1998 and 5.74% for 1997, volatility of .75 for 1999 and 1998 grants and .50 for
1997 grants. We determined our volatility factor in 1999 and 1998 based on the
Company's historic stock performance and in 1997 with the assistance of an
investment banker based on peer public companies.

                                       65
<PAGE>   67
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                              ---------------------------------------------------------------------
                                      1999                    1998                    1997
                              ---------------------   ---------------------   ---------------------
                                           WEIGHTED                WEIGHTED                WEIGHTED
                                           AVERAGE                 AVERAGE                 AVERAGE
                                           EXERCISE                EXERCISE                EXERCISE
                                SHARES      PRICE       SHARES      PRICE       SHARES      PRICE
                              ----------   --------   ----------   --------   ----------   --------
<S>                           <C>          <C>        <C>          <C>        <C>          <C>
Outstanding at beginning of
  year......................  18,520,280    $ 8.93    15,449,514    $ 4.10    11,350,512    $3.07
Options granted.............  12,820,630     28.32     9,235,842     13.44     5,561,556     6.03
Options exercised...........   4,594,246      5.21     5,223,982      3.01       359,234     1.60
Options canceled or
  expired...................   2,676,249     15.29       941,094      8.14       893,584     3.58
                              ----------              ----------              ----------
Outstanding at end of
  year......................  24,070,415     19.55    18,520,280      8.94    15,659,250     4.05
                              ==========              ==========              ==========
Options exercisable at year
  end.......................   4,461,025    $ 7.26     5,433,264    $14.35     6,628,991    $2.71
</TABLE>

     The following table summarizes information about stock options outstanding:

<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                  ------------------------------------   ----------------------
                                                 WEIGHTED
                                                  AVERAGE
                                                 REMAINING    WEIGHTED                 WEIGHTED
                                                CONTRACTUAL   AVERAGE                  AVERAGE
    RANGE OF EXERCISE PRICE         NUMBER         LIFE       EXERCISE     NUMBER      EXERCISE
     AT DECEMBER 31, 1999:        OUTSTANDING   (IN YEARS)     PRICE     EXERCISABLE    PRICE
    -----------------------       -----------   -----------   --------   -----------   --------
<S>                               <C>           <C>           <C>        <C>           <C>
$ 0.10 to $5.13................    2,903,486        5.1        $ 3.39     2,262,414     $ 3.47
  6.45 to 10.00................    3,505,462        6.6          7.84     1,599,064       7.72
 12.42 to 19.00................    4,589,409        8.6         13.55       313,199      17.76
 19.38 to 24.92................    1,579,980        8.9         22.20       272,200      22.29
 26.06 to 32.00................   10,269,430        9.5         28.25            --         --
 32.11 to 38.62................    1,222,648        9.5         37.43        14,148      38.13
</TABLE>

     In addition, prior to the establishment of the Option Plans, options were
granted to certain key employees to purchase 2,344,500 shares of the Company's
common stock at an exercise price of $0.265 per share. There are 388,256 of
these options outstanding and fully exercisable at December 31, 1999.

     In the fourth quarter of 1997, GTS Europe B.V. implemented a stock option
plan for its key officers and employees (the "GTS Europe B.V. Plan"). As a
result of issuing options under the GTS Europe B.V. Plan, GTS Europe B.V.
incurred a non-cash charge of approximately $3.7 million, of which $2.6 million
was recorded during 1997 and the remaining $1.1 million was recorded in 1998.

NOTE 9: EMPLOYEE BENEFIT PLAN

     The Company has a 401(k) retirement savings plan (the "Savings Plan")
covering all U.S. citizen employees. The Savings Plan qualifies under section
401(k) of the Internal Revenue Code and as such, participants may defer pretax
income in accordance with federal income tax limitations. The Company provides a
50% matching contribution on the first 5% contributed by the employee. The
Company may also, at its discretion, make non-matching contributions. Both
matching and non-matching contributions by the Company vest after three years of
service. The Company's expense under the Savings Plan was approximately $0.2
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
Company made no discretionary (non-matching) contributions for the years ended
December 31, 1999, 1998 or 1997.

                                       66
<PAGE>   68
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     With respect to certain GTS (Europe) Ltd. employees, the Company is
required to contribute a fixed percentage, based upon the salary earned, to the
employees' nominated pension insurance policy or other pension arrangements.
During the years ended December 31, 1999, 1998 and 1997, the Company incurred
expense of $0.4 million, $1.9 million and $0.3 million, respectively related to
these pension arrangements.

     GTS Europe B.V. established a pension plan in 1995 that covers all GTS
Europe B.V. employees upon twenty-five years of age and at least one year of
service. GTS Europe B.V. has entered into an insurance arrangement (an
investment contract) whereby an insurance provider has undertaken a legal
obligation to provide specific benefits to participants in return for a fixed
premium. As such, GTS Europe B.V. does not bear significant financial risk for
its pension plan. GTS Europe B.V.'s expense under the pension plan was $1.8
million, $1.0 million and $0.7 million for the years ended December 31, 1999,
1998 and 1997, respectively.

NOTE 10: INCOME TAXES

     The components of loss before extraordinary loss and income taxes were as
follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                  ---------------------------
                                                   1999      1998      1997
                                                  -------   -------   -------
                                                         (IN MILLIONS)
<S>                                               <C>       <C>       <C>
Pretax loss:
  Domestic......................................  $(177.2)  $ (63.9)  $ (64.9)
  Foreign.......................................   (421.6)   (171.4)    (67.4)
                                                  -------   -------   -------
                                                  $(598.8)  $(235.3)  $(132.3)
                                                  =======   =======   =======
</TABLE>

     For the years ended December 31, 1999, 1998 and 1997, the Company recorded
$17.9 million, $7.8 million and $2.5 million, respectively, in income tax
expense that related exclusively to its current provision for foreign taxes.

     The reconciliation of the U.S. statutory federal tax rate of 35.0% to the
Company's effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                        ------------------------
                                                         1999     1998     1997
                                                        ------   ------   ------
<S>                                                     <C>      <C>      <C>
Taxes at U.S. statutory rates.........................   35.0%    35.0%    35.0%
Foreign income taxes..................................    3.0      3.3      1.8
Foreign operating losses generating no tax benefit....  (24.6)   (25.5)   (18.3)
Domestic operating losses generating no tax benefit...  (10.4)    (9.5)   (16.7)
                                                        -----    -----    -----
                                                          3.0%     3.3%     1.8%
                                                        =====    =====    =====
</TABLE>

                                       67
<PAGE>   69
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred tax assets and liabilities are recorded based on temporary
differences between earnings as reported in the financial statements and
earnings for income tax purposes. The following table summarizes major
components of the Company's deferred tax assets and liabilities:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              -------------
                                                              1999    1998
                                                              -----   -----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Deferred Tax Assets:
  Net operating loss carry-forwards.........................  $64.3   $64.9
  Other deferred tax assets.................................   11.0     4.0
                                                              -----   -----
Net deferred tax asset......................................   75.3    68.9
  Less: valuation allowance.................................  (75.3)  (68.9)
                                                              -----   -----
          Total.............................................  $  --   $  --
                                                              =====   =====
</TABLE>

     As of December 31, 1999, the Company had net operating loss carry-forwards
("NOL's") for U.S. federal income tax purposes of approximately $183.8 million
expiring in fiscal years 2004 through 2019. Because of the "change in ownership"
provisions of the Tax Reform Act of 1986, the utilization of the Company's net
operating loss carry-forwards may be subject to an annual limitation.

     As of October 1, 1999, the U.S. companies of Golden Telecom, Inc. ("GTI")
are no longer included in the consolidated U.S. tax return of the Company as the
Company owns less than 80% of Golden Telecom companies. Upon the initial public
offering of Golden Telecom shares, GTI was allocated $23.6 million previous
NOL's.

NOTE 11: COMMITMENTS AND CONTINGENCIES

LEASES

     The Company has various lease agreements for fiber and equipment. The
obligations extend through 2018. Most of the leases contain renewal options of
one to twelve years. Assets under capital leases are included in the
consolidated balance sheets as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                               1999     1998
                                                              ------   ------
                                                               (IN MILLIONS)
<S>                                                           <C>      <C>
Telecommunications equipment................................  $395.8   $313.0
Less: accumulated amortization..............................    47.1     16.5
                                                              ------   ------
                                                              $348.7   $296.5
                                                              ======   ======
</TABLE>

     Rental expense for operating leases aggregated $23.4 million, $9.9 million
and $4.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively.

                                       68
<PAGE>   70
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Future minimum payments, by year and in the aggregate, under the capital
leases and non-cancelable operating leases with initial or remaining terms in
excess of one year as of December 31, 1999 were as follows:

<TABLE>
<CAPTION>
                                                            CAPITAL   OPERATING
                                                            LEASES     LEASES
                                                            -------   ---------
                                                               (IN MILLIONS)
<S>                                                         <C>       <C>
December 31, 2000.........................................  $ 53.9     $ 59.4
  2001....................................................    47.9       20.3
  2002....................................................    46.2       17.2
  2003....................................................    44.6       15.9
  2004....................................................    43.1       14.7
Thereafter................................................   267.4      100.2
                                                            ------     ------
          Total minimum lease payments....................   503.1     $227.7
                                                                       ======
Less amount representing interest.........................   219.9
                                                            ------
Present value of net minimum lease payments...............   283.2
Less current portion of capital lease obligations.........    28.5
                                                            ------
Long-term portion of capital lease obligations............  $254.7
                                                            ======
</TABLE>

OTHER COMMITMENTS AND CONTINGENCIES

     The Company's has future purchase commitments amounting to $189.3 million
as of December 31, 1999.

     As discussed in Note 14, "Investments in and Advances to Ventures", the
Company has committed to purchase capacity from its FLAG joint ventures in
addition to an equity investment. This commitment is included in the future
purchase commitments noted above.

     In the ordinary course of business, the Company has issued financial
guarantees on debt and equities for the benefit of certain of its consolidated
ventures. The total amount guaranteed at December 31, 1999 was approximately
$19.8 million.

TAX MATTERS

     In various foreign jurisdictions, the Company is obligated to pay value
added taxes ("VAT") on the purchase or importation of assets, and for certain
other transactions. In many instances, VAT can be offset against VAT the Company
collects and otherwise would remit to the tax authorities, or may be refundable.
Because the law in some jurisdictions is unclear, the local tax authorities
could assert that the Company is obligated to pay additional amounts of VAT. In
the opinion of management, any additional VAT the Company may be obligated to
pay would not be material.

OTHER MATTERS

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

NOTE 12: RELATED PARTY TRANSACTIONS

     The Company has entered into a subscription agreement (the "Subscription
Agreement") dated as of April 6, 1999 with H. Brian Thompson, its Chairman and
Chief Executive Officer, in connection with

                                       69
<PAGE>   71
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mr. Thompson's employment agreement with the Company. The Subscription Agreement
provides that Mr. Thompson purchase $20 million of the Company's common stock
valued at $27.17 per share, or a total of 736,056 shares. The Subscription
Agreement provides further that Mr. Thompson pay for 368,028 of these shares for
$10 million in cash and for 368,028 of these shares using the proceeds of a loan
in the principal amount of $10 million from the Company. These arrangements were
consummated in June 1999. In connection with the loan, Mr. Thompson has
delivered a secured promissory note to the Company which bears interest at the
Federal Mid-Term Rate and has a maturity of six years.

     During the fourth quarter of 1998 and the second quarter of 1999, the
Company acquired AB Swed Carrier's and NMBS/SNCB's ownership interest in GTS
Europe B.V. (formerly Hermes Europe Railtel, B.V.). In connection with this
purchase, a wholly-owned subsidiary of the Company paid approximately $10.1
million to a company, which was affiliated with a then board member of GTS
Europe B.V., for negotiating the purchase transaction on behalf of the Company.

NOTE 13: INVESTMENTS IN AND ADVANCES TO VENTURES

     The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments range from 49% to 75%. The Company has no investments in ventures
that are accounted for by the cost method.

     The components of the Company's investments in and advances to ventures,
which are included in other assets, are as follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              -------------
                                                              1999    1998
                                                              -----   -----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Equity in net assets acquired...............................  $14.7   $14.8
Excess of investment cost over equity in net assets acquired
  net of amortization of $3,476 and $3,836, respectively....    3.5     4.1
Accumulated earnings recognized.............................    8.8    12.8
Dividends...................................................   (1.5)    (.7)
Cash advances and other.....................................   35.1    19.7
                                                              -----   -----
          Total investments in and advances to ventures.....  $60.6   $50.7
                                                              =====   =====
</TABLE>

     In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 2, "Summary of Significant Accounting Policies."

     The Company has financed the operating and investing cash flow requirements
of several of its ventures in the form of cash advances. The Company anticipates
that these ventures will generate sufficient cash inflows for the repayment of
the cash advances as their businesses mature. Also, due to the long-term nature
of the anticipated repayment period and the potential risk associated with the
repatriation of the cash advances, the Company has aggregated its investments in
and cash advances to the ventures.

     The Company's share of the ventures' foreign currency translation
adjustments is reflected in the investment accounts.

                                       70
<PAGE>   72
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVESTMENT RECOVERABILITY

     The Company periodically evaluates the recoverability of its equity
investments, in accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," and if circumstances arise where a loss in value
is considered to be other than temporary, the Company will record a write-down
of excess investment cost. The Company's recoverability analysis is based on the
projected undiscounted cash flows of the operating ventures, which is the lowest
level of cash flow information available. During 1997, the Company recorded a
write-off of certain investments in excess of their net realizable value. The
total charge was classified in the statement of operations as other income
(loss). The Company recorded no such write-offs during the years ended December
31, 1999 and 1998.

     Investments in FLAG Atlantic Limited

     GTS indirectly owns 50% of FLAG Atlantic Limited, a Bermuda corporation
("FLAG Atlantic"), which was formed to develop, construct, operate and arrange
the financing for a 15,000 kilometer, 12 fiber, submarine fiber optic cable
system which will connect the United States and Europe, and the landed portions
of the system, which will connect London, Paris and New York. FLAG Telecom is
the indirect owner of the other 50% of FLAG Atlantic. Total project costs are
estimated at $1.1 billion.

     GTS has made an equity investment commitment of $100 million and a dark
fiber capacity purchase commitment of $200 million, which are fully supported by
a bank letter of credit. As of December 31, 1999, GTS paid $60 million in cash
toward our commitment. In addition, FLAG Atlantic has entered into a $600
million credit facility with a group of banks. The bank facility is non-recourse
to GTS and FLAG; however, in addition to other collateral and assignment of
certain contracts, GTS and FLAG Telecom have pledged the stock they own in FLAG
Atlantic to the lenders in the bank credit facility.

     The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 1999, 1998 and 1997 (in millions):

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
EQUITY METHOD ENTITIES                                        1999     1998     1997
----------------------                                       ------   ------   ------
<S>                                                          <C>      <C>      <C>
Revenue....................................................  $115.4   $201.1   $226.2
Gross margin...............................................    55.1     82.0    110.2
Net income (loss)..........................................    (6.6)     (.7)     4.3
Current assets.............................................   184.5     58.0     80.8
Total assets...............................................   357.2    178.4    211.2
Current liabilities........................................    43.8     78.0     87.2
Total liabilities..........................................   294.0    114.2    130.4
</TABLE>

NOTE 14: MERGER AND RESTRUCTURING CHARGES

     During 1999 the Company recorded a $142.5 million charge to earnings
attributable to merger and restructuring costs. Of the $142.5 million, $63.7
million, $19.8 million and $59.0 million was recorded in the first quarter,
third quarter and fourth quarter of 1999, respectively.

     The $63.7 million first quarter charge was attributable to the
transactional and other costs associated with the acquisition and integration of
GTS (Europe) Ltd. (formerly Esprit Telecom plc). Of the $63.7 million, $1.4
million remains as an accrual, at December 31, 1999, for additional
transactional costs to be paid.

     The $19.8 million third quarter charge was a result of the Company's
decision that the allocation of sufficient resources to support certain cellular
ventures in Russia was not consistent with the Company's current strategic
plans. Accordingly, the Company decided to abandon certain cellular ventures in
and decided to cease to provide any further financial assistance to these
ventures other than the assumption of certain debt

                                       71
<PAGE>   73
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

obligations. The Company is seeking to sell its ownership interests in these
assets in furtherance of the plan of abandonment. Of the $19.8 million, $3.3
million remains as an accrual, at December 31, 1999, for cash payments that the
Company expects to incur as part of the plan of abandonment.

     The $59.0 million fourth quarter charge reflects a charge of $40.1 million
for the integration and rationalization of our switched-voice assets as well as
$18.9 million for certain employee-related reorganization costs. These charges
were principally a result of the acquisitions and organizational consolidations
that the Company affected in 1999. Of the $59.0 million, $25.8 million remains
as an accrual, at December 31, 1999, for additional cash payments that the
Company expects to incur as part of our plan of restructuring.

     In 1998, the Company recorded a $12.7 million extraordinary charge to
earnings resulting from the early extinguishment of debt obligations. The nature
of the charge is comprised of the write-off of $11.6 million of unamortized debt
discount and $1.1 million of unamortized debt issuance costs that were deferred
as financing costs and were being amortized over the original maturity of the
debt obligations.

NOTE 15: SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA

     The Company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 131, or SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information," as of December 31, 1998. SFAS 131
establishes annual and interim reporting standards for an enterprise's operating
segment and related disclosures about its products, services, geographic areas
and major customers.

     Based on our organizational structure, the Company operates in two
reportable segments: Europe and Golden Telecom. The Company's reportable
segments represent business units that primarily offer similar products and
services to communications carriers, internet service providers and other
high-usage customers; however, the business units are managed separately due to
the geographic dispersion of their operations.

     Our product and service offering includes the provision of broadband,
internet, data and voice services to our customers.

                                       72
<PAGE>   74
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Information about the Company's segments is as follows:

LINE OF BUSINESS DATA:

  CONSOLIDATED:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                         -----------------------------
                                                           1999       1998      1997
                                                         --------   --------   -------
                                                                 (IN MILLIONS)
<S>                                                      <C>        <C>        <C>
Revenue:
  Europe...............................................  $  746.8   $  286.6   $  93.3
  Golden Telecom.......................................      97.9       86.1      27.2
  Corporate............................................       7.5       (0.3)      0.9
                                                         --------   --------   -------
Total Revenue..........................................     852.2      372.4     121.4
Loss from operations:
  Europe...............................................    (306.1)     (90.5)    (42.8)
  Golden Telecom.......................................     (31.6)     (19.5)    (18.8)
  Corporate............................................     (96.0)     (33.7)    (29.8)
                                                         --------   --------   -------
Total loss from operations.............................    (433.7)    (143.7)    (91.4)
Unallocated other (income) expense:
  Interest expense, net................................    (134.6)     (71.0)    (26.6)
  Other (income) expense, net..........................     (30.5)     (20.6)    (14.3)
                                                         --------   --------   -------
     Loss before income taxes..........................    (598.8)    (235.3)   (132.3)
Assets:
  Europe...............................................   3,120.1    1,497.6     625.6
  Golden Telecom.......................................     366.6      235.8     129.6
  Corporate............................................     515.1      881.2     121.4
                                                         --------   --------   -------
Total assets...........................................   4,001.8    2,614.6     876.6
Capital expenditures:
  Europe...............................................     347.8      208.9      55.2
  Golden Telecom.......................................      22.1       20.7       1.8
  Corporate............................................      16.1        1.4       1.2
                                                         --------   --------   -------
Total capital expenditures.............................     386.0      231.0      58.2
</TABLE>

                                       73
<PAGE>   75
                         GLOBAL TELESYSTEMS GROUP, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)

     The selected financial data presents the restatement of the Company's
historical financial statements for 1998 to reflect the business combination
with GTS (Europe) Ltd., which was accounted for as a pooling of interests.

     Summarized quarterly financial data is as follows:

<TABLE>
<CAPTION>
                                                FIRST    SECOND     THIRD    FOURTH     TOTAL
                                               QUARTER   QUARTER   QUARTER   QUARTER    YEAR
                                               -------   -------   -------   -------   -------
                                                   (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>       <C>       <C>       <C>       <C>
1999
  Revenues...................................  $ 170.9   $ 200.3   $ 227.9   $ 253.1   $ 852.2
  Gross profit...............................     68.3      87.0      87.7      85.5     328.5
  Net loss...................................   (162.2)   (102.3)   (112.8)   (239.4)   (616.7)
                                               =======   =======   =======   =======   =======
Preferred dividend...........................       --      (7.6)     (9.1)     (9.0)    (25.7)
                                               -------
  Net loss applicable to common
     shareholders............................   (162.2)   (109.9)   (121.9)   (248.4)   (642.4)
                                               =======   =======   =======   =======   =======
Loss per common share:
  Net loss per share.........................    (1.00)    (0.66)    (0.70)    (1.38)    (3.76)(a)
                                               =======   =======   =======   =======   =======
1998
  Revenues...................................  $  46.2   $  66.0   $ 118.3   $ 141.9   $ 372.4
  Gross profit...............................     13.1      20.9      45.4      54.9     134.3
  Net loss before extraordinary item(1)......    (37.1)    (48.0)    (63.7)    (94.3)   (243.1)
Extraordinary item...........................    (12.7)       --        --        --     (12.7)
                                               -------   -------   -------   -------   -------
  Net loss...................................    (49.8)    (48.0)    (63.7)    (94.3)   (255.8)
                                               =======   =======   =======   =======   =======
  Net loss per share before extraordinary
     item....................................    (0.30)    (0.34)    (0.42)    (0.61)    (1.70)
Extraordinary loss per share.................    (0.11)       --        --        --     (0.09)
                                               -------   -------   -------   -------   -------
  Net loss per share.........................    (0.41)    (0.34)    (0.42)    (0.61)    (1.79)(a)
                                               =======   =======   =======   =======   =======
</TABLE>

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

(a) The sum of earnings per share for the four quarters will not equal earnings
    per share for the total year due to changes in the average number of common
    shares outstanding.

(1) On July 22, 1999, the Company effected a two for one stock split through a
    distribution of a stock dividend. The historical per share information
    contained herein has been restated to reflect this split.

NOTE 17: SUBSEQUENT EVENTS (UNAUDITED)

     On February 18, 2000, GTS completed its acquisition of Netcom Internet
Limited ("Netcom") for purchase consideration of approximately $91.5 million in
the form of the issuance of our common stock. Netcom is an Internet service
provider in the United Kingdom, which provides dedicated and dial-up Internet
access, Web-hosting, server co-location, Internet protocol virtual private
networks and other services. Netcom currently serves over 3,600 Web-hosting
customers, approximately 600 dedicated and high-speed Internet access customers
and 14,000 subscription-based Internet dial-up Internet access customers. Netcom
had approximately $12 million in revenues in calendar year 1999.

                                       74
<PAGE>   76

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors Global TeleSystems Group, Inc.

     We have audited the accompanying consolidated balance sheets of Global
TeleSystems Group, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements or financial statement schedule of Global TeleSystems (Europe) Ltd.,
a subsidiary, which statements reflect total assets of $632,951,000 as of
December 31, 1998 and total revenues of $176,826,000 and $74,473,000 for the
years ended December 31, 1998 and September 30, 1997, respectively. Those
financial statements and schedule were audited by other auditors whose report
has been furnished to us, and our opinion insofar as it relates to data included
for Global TeleSystems (Europe) Ltd., is based solely on the report of the other
auditors.

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

     In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Global TeleSystems Group, Inc. at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, based on our audits and the report of other
auditors, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

                                            ERNST & YOUNG LLP

McLean, Virginia
February 4, 2000

                                       75
<PAGE>   77

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

     The following table sets forth the name, current business address,
citizenship and present principal occupation or employment, and material
occupations, positions, offices or employments and business addresses thereof
for the past five years of each director and executive officer of the Company.
Unless otherwise indicated, the current business address of each person is 4121
Wilson Boulevard, 8th Floor, Arlington, Virginia, 22203. There are no family
relationships among any of the directors and officers. Unless otherwise
indicated, each such person is a citizen of the United States.

MEMBERS OF THE BOARD OF DIRECTORS

<TABLE>
<CAPTION>
                                                  PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                     AGE    MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                     ---    --------------------------------------------------
<S>                                      <C>   <C>
Robert J. Amman........................  61    Mr. Amman was elected to GTS's Board of Directors in
                                               May 1998 and was appointed President of GTS in March
                                               1999. His term as a director expires at the 2000
                                               annual stockholders meetings. Mr. Amman was Chairman,
                                               President and Chief Executive Officer of John H.
                                               Harland Company, a printing firm, from 1995 to 1998.
                                               Previously, from 1994 to 1995, he served as Vice
                                               Chairman of First Financial Management Corporation,
                                               where he was responsible for the merchant services
                                               businesses consisting of Western Union, NaBanco,
                                               Telecheck, Nationwide Credit and International
                                               Banking Technologies. From 1988 to 1994, Mr. Amman
                                               served as President and Chief Executive Officer of
                                               Western Union Corporation, where he oversaw the
                                               transformation of the firm from a telecommunications
                                               to a financial services company. Mr. Amman is a
                                               member of the Executive Committee of the Board of
                                               Directors.
David Dey..............................  62    Mr. Dey was elected to GTS's Board of Directors in
                                               May 1998. His term expires at the 2001 annual
                                               stockholders meeting. Since 1995, Mr. Dey has served
                                               as an independent consultant, particularly to high
                                               technology start-up companies in Europe. In that
                                               capacity, he serves as Chairman of World Telecom and
                                               as Chairman of STARTECH Scotland. From 1992 to 1995,
                                               Mr. Dey served as Chief Executive Officer of Energis
                                               Communications, which grew from a start-up company to
                                               become the United Kingdom's third national
                                               telecommunications operation during his tenure. Mr.
                                               Dey was employed by British Telecom plc from 1987 to
                                               1991, most recently, as Managing Director of its
                                               Business Communications Division, and he held various
                                               management positions at IBM Corporation, where he was
                                               employed from 1961 to 1985. Mr. Dey is a member of
                                               the Audit and Budget, and Nominations and Governance
                                               Committees of the Board of Directors. Mr. Dey is a
                                               citizen of the United Kingdom.
</TABLE>

                                       76
<PAGE>   78

<TABLE>
<CAPTION>
                                                  PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                     AGE    MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                     ---    --------------------------------------------------
<S>                                      <C>   <C>
Roger W. Hale..........................  56    Mr. Hale was elected to GTS's Board of Directors in
                                               May 1998. His term expires at the 2001 annual
                                               stockholders meeting. Mr. Hale is Chairman, President
                                               and Chief Executive Officer of LG&E Energy Corp., a
                                               diversified energy services company with businesses
                                               in retail gas and electric utility services, energy
                                               marketing and power generation and project
                                               development. Mr. Hale has served in that capacity
                                               since August 1990. Previously, Mr. Hale served as
                                               Executive Vice President of Bell South Corp. and Bell
                                               South Enterprises, Inc. from 1986 to 1989 and with
                                               AT&T Corporation from 1966 to 1986, serving in
                                               various management positions including Vice President
                                               of Marketing, Southern Region. Mr. Hale is a Director
                                               of H&R Block, Inc. Mr. Hale is Chairman of the
                                               Nominations and Governance Committee and is a member
                                               of the Executive Committee of the Board of Directors.
Bernard McFadden.......................  66    Mr. McFadden has served as a director of GTS since
                                               February 1994. His term expires at the 2000 annual
                                               stockholders meeting. During 1999, Mr. McFadden
                                               served as an independent consultant for GTS. Mr.
                                               McFadden's career in international telecommunications
                                               includes 32 years with ITT Corporation, where he
                                               served as President and Chief Executive Officer of
                                               ITT's Telecom International Group, and a four and
                                               one-half year assignment as President and Chief
                                               Operating Officer of Alcatel Trade International,
                                               S.A. Mr. McFadden is chairman of the Compensation
                                               Committee of the Board of Directors.
Stewart J. Paperin.....................  52    Mr. Paperin has served as a director of GTS since
                                               March 1997. His term expires at the 2000 annual
                                               stockholders meeting. Mr. Paperin serves as Chief
                                               Financial Officer of the Soros Foundations. In
                                               addition, he has served as the President of Capital
                                               Resource East since October 1993. Prior to that, Mr.
                                               Paperin was President of Brooke Group International
                                               from 1990 to 1993 where he was responsible for
                                               investments in the former Soviet Union. Mr. Paperin
                                               also served as Chief Financial Officer of Western
                                               Union Corporation from 1989 to 1990. Mr. Paperin
                                               serves as a director of Penn Octane Corporation,
                                               NewsReal, Inc., SynXis Corporation and Svyazinvest.
                                               Mr. Paperin is Chairman of the Audit and Budget
                                               Committee and is a member of the Compensation, and
                                               Nominations and Governance Committees of the Board of
                                               Directors.
</TABLE>

                                       77
<PAGE>   79

<TABLE>
<CAPTION>
                                                  PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                     AGE    MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                     ---    --------------------------------------------------
<S>                                      <C>   <C>
W. James Peet..........................  45    Mr. Peet has served as a director of GTS since
                                               January 1996. His term expires at the 2002 annual
                                               stockholders meeting. Since July, 1999, Mr. Peet has
                                               been Managing Director of Lehman Brothers
                                               Communications Fund. Mr. Peet was affiliated with The
                                               Chatterjee Group, an investment firm, from 1991 until
                                               February 1999. Prior to that, Mr. Peet spent 6 years
                                               with McKinsey & Company. Mr. Peet was a director of
                                               Hainan Airlines and of Phoenix Information Systems
                                               Corporation. In addition, Mr. Peet served as director
                                               of Viatel, Inc. from November 1995 until June 1998.
                                               Mr. Peet is a member of the Compensation Committee of
                                               the Board of Directors.
Jean Salmona...........................  64    Mr. Salmona has served as a director of GTS since
                                               March 1996. His term expires at the 2001 annual
                                               stockholders meeting. Between December 1989 and
                                               November 1998, Mr. Salmona was Chairman and C.E.O. of
                                               CESIA Consulting Group, of which he is now Honorary
                                               Chairman. He is President and C.E.O. of J&P Partners,
                                               a consulting concern for high-tech companies which
                                               invest in Europe, India and China. Mr. Salmona is
                                               also Chairman and Director General, Data for
                                               Development International Association, a
                                               nongovernmental organization with consultative status
                                               to the United Nations Economic and Social Council,
                                               and is a member of the investment committee of AXA
                                               FCPI, an affiliate of AXA Investment Managers. Mr.
                                               Salmona is a graduate of Ecole Polytechnique, Paris,
                                               Institut d'Etudes Politiques, Paris, and Ecole
                                               Nationale de la Statistique et de l'Administration
                                               Economique, Paris. Mr. Salmona is a citizen of
                                               France.
Frank V. Sica..........................  48    Mr. Sica was elected as a director of GTS in March
                                               1999. His term expires at the 2002 annual
                                               stockholders meeting. Mr. Sica is a Managing Director
                                               of Soros Fund Management LLC and head of Soros Fund
                                               Management's private equity operations. Prior to
                                               joining Soros Fund Management, Mr. Sica was a
                                               Managing Director at Morgan Stanley Dean Witter &
                                               Co., the investment banking and brokerage firm. He is
                                               also a director of CSG Systems International, Inc.,
                                               Kohl's Corporation, Emmis Broadcasting, Outboard
                                               Marine Corp., Banco Hipotecario, and JetBlue. Mr.
                                               Sica is a member of the Audit and Budget and
                                               Compensation Committees of the Board of Directors.
</TABLE>

                                       78
<PAGE>   80

<TABLE>
<CAPTION>
                                                  PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                     AGE    MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                     ---    --------------------------------------------------
<S>                                      <C>   <C>
Alan B. Slifka.........................  70    Mr. Slifka has served as a director of GTS since
                                               1990, and was Chairman until March 1999 when he was
                                               elected Vice Chairman. His term expires at the 2000
                                               annual stockholders meeting. Mr. Slifka is a New York
                                               investment banker and the Managing Principal of
                                               Halcyon/Alan B. Slifka Management Company LLC, an
                                               equity asset management firm specializing in
                                               nontraditional investments, specifically corporate
                                               event investing. Previously, Mr. Slifka was a partner
                                               of L.F. Rothschild, Unterberg, Towbin from 1961 to
                                               1982. He is a director of Pall Corporation and is
                                               active in other business, civic and philanthropic
                                               affairs as founder, director or officer of numerous
                                               for-profit and not-for-profit corporations and
                                               foundations. Mr. Slifka served as acting Chief
                                               Executive Officer of GTS during most of 1993. Mr.
                                               Slifka is a member of the Executive and Nominations
                                               and Governance Committees of the Board of Directors.
Adam Solomon...........................  47    Mr. Solomon has served as a director of GTS since
                                               June 1995. His term expires at the 2001 annual
                                               stockholders meeting. Mr. Solomon is also Chairman of
                                               Shaker Investments, Inc., a growth equity investment
                                               firm and Chairman of Signature Properties
                                               International, L.P., a venture/development firm whose
                                               initial focus is redeveloping existing
                                               residential/golf communities, and a member of the
                                               board of directors of MetaSolv Software, Inc. Prior
                                               to that, Mr. Solomon spent eleven years with E.M.
                                               Warburg, Pincus & Co., Inc., where he was Managing
                                               Director from 1988 to 1992. While at E.M. Warburg,
                                               Pincus & Co., Inc., Mr. Solomon served as a member of
                                               the board of directors of LCI International, Inc., a
                                               regional long-distance carrier. Mr. Solomon is a
                                               member of the Executive and Compensation Committees
                                               of the Board of Directors.
Gerald W. Thames.......................  53    Mr. Thames joined GTS as Chief Executive Officer in
                                               February 1994, and has served as a director of GTS
                                               since February 1994. He was elected Vice Chairman of
                                               the Board of Directors in 1998 and Executive Vice
                                               Chairman in March 1999. His term expires at the 2002
                                               annual stockholders meeting. From 1990 to 1994, Mr.
                                               Thames was President and Chief Executive Officer for
                                               British Telecom North America and Syncordia, a joint
                                               venture company focused on the international
                                               outsourcing market. Mr. Thames has spent over 18
                                               years in senior positions with telecommunications
                                               companies, where he was responsible for developing
                                               start-up telecommunications companies, including 15
                                               years with AT&T, where he rose to the position of
                                               General Manager of Network Services for the Northeast
                                               Region of AT&T Communications. He is a director of
                                               Data for Development International Association. Mr.
                                               Thames is a member of the Executive Committee of the
                                               Board of Directors.
</TABLE>

                                       79
<PAGE>   81

<TABLE>
<CAPTION>
                                                  PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND
NAME                                     AGE    MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
----                                     ---    --------------------------------------------------
<S>                                      <C>   <C>
H. Brian Thompson......................  60    Mr. Thompson was elected Chairman of the Board and
                                               Chief Executive Officer of GTS in March 1999. His
                                               term as a director expires at the 2002 annual
                                               stockholders meeting. From 1991 until June 1998, Mr.
                                               Thompson was Chairman and Chief Executive Officer of
                                               LCI International, Inc., a provider of
                                               telecommunications services in the United States and
                                               to more than 230 international locations. In June
                                               1998, LCI was acquired by Qwest Communications
                                               International, Inc. and Mr. Thompson became Vice
                                               Chairman of Qwest. He resigned from the Board of
                                               Directors of Qwest in December 1998. He serves as a
                                               member of the board of directors of Bell Canada
                                               International, Inc., Williams Communications Group,
                                               Inc., DynCorp, and as a member of the management
                                               committee of Paging Brazil Holding Co., LLC. He also
                                               serves as Co-Chairman of the Global Information
                                               Infrastructure Commission and as a member of the
                                               Irish Prime Minister's Ireland-America Economic
                                               Advisory Board, and was Chairman of the Advisory
                                               Committee for Telecommunications for Ireland
                                               Department of Public Enterprise. Mr. Thompson is
                                               chairman of the Executive Committee of the Board of
                                               Directors.
</TABLE>

EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
NAME                                     AGE
----                                     ---
<S>                                      <C>   <C>
Robert J. Amman........................  61    See biographical information under "Directors" above.
Gerard J. Caccappolo...................  58    Mr. Caccappolo joined GTS Europe in January 1995 as
                                               Director of Marketing and Sales, responsible for
                                               market and customer segmentation, services
                                               development, and pricing and sales strategies. Mr.
                                               Caccappolo also serves as President of GTS's Carrier
                                               Services division. Prior to joining GTS Europe, from
                                               September 1988 to December 1994, he was Vice
                                               President of Marketing and Sales -- International
                                               Carriers at Ascom Timeplex Equipment
                                               (Telecommunications) Manufacturer. From 1983 to 1988,
                                               Mr. Caccappolo was Vice President -- Planning and
                                               Corporate Development at Bell Atlantic Corporation.
                                               He began his career at AT&T-Bell Laboratories and
                                               held a number of executive positions at AT&T
Hans Peter Kohlhammer..................  53    Mr. Kohlhammer joined GTS as President of GTS
                                               Business Services -- Western Europe on March 5, 1999.
                                               From October 1998 to March 1999, Mr. Kohlhammer was
                                               Managing Director of Sales and Marketing GTS (Europe)
                                               Ltd., which then was acquired by GTS. Prior to that,
                                               Mr. Kohlhammer was Chairman of the Board at Thyssen
                                               Telecom AG and held a Board position with Loewe Opta.
                                               Dr. Kohlhammer holds a degree in mathematics and
                                               physics and a doctorate in mathematics from the
                                               University of Bonn.
</TABLE>

                                       80
<PAGE>   82

<TABLE>
<CAPTION>
NAME                                     AGE
----                                     ---
<S>                                      <C>   <C>
Jan Loeber.............................  56    Mr. Loeber is Executive Vice President -- Strategic
                                               Planning of GTS. Mr. Loeber joined GTS in January
                                               1995 and served as President, GTS Carrier Services,
                                               and Managing Director of GTS Europe until June 1999.
                                               From October 1992 to December 1994, Mr. Loeber was a
                                               Managing Director of BT Securities Corporation. From
                                               April 1990 to September 1992, Mr. Loeber held
                                               positions as Managing Director of Unitel Ltd. (now
                                               One 2 One) in the United Kingdom, Group President of
                                               Nokia NorthAmerica Inc., Vice President of ITT
                                               Corporation, and Marketing and Product Management
                                               Director of ITT Europe. Mr. Loeber also spent almost
                                               10 years with AT&T, where his last position was
                                               Executive Director, Bell Laboratories. Mr. Loeber has
                                               over 25 years of experience in the telecommunications
                                               industry and an additional 9 years of experience in
                                               information technology with the Pentagon, IBM and
                                               Chemical Bank of New York.
Grier C. Raclin........................  47    Mr. Raclin joined GTS as its Senior Vice President
                                               and General Counsel in September, 1997, and was
                                               elected Corporate Secretary of the Company in
                                               December 1997. In March 1999, Mr. Raclin was elected
                                               Senior Vice President -- External Affairs, General
                                               Counsel and Corporate Secretary. Prior to joining
                                               GTS, Mr. Raclin served as Vice-Chairman and a
                                               Managing Partner of the Washington, D.C. office of
                                               Gardner, Carton & Douglas, a 250-attorney, corporate
                                               law firm based in Chicago, Illinois, where his
                                               practice was concentrated in the area of
                                               international telecommunications. Mr. Raclin received
                                               his undergraduate and law degrees from Northwestern
                                               University and attended the University of Chicago
                                               School of Business Executive Program.
Robert A. Schriesheim..................  39    Mr. Schriesheim joined GTS as Executive Vice
                                               President and Chief Corporate Development Officer in
                                               February 1999. In September 1999, Mr. Schriesheim was
                                               appointed Executive Vice President, Corporate
                                               Development and Chief Financial Officer. Prior to
                                               GTS, from 1997, he was President, Chief Executive
                                               Officer and Director of SBC Equity Partners, Inc., a
                                               private equity firm affiliated with Sanwa Business
                                               Credit Corporation that invested in technology-based
                                               service and manufacturing companies. From 1996-1997,
                                               Mr. Schriesheim was Vice President -- Corporate
                                               Business Development for Ameritech Corp., the
                                               regional Bell operating company, and Managing
                                               Director -- Ameritech Development Corporation. From
                                               1993-1996, he was Vice President -- Acquisitions and
                                               New Business Development (1993-1994) and Vice
                                               President -- Global Corporate Development (1995-1996)
                                               of A.C. Nielsen Company, a consumer marketing
                                               research, information and decision-support services
                                               company.
</TABLE>

                                       81
<PAGE>   83

<TABLE>
<CAPTION>
NAME                                     AGE
----                                     ---
<S>                                      <C>   <C>
Eileen K. Sweeney......................  48    Ms. Sweeney joined GTS as Senior Vice
                                               President -- Human Resources in November, 1997. Prior
                                               to joining GTS, Ms. Sweeney was President of Global
                                               Resource Associates, a consulting company
                                               specializing in international human resource issues.
                                               Prior to that time, Ms. Sweeney spent 10 years with
                                               ITT Corporation in a variety of human resource
                                               management positions, including eight years based in
                                               Europe and in the Middle East. Ms. Sweeney holds a
                                               Master's Degree in Business Administration from
                                               Simmons Graduate School of Management in Boston.
H. Brian Thompson......................  60    See biographical information under "Directors" above.
Jeffrey H. Von Deylen..................  36    Mr. Von Deylen joined GTS as Senior Vice President,
                                               Finance in October 1999. Prior to his appointment,
                                               Mr. Von Deylen was Vice President, Corporate
                                               Controller at Qwest Communications International,
                                               Inc. He was with Qwest and LCI International, which
                                               Qwest acquired in 1998, for six years. Before his
                                               tenure at Qwest and LCI, Mr. Von Deylen was with
                                               Arthur Andersen, the auditing firm.
</TABLE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons or entities who own more than 10% of the
Company's Common Shares, to file with the SEC and the Nasdaq Stock Market or the
New York Stock Exchange, as the case may be, initial reports of beneficial
ownership and changes in beneficial ownership of the company's equity
securities. Such persons are also required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on a review of the copies of such reports furnished to
the Company as to transactions for which reports are required, all Section 16(a)
filing requirements applicable to such individuals or entities were complied
with during 1999, except with respect to Messrs. James Newman, James Reynolds,
Gerard Caccappolo, Hans-Peter Kohlhammer and Gerald Thames. The Company
determined on February 1, 1999, June 18, 1999, June 18, 1999 and June 18, 1999
that Messrs Newman, Reynolds, Caccappolo and Kohlhammer, respectively, were
executive officers of the Company. Messrs. Newman, Reynolds, Caccappolo and
Kohlhammer filed their "Initial Statements of Beneficial Ownership of
Securities" on Form 3 on April 9, 1999, August 4, 1999, July 29, 1999 and August
3, 1999, respectively. Mr. Newman left the employ of the Company during 1999.
Mr. Thames sold 150,000 shares of the Company's common stock on November 17,
1999, and transferred 19,000 shares of the Company's common stock to a family
foundation on November 22, 1999. Mr. Thames disclosed these dispositions in his
"Annual Statement of Changes in Beneficial Ownership" on Form 5, which was filed
with the SEC on February 14, 2000, instead of in a "Statement of Changes in
Beneficial Ownership" on Form 4.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

     During 1999, each Director of GTS, except Messrs. Thompson, Amman, and
Thames, received an annual directors' cash fee of $15,000 applicable to the one
year period commencing June 1, 1999. In addition, the fee paid to each Director,
except for Messrs. Thompson, Amman, and Thames, for attending any meeting of the
Board of Directors is $1,500 per meeting, except for telephonic Board of
Directors meetings of two hours or less, where the fee is $750 for each such
meeting. Each Director, except Messrs. Thompson, Amman, and Thames, who attends
a committee meeting is entitled to a fee of $1,000 per meeting, except for
telephonic committee meetings of a duration of two hours or less, for which a
fee of $500 is paid.

                                       82
<PAGE>   84

     GTS maintains the Global TeleSystems Group, Inc. Second Amended and
Restated Non-Employee Directors' Stock Option Plan and Restricted Stock Plan
that permits directors to share in the growth of the value of GTS through the
grant and exercise of nonqualified stock options and restricted stock. See
"-- Global TeleSystems Group, Inc. Second Amended and Restated Non-Employee
Directors' Stock Option and Restricted Stock Plan."

GLOBAL TELESYSTEMS GROUP, INC. SECOND AMENDED AND RESTATED NON-EMPLOYEE
DIRECTORS' STOCK OPTION AND RESTRICTED STOCK PLAN

     The purpose of the Global TeleSystems Group, Inc. non-employee directors'
stock option and restricted stock plan, which we refer to as the Directors'
Plan, is to permit eligible non-employee directors of GTS to share in the growth
of the value of GTS through the grant and exercise of nonqualified stock options
and restricted stock.

     The total number of shares of GTS common stock presently reserved and
available for delivery under the Directors' Plan is 2,550,000. The Directors'
Plan is administered by the Board of Directors. Only directors of GTS who are
not employees of GTS or any subsidiary of GTS on the date on which an option or
restricted stock is to be granted are eligible to participate in the Directors'
Plan on such date.

     On the date of each annual shareholders meeting, pursuant to the Directors'
Plan, each Director (except for Messrs. Thompson, Amman, and Thames) receives an
option to purchase a certain number of shares, determined by a formula where the
numerator is $60,000 and the denominator is equal to the fair market value of
GTS common stock on that date. This option vests and is exercisable immediately.
Additionally, pursuant to the Directors' Plan, each Director (except for Messrs.
Thompson, Amman, and Thames) receives a grant of restricted stock for each
committee of the Board of Directors on which he serve: each chairman of a
committee receives a grant of restricted shares of common stock equal to $5,000
divided by the fair market value of the common stock on the date of the annual
shareholders meeting; and each member of each committee receives a grant of
restricted shares of common stock equal to $2,500 divided by the fair market
value of the common stock on the date of the annual shareholders meeting. Such
restricted stock becomes free of restrictions upon the first to occur of the
following events: (a) the Director's death or total disability; (b) one year
from the grant date; or (c) a change of control transaction following which the
Director is not continued as on the Board of Directors of GTS or the survivor
company.

     An option to purchase shares of GTS common stock was granted to each
non-employee director on the effective date of the Directors' Plan and a
director's option is granted to each new non-employee director when he or she is
first elected or appointed to serve as a director of GTS, and we refer to these
as "Initial Grants." A director's Initial Grant option represents 22,500 shares
of GTS common stock. The entire amount of Initial Grant options vests on the
first to occur of (a) the Director's death or total disability; (b) one year
from the grant date; or (c) a change of control transaction following which the
Director is not continued as a member of the Board of Directors of GTS or the
survivor company.

     On the date of each annual meeting of GTS's shareholders after the Initial
Grant has been issued, an additional directors' option to purchase 9,000 shares
will be granted to the individuals who will serve as elected non-employee
directors of GTS during the next year, and we refer to these as "Subsequent
Grants." The entire amount of Subsequent Grant options vests on the first to
occur of (a) the Director's death or total disability; (b) one year from the
grant date; or (c) a change of control transaction following which the Director
is not continued as a member of the Board of Directors of GTS or the survivor
company.

     Directors' options are nonqualified stock options which are subject to
certain terms and conditions including those summarized below. The exercise
price per share of GTS common stock purchasable under a director's option will
be equal to 100% of the fair market value of GTS common stock on the date of
grant. Each directors' option will expire upon the earliest of (a) the tenth
anniversary of the date of grant, (b) one year after the non-employee director
ceases to serve as a director of GTS due to death or disability (except that, in
the case of disability, if the non-employee director dies within that one-year
period, the directors' options are exercisable for a period of one year from the
date of death), (c) three months after the non-employee director ceases to serve
as a director of GTS for any reason other than death or disability (except
                                       83
<PAGE>   85

that, if the non-employee director dies within that three-month period, the
directors' options are exercisable for a period of one year from the date of
such death), and (d) three months after the non-employee director ceases to be
employed by GTS if such non-employee director had become an employee of GTS
(except that, if the non-employee director dies within that three-month period,
the directors' options are exercisable for a period of one year from the date of
such death). Each directors' option may be exercised in whole or in part by
giving written notice of exercise to GTS specifying the directors' option to be
exercised and the number of shares to be purchased. Such notice must be
accompanied by payment in full of the exercise price in cash or by surrender of
shares of GTS common stock or a combination thereof. Directors' options granted
under the Directors' Plan may not be sold, pledged, assigned or otherwise
disposed of in any manner other than by will or by the laws of descent and
distribution.

     Directors' restricted stock are subject to certain terms and conditions
including those summarized below. The directors may vote their shares of
restricted stock on matters presented to shareholders of GTS common stock, but
may not sell, transfer, pledge or assign the restricted stock. The restricted
stock become free of restrictions on the first to occur of (a) the Director's
death or total disability; (b) one year from the grant date; or (c) a change of
control transaction following which the Director is not continued as a member of
the Board of Directors of GTS or the survivor company. Any stock dividends on
restricted stock are granted in the form of restricted stock. Prior to the
restricted stock becoming free of restrictions, a director would forfeit the
restricted stock upon termination of service from the chairmanship or membership
of the relevant committee, or termination of service from the Board of
Directors.

     At the time of grant, the Board of Directors may provide in connection with
any grant made under the Directors' Plan that the shares of GTS common stock
received as a result of such grant are subject to a right of first refusal by
GTS.

     The Board of Directors may amend, alter, suspend, discontinue or terminate
the Directors' Plan at any time, except that any such action will be subject to
the approval of GTS shareholders at the next annual meeting following such Board
of Directors' action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which GTS common stock may then be listed or quoted, or if
the Board of Directors determines in its discretion to seek such shareholder
approval.

                                       84
<PAGE>   86

                           SUMMARY COMPENSATION TABLE

     The following table sets forth each component of compensation paid or
awarded to, or earned by, the Chief Executive Officer and the four other most
highly compensated executive officers serving as of December 31, 1999, for the
years indicated.

<TABLE>
<CAPTION>
                                                                             LONG-TERM COMPENSATION
                                                                                     AWARDS
                                              ANNUAL COMPENSATION           ------------------------
                                       ----------------------------------   RESTRICTED   SECURITIES
                                                             OTHER ANNUAL     STOCK      UNDERLYING     ALL OTHER
                                        SALARY     BONUS     COMPENSATION    AWARD(S)    OPTIONS/SAR   COMPENSATION
NAME AND PRINCIPAL POSITION     YEAR     ($)        ($)          ($)           ($)           (#)         ($)(10)
---------------------------     ----   --------   --------   ------------   ----------   -----------   ------------
<S>                             <C>    <C>        <C>        <C>            <C>          <C>           <C>
H. Brian Thompson............   1999   $468,461   $449,000     $51,040(3)            0    3,300,000(8)    $6,466
  Chairman and
  Chief Executive Officer(1)
Robert Amman.................   1999   $312,307   $213,552            (4)            0    1,050,000(8)    $5,532
  President and Chief
Operating
  Officer(1)
Robert Schriesheim...........   1999   $319,711   $168,100            (4)   $1,647,600(7)    700,000(8)    $  936
  Executive Vice President,
  Corporate Development and
  Chief Financial Officer(1)
Hans Peter Kohlhammer(2).....   1999   $306,963   $169,474     $81,307(5)            0       43,302(8)         0
  President of Business
Services
Gerard J. Caccappolo.........   1999   $232,542   $367,424     $52,681(6)            0      200,000(8)    $4,000
  President of Carrier          1998    191,042     57,750      83,125(6)            0       61,000(8)     4,000
  Services
                                1997    173,750     52,500      32,043(6)            0        1,714(9)     4,000
</TABLE>

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

(1) Messrs. Thompson and Amman were elected to their positions in March 1999.
    Mr. Schriesheim was elected Executive Vice President, Corporate Development
    in February 1999, and was elected to the additional position of Chief
    Financial Officer in September 1999.

(2) Mr. Kohlhammer joined the Company in March 1999 as a result of the Company's
    acquisition of GTS (Europe) Ltd., formerly Esprit Telecom Group plc.

(3) The amount disclosed includes $24,127 related to spousal travel with the
    remaining attributable to gross-up payments for certain tax liabilities.

(4) Perquisites and other personal benefits paid to the named executive officer
    were less than the lesser of $50,000 and 10% of the total of salary and
    bonus report for the named executive officer.

(5) The amount disclosed includes transportation and travel allowance of
    $29,268, social security and medical payment of $21,988 and pension
    arrangements of $28,684.

(6) Mr. Caccappolo received a cost of living allowance of $4,833, $13,373 and
    $12,163 in 1999, 1998 and 1997, respectively, and resides in a company
    apartment for which the company paid the equivalent of $15,466, $16,595 and
    $16,109 per year in rent in 1999, 1998 and 1997, respectively. In 1999 and
    1998, respectively, Mr. Caccappolo also received tax equalization payments
    of $24,428 and $42,278 and a gross-up payment for certain tax liabilities of
    $660 and $1,011. In 1998, Mr. Caccappolo received paid home leave of $3,660.
    In addition, we provided Mr. Caccappolo with the use of a company car in
    1999, 1998 and 1997.

(7) The dollar amount represents 60,000 shares of restricted stock granted on
    April 5, 1999 when the closing price of the Company's common stock on the
    Nasdaq National Market was $27.56. The restriction on 20,000 of the shares
    will lapse on April 5, 2002; the restriction on the remaining 40,000 shares
    will lapse on April 5, 2002 if certain performance levels are met, otherwise
    the restriction on the remaining 40,000 shares will lapse on April 5, 2004.

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

(9) Stock options awarded under The Key Employee Stock Option Plan of Global
    TeleSystems Europe B.V. which we refer to as the GTS Europe B.V. Stock
    Option Plan.

                                       85
<PAGE>   87

(10) Amounts disclosed hereunder represent the sum of premiums paid by GTS for
     $1 million in group term life insurance for each named executive officer
     and contributions by GTS under the 401(k) Plan, as defined below, to each
     named executive officer's account, except Messrs. Thompson , Schriesheim
     and Kohlhammer who did not participate in the 401(k) Plan. In each case in
     which GTS paid 401(k) Plan contributions, $4,000 was paid in each of 1999,
     1998 and 1997 to the named executive officers.

                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

     The following table provides information on stock option grants to the five
most highly compensated officers in 1999 under the Stock Option Plan.

<TABLE>
<CAPTION>
                                               % OF TOTAL
                                  NUMBER OF      OPTIONS
                                  SECURITIES   GRANTED TO      EXERCISE
                                  UNDERLYING    EMPLOYEES         OR                      GRANT DATE
                                   OPTIONS         IN            BASE       EXPIRATION      PRESENT
NAME                              GRANTED(#)   FISCAL YEAR   PRICE($/SH.)      DATE       VALUE($)(4)
----                              ----------   -----------   ------------   ----------    -----------
<S>                               <C>          <C>           <C>            <C>           <C>
H. Brian Thompson...............  3,000,000       23.40%        $27.21      03/26/09(1)   $18,360,000
                                    300,000        2.34%         29.13      12/10/09(1)     3,735,690
Robert Amman....................    700,000        5.46%         27.21      03/26/09(1)     4,284,000
                                     50,000        0.39%         23.19      09/15/09(1)       292,195
                                    300,000        2.34%         29.13      12/10/09(1)     3,735,690
Robert Schriesheim..............    500,000        3.90%         27.50      02/22/09(2)     3,014,700
                                    200,000        1.56%         29.13      12/10/09(1)     2,490,460
Hans Peter Kohlhammer...........        496        0.00%         29.31      03/18/05(3)           984
                                    150,000        1.17%         27.73      03/18/09(2)     1,553,310
                                     50,000        0.39%         38.08      06/17/09(1)       517,575
                                    100,000        0.78%         29.13      12/10/09(1)     1,245,230
Gerard J. Caccappolo............    100,000        0.80%         38.08      06/17/09(1)     1,082,030
                                    100,000        0.80%         29.13      12/10/09(1)     1,245,230
</TABLE>

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

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

(2) These options vest in February 2005, when financial results for 2004 are
    expected to be publicly announced. If certain performance targets are met or
    exceeded, these options could be fully exercisable in February 2002, when
    financial results for 2001 are expected to be publicly announced.

(3) These options are 100% vested after one year.

(4) The present value of each grant is estimated on the date of grant using the
    Black-Scholes option pricing model with the following weighted-average
    assumptions: dividend yield 0%, expected volatility of 0.75, risk-free
    interest rates between 4.95% and 6.03% and expected life of five years.

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

     The following table provides information on the number and value of GTS
stock options exercised by the five most highly compensated officers during
1999, the number of options under the Stock Option Plan held by

                                       86
<PAGE>   88

such persons at December 31, 1999, and the value of all unexercised options held
by such persons as of that date.

<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                                SHARES                     UNDERLYING UNEXERCISED           IN-THE-MONEY
                              ACQUIRED ON      VALUE        OPTIONS AT FY-END(#)       OPTIONS AT FY-END($)(1)
NAME                          EXERCISE(#)   REALIZED($)   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----                          -----------   -----------   -------------------------   -------------------------
<S>                           <C>           <C>           <C>                         <C>
H. Brian Thompson...........      --            --               -0-/3,300,000                -0-/24,306,000
Robert Amman................      --            --            33,750/1,061,250             532,913/7,719,638
Robert Schriesheim..........      --            --                 -0-/700,000                 -0-/4,749,000
Hans Peter Kohlhammer.......      --            --              40,052/389,494           1,008,910/3,693,058
Gerard J. Caccappolo........      --            --              12,500/309,500             142,250/2,564,110
</TABLE>

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

(1) Based on the closing price of $34.75 on the New York Stock Exchange of the
    Common Stock on December 31, 1999.

THE GTS 401(k) PLAN

     The GTS 401(k) Plan is a defined contribution retirement benefit plan that
is qualified for favorable tax treatment under Section 401 of the Code. All
employees of GTS, subject to certain regulatory qualifications, including the
five most highly compensated officers, who are at least 21 years of age and have
completed the minimum service requirement are eligible to participate in the
401(k) Plan. The 401(k) Plan participants may defer pre-tax income by
contributing to the plan up to the maximum amount permitted by law. After-tax
contributions are also permitted under the 401(k) Plan. GTS matches 50% of each
participant's pre-tax contribution to the 401(k) Plan up to 5% of the
participant's total compensation. In addition, GTS may, in its sole discretion
and in a nondiscriminatory manner, contribute additional amounts as profit
sharing to each participant's account. The amounts that are deposited into each
participant's account are invested among various investment options according to
the direction of the participant. Each participant's pre-tax and after-tax
contributions are immediately vested and nonforfeitable. GTS's matching
contribution and profit sharing allocations to each participant's account do not
vest until the participant has completed three years of service with GTS, at
which time the matching contribution and profit sharing allocations become 100%
vested. Each participant is eligible to begin receiving benefits under the
401(k) Plan on the first day of the month coincident with or following the
attainment of normal retirement age. There is no provision for early retirement
benefits under the 401(k) Plan.

THE GLOBAL TELESYSTEMS GROUP, INC. EQUITY COMPENSATION PLAN

     The purpose of the Global TeleSystems Group, Inc. Equity Compensation Plan
is to attract, retain and motivate key employees, officers and eligible
independent contractors of GTS and to enable such individuals to own shares of
GTS common stock and to have a mutuality of interest with other shareholders of
GTS through the grant of restricted stock and other equity-based awards.

     The total number of shares of common stock that may be issued or
transferred under the Equity Compensation Plan is four percent of the total
number of shares of common stock outstanding at the beginning of the calendar
year, subject to certain adjustments, which are described below. This threshold
number may be increased by the number of shares (a) that were issued under the
Equity Compensation Plan with respect to which no dividends were paid and (b)
that were subsequently forfeited, in accordance with the terms of the Equity
Compensation Plan.

     The Equity Compensation Plan is administered by the Committee. The chief
executive officer of GTS has the authority to recommend the individuals to whom
awards will be granted, subject to approval by the Committee. The Committee has
full and binding authority to determine the fair market value of the GTS common
stock and the number of shares included in any awards, to establish terms and
conditions of any award, to interpret the Equity Compensation Plan, to prescribe
rules relating to the Equity Compensation Plan and to make all other
determinations necessary to administer the Equity Compensation Plan. The
Committee may condition the vesting of restricted stock upon the attainment of
specified performance goals or such other

                                       87
<PAGE>   89

factors as the Committee may determine in its sole discretion. In the event that
the Committee determines, in its sole discretion, that an award of restricted
stock would not be appropriate with respect to any individual who has been
recommended for an award by the chief executive officer, the Committee has the
authority to grant to any such individual any other variety of equity-based
compensation award, including, but not limited to, phantom stock, phantom units,
stock appreciation rights, performance shares and performance units. The
Committee does not, however, have the authority to grant stock options pursuant
to the Equity Compensation Plan.

     Grants under the Equity Compensation Plan are determined by the Committee
in its sole discretion. For this reason, it is not possible to determine the
benefits or amounts that will be received by any individual employee or group of
employees in the future. The Equity Compensation Plan will remain effective
until November 14, 2002, unless earlier terminated by GTS. No restricted stock
may be granted under the Equity Compensation Plan on or after November 14, 2002.

     During a specified period set by the Committee commencing with the date of
any restricted stock award, the participant is not permitted to sell, transfer,
pledge or otherwise encumber shares of restricted stock. Within these limits,
the Committee, in its sole discretion, may provide for the lapse of such
restrictions or may accelerate or waive such restrictions in whole or in part,
based on service, performance and such other factors. Unless the Committee
specifically determines otherwise, a restricted stock award granted under the
Equity Compensation Plan vests one-third on the second anniversary of the date
of grant, one-third on the third anniversary of the date of grant and one-third
on the fourth anniversary of the date of grant.

     The Committee may impose such other restrictions on shares of Common Stock
issued under the Equity Compensation Plan, including a right of first refusal by
GTS that requires the participant to offer GTS any shares that the participant
wishes to sell.

     The Equity Compensation Plan provides that, in the event of a change to the
GTS common stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination or exchange of
shares, or other change in the capital structure made without receipt of
consideration), the Board of Directors will preserve the value of outstanding
awards by making certain equitable adjustments in its discretion.

     The Board of Directors may amend, alter, suspend, discontinue or terminate
the Equity Compensation Plan at any time, except that any such action will be
subject to the approval of GTS shareholders at the first annual meeting
following such action if such shareholder approval is required by any federal or
state law or regulation or the rules of any stock exchange or automated
quotation system on which Common Stock may then be listed or quoted, or if the
Board of Directors determines in its discretion to seek such shareholder
approval.

THE FOURTH AMENDED AND RESTATED 1992 STOCK OPTION PLAN OF GLOBAL TELESYSTEMS
GROUP, INC.

     The Fourth Amended and Restated 1999 Stock Option Plan of the Company (the
"Fourth and Amended and Restated Plan") provides for the grant of options to
employees, non-employee directors, and independent contractors of GTS and any
subsidiary or affiliate of GTS. Up to 18.5% of the outstanding shares of Common
Stock, from time to time, are authorized to be granted as options under the
Fourth Amended and Restated Plan. A total of approximately 34.1 million shares
of common stock were reserved for issuance to employees, non-employee directors
and independent contractors under the Fourth Amended and Restated Plan
representing 18.5% of the outstanding shares of Common Stock on December 31,
1999. A total of 1 million shares of Common Stock may be issued pursuant to
options qualifying for tax purposes as incentive options under the Fourth
Amended and Restated Plan.

     The Fourth Amended and Restated Plan is administered by the Compensation
Committee (or a sub-committee thereof), which consists of not less than two
directors appointed by the Board of Directors. The Compensation Committee (or a
sub-committee) selects the employees, independent contractors and directors of
GTS and its subsidiaries and affiliates to whom options will be granted. Options
covering not more than 1.5 million shares of Common Stock may be granted to any
employee during any calendar year.

                                       88
<PAGE>   90

     The option exercise price under the Fourth Amended and Restated Plan may
not be less than the exercise price determined by the Compensation Committee (or
a sub-committee) (or 110% of the fair market value of the Common Stock on the
date of grant of the option in the case of an incentive option granted to an
optionee beneficially owning more than 10% of the outstanding Common Stock). The
maximum option term is 10 years and one day (or five years in the case of an
incentive option granted to an optionee beneficially owning more than 10% of the
outstanding Common Stock). Options become vested and exercisable at the time and
to the extent provided in the option agreement related to such option. The
Compensation Committee (or a sub-committee) has the discretion to accelerate the
vesting and exercisability of options.

     There is a $100,000 limit on the value of stock (determined at the time of
grant) covered by incentive options that first become exercisable by an optionee
in any calendar year. No option may be granted more than 10 years after the
effective date of the Fourth Amended and Restated Plan. Generally, during an
optionee's lifetime, only the optionee (or a guardian or committee if the
optionee is incapacitated) may exercise an option except that, upon approval by
the Compensation Committee (or a sub-committee), nonqualified options may be
transferred to the spouse of the optionee and certain nonqualified options may
be granted or transferred to the GTS Employee Stock Option Plan Trust for the
benefit of one or more designated foreign employees, independent contractors or
directors. Incentive stock options are non-transferable except at death.

     Payment for shares purchased under options granted pursuant to the Fourth
Amended and Restated Plan may be made either in cash or by exchanging shares of
Common Stock (which shares have been held by the optionee for at least six
months) with a fair market value of up to the total option exercise price and
cash for any difference. Options may be exercised by directing that certificates
for the shares purchased be delivered to a licensed broker-dealer as agent for
the optionee, provided that the broker-dealer tenders to GTS cash or cash
equivalents equal to the option exercise price plus the amount of any taxes that
GTS may be required to withhold in connection with the exercise of the option.

     If an optionee's employment or service with GTS or a subsidiary or
affiliate terminates by reason of death, retirement or permanent and total
disability, his or her vested options may be exercised within one year after
such death, retirement or disability, unless otherwise provided with respect to
a particular option (but not later than the date the option would otherwise
expire). If the optionee's employment or service with GTS or a subsidiary or
affiliate terminates for any reason other than death, retirement or disability,
options held by such optionee terminate 90 days after such termination, unless
otherwise provided with respect to a particular option (but not later than the
date the options would otherwise expire), except that options terminate
immediately upon termination of an employee or independent contractor for
"cause" (as defined), unless the Compensation Committee (or a
sub-committee)determines otherwise. Each option would be exercisable to the
extent it had become vested before the termination of employment or service
(unless otherwise provided in the option agreement).

     If the outstanding shares of Common Stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or securities
of GTS, by reason of merger, consolidation, reorganization, recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend, spin-off or other distribution payable in capital stock, or
other increase or decrease in such shares without receipt of consideration by
GTS, an appropriate and proportionate adjustment will be made in the number and
kinds of shares subject to the Fourth Amended and Restated Plan, and in the
number, kinds and per share exercise price of shares subject to the unexercised
portion of options granted prior to any such change, in order to preserve the
value of any granted options. Any such adjustment in an outstanding option,
however, will be made without a change in the total price applicable to the
unexercised portion of the option, but with a corresponding adjustment in the
per share option price.

     Upon any dissolution or liquidation of GTS, or upon a reorganization,
merger or consolidation in which GTS is not the surviving corporation, or upon
the sale of substantially all of the assets of GTS to another corporation, or
upon any transaction (including, without limitation, a merger or reorganization
in which GTS is the surviving corporation) approved by the board of directors
which results in any person or entity owning 80% or more of the total combined
voting power of all classes of stock of GTS, the Fourth Amended and Restated
Plan and the options issued thereunder will terminate, unless provision is made
in connection with

                                       89
<PAGE>   91

such transaction for the continuation of the Fourth Amended and Restated Plan,
the assumption of such options or for the substitution for such options of new
options covering the stock of a successor corporation or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kinds of shares and
the per share exercise price. In the event of such termination, all outstanding
options shall be exercisable in full during such period immediately prior to the
occurrence of such termination as the Board of Directors in its discretion shall
determine.

     The board of directors may further amend the Fourth Amended and Restated
Plan with respect to shares of the Common Stock as to which options have not
been granted. However, GTS's stockholders must approve any amendment that would
(1) change the requirements as to eligibility to receive incentive options; or
(2) increase the maximum number of shares in the aggregate for which incentive
options may be granted (except for adjustments upon changes in capitalization);
or (3) otherwise to the extent required by applicable law, rule or regulation.

     The board of directors at any time may terminate or suspend the Fourth
Amended and Restated Plan. Unless previously terminated, the Fourth Amended and
Restated Plan will terminate automatically on April 9, 2008. No termination,
suspension or amendment of the Fourth Amended and Restated Plan may, without the
consent of the person to whom an option has been granted, adversely affect the
rights of the holder of the option.

GTS EUROPE B.V. STOCK OPTION PLAN

     In 1997, GTS Europe B.V. established a stock option plan to replace the
GTS-Hermes Plan for the purpose of incentivizing GTS Europe B.V. key employees.
The aggregate number of shares of GTS Europe B.V. stock subject to this new plan
is approximately 13% of the total shares of GTS Europe B.V. stock issued and
outstanding including options. During 1997, GTS Europe B.V. issued 10,166
options in replacement of those outstanding under a previous stock option plan,
as well as additional options to certain employees. The issuance of these
options resulted in a non-cash charge of $3.7 million of which $2.6 million was
recorded during the fourth quarter of 1997 and the remaining $1.1 million was
recognized in 1998.

EMPLOYMENT AGREEMENTS

     GTS has employment agreements with each of the five most highly compensated
executive officers during 1999. Mr. Thompson's agreement provides that he will
serve in his position for an initial term commencing on March 22, 1999 and
ending on December 31, 2001. This initial term shall be extended for an
additional period expiring on March 31, 2005, unless either Mr. Thompson or the
Company gives notice of non-extension by September 1, 2001. Mr. Caccappolo's
agreement provides that he will serve in his position for an initial term
commencing on January 3, 1995 and ending on January 2, 1997. Since then, his
agreement has been extended for successive one-year periods, and is renewable
automatically for one-year terms, unless either the Company or Mr. Caccappolo
gives three months' notice of non-extension prior to the expiration of such
one-year extensions. Mr. Kohlhammer's agreement provides that he will serve in
his position for a term commencing on March 4, 1999 and ending on September 30,
2001. Messrs. Amman's and Schriesheim's agreements provide that they will serve
in their positions from March 22, 1999 and February 22, 1999, respectively,
until terminated under their agreements. The salary and bonus potential of each
of the five most highly compensated officers is provided for in each agreement
and may be increased at the discretion of the Compensation Committee of the
Board of Directors. In addition to salary and bonus, each of the five most
highly compensated officers is eligible to participate in the employee stock
option plan, to receive standard health and insurance benefits that are provided
to employees of GTS, to receive certain other fringe benefits and to be
reimbursed for all reasonable expenditures incurred in the execution of each
named executive officer's respective duties.

     The employment agreements provide for severance payments in the event of
(a) termination without cause, as defined, or (b) resignation for good reason,
as defined. Severance arrangements for the five most highly compensated
executive officers are for a period of up to twenty-four months of base salary
and an imputed bonus. If the named executive officer is terminated for cause of
if he voluntarily terminates his

                                       90
<PAGE>   92

employment other than for good reason, he shall not be entitled to any salary,
bonus or severance payments (other than accrued salary).

     Each employment agreement includes noncompetition and nonsolicitation
clauses that are effective during the term of employment and for a period of up
to two years thereafter. In addition, the employment agreements include
covenants of confidentiality and nondisclosure. Any dispute arising under an
employment agreement must be resolved through arbitration, except that each
agreement also provides for specific performance and for a court injunction in
the event of a breach by the named executive officer of the covenants described
above.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Bernard McFadden, a Director and Chairman of the Compensation Committee,
was paid $100,000 in consulting fees in 1999.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

     The role of the Compensation Committee is to oversee and direct the
development of executive compensation policies and programs that are consistent
with, explicitly linked to, and supportive of the strategic objectives of
growing the Company's businesses and maximizing shareholder value. The
Committee's specific responsibilities include determining the appropriate levels
of compensation, including salaries, annual incentives, long-term incentives and
employee benefits, for members of the Company's senior management, including
executive officers. The Company believes that a strong link should exist between
executive compensation and management's ability to maximize shareholder value.
This belief is adhered to by developing both short- and long-term incentive
compensation programs that provide competitive compensation and reflect Company
performance.

  Compensation Philosophy

     The four fundamental principles to which the Committee adheres in
discharging its responsibilities are as follows. First, the majority of annual
and long-term compensation for the Company's executive officers should be at
risk, with actual compensation levels correlating with the Company's actual
performance in certain key areas determined by the Committee. Second, over time,
incentive compensation of the Company's executive officers should focus more
heavily on long-term rather than short-term accomplishments and results. Third,
equity-based compensation should be used on an increasing basis so as to provide
executive officers with clear and direct links to the shareholders' interests.
Fourth, the overall executive compensation program should be competitive,
equitable and structured so as to ensure the Company's ability to attract,
retain, motivate and reward the talented executives who are essential to the
Company's continuing success. Total compensation, rather than individual
compensation elements, is the focus of the Company's intent to provide
competitive compensation opportunities.

     The Committee believes that continued revenue growth as well as continued
improvement in other key financial and operating measures should be recognized
in considering compensation levels along with improvements in overall
effectiveness, productivity, return on investment and success of strategic
alliances and business acquisitions and combinations.

     The Committee periodically meets with an outside compensation consultant to
evaluate how well the Company's executive compensation program adheres to this
philosophy and to evaluate the level and mix of salary, annual bonuses and
long-term incentives.

  Compensation Elements

     The Company's compensation program for executives consists of four
principal elements, each of which is vitally important in meeting the Company's
need to attract, retain, motivate and reward highly-qualified executives.

                                       91
<PAGE>   93

     The four principal elements are:

     Base Salaries

     Base salaries for executive officers are generally set at levels that
reflect the competitive marketplace for companies that are of comparable size
and complexity and would be considered competitors of the Company in attracting
and retaining qualified executives. The salaries of the executive officers are
reviewed and approved by the Compensation Committee based on its assessments of
each executive's experience and performance and a comparison of salaries of
peers in other companies.

     Annual Performance Incentives

     Incentive awards have been made on a periodic basis to executive officers
on the basis of Company, business unit and individual performance relative to
budget in such areas as revenue, cash flow, operating income, operating margin
and the like. The Company intends to continue providing incentives in concert
with other compensation elements in order to maintain a competitive total
compensation program for its executive officers. The Committee reviews and
approves all performance measures and goals established under the annual and
long-term incentive plans. The Committee also approves all incentive payments to
executive officers.

     Long-Term Incentives

     The Company relies on stock options as the principal means of providing
long-term incentive compensation. Stock options have been, and will continue to
be, granted to executive officers under the Fourth Amended and Restated 1992
Stock Option Plan.

     Benefits

     Benefits offered to executive officers serve a different purpose than do
other elements of the total compensation program. In general, they provide for
retirement income and serve as a safety net against problems that can arise from
illness, disability or death. Benefits offered to executive officers are
basically those offered to other employees of the Company.

  Evaluation Procedures

     In determining matters regarding executive officer compensation (other than
the Chief Executive Officer), the Committee with the Chairman and Chief
Executive Officer reviews the President and Chief Operating Officer and the
other key executives including the executive officers, the respective areas of
authority and responsibility of the various executive officers, and the
performance and contribution of each to the efforts of the Company in meeting
its goals.

     The Committee has confirmed that the compensation paid in 1999 to the named
executive officers is consistent with the Company's compensation philosophy and
objectives.

  Compensation of the Chief Executive Officer

     Decisions regarding the compensation of the Chairman and Chief Executive
Officer, H. Brian Thompson, were the responsibility of the Committee. Upon his
employment as Chairman and Chief Executive Officer, the Company entered into an
employment agreement with Mr. Thompson that established his initial annual base
salary at $600,000 and his annual target bonus at 140 percent of salary paid.
For the portion of 1999 during which Mr. Thompson served as Chairman and Chief
Executive Officer, salary payments to Mr. Thompson totaled $468,461. Mr.
Thompson was awarded bonuses totaling $449,000 for the performance year 1999,
which was less than his target bonus. This bonus reflected the Company's
performance in revenues, earnings and strategy development and execution. In
evaluating Mr. Thompson's compensation, the Committee and its compensation
consultant compared the Company's compensation practices and levels to those of
other companies involved in similar businesses, including but not limited to,
the companies included in the

                                       92
<PAGE>   94

Performance Graph. Based on this review, the Committee determined Mr. Thompson's
compensation to be appropriate.

  Deductibility of Certain Executive Compensation

     Beginning in 1994, the Omnibus Reconciliation Act of 1993 (the Act) limits
to $1 million the amount that may be deducted by a publicly-held corporation for
compensation paid to each of its named executive officers in a taxable year,
unless the compensation in excess of $1 million is "qualified performance-based
compensation." The Committee and the Company have determined that the Company's
practice is to design its short-term and long-term compensation plans to qualify
for the exemption from the deduction limitations of Section 162(m) of the
Internal Revenue Code and to be consistent with providing appropriate
compensation to executives. Shareholder approval of incentive compensation plans
and various provisions thereunder covering the executive officers has been
sought and obtained and will be sought in the future to continue to qualify
performance-based compensation for the exemption. Although it is the Company's
intent to qualify compensation for the exemption from the deduction limitations,
the Company's compensation practices have been and, will continue to be,
designed to serve the best interests of the shareholders regardless of the
whether specific compensation qualifies for the exemption.

Compensation Committee Members during 1999:

          Bernard McFadden, Chairman
          James W. Peet
          Frank V. Sica
          Adam Solomon
          David Dey (no longer on the Committee as of July 1999)
          Michael Greeley (resigned from Board in March 1999)
          Stewart J. Paperin (no longer on the Committee as of July 1999)

                                       93
<PAGE>   95

                               PERFORMANCE GRAPH

     The following performance graph compares the percentage change in the
Company's cumulative total shareholder return on our common stock from February
5, 1998 (the date on which the common stock began trading on the Nasdaq National
Market) and ending on December 31, 1999 with the cumulative total return,
assuming reinvestment of dividends of the Standard & Poor's 500 Stock Index and
the Nasdaq Telecom Index.

                              [PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                   2/5/98     3/98      6/98      9/98      12/98     3/99      6/99      9/99      12/99
---------------------------------------------------------------------------------------------------------------------------
<S>                               <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
 Global TeleSystems Group, Inc.    $100.00   $171.16   $178.49   $123.57   $204.12   $204.80   $296.56   $144.39   $254.46
 S & P 500                          100.00    112.70    116.42    104.84    127.17    133.51    142.92    133.99    153.93
 NASDAQ Telecommunications          100.00    119.34    126.21    111.70    154.37    191.82    203.93    189.02    268.82
</TABLE>

                                       94
<PAGE>   96

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information ownership of our common
stock and rights to acquire common stock by (i) GTS stockholders that manage or
own, either beneficially or of record, five percent or more of the common stock,
(ii) each of the directors and executive officers of GTS and (iii) the directors
and officers of GTS as a group as of December 31, 1999. For the purposes of this
table, a person or group of persons is deemed to have "beneficial ownership" of
any shares which such person or group has the right to acquire within 60 days
after such date, but such shares are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.

<TABLE>
<CAPTION>
                                                               NUMBER OF
                                                                 SHARES          PERCENTAGE
                                                              BENEFICIALLY      BENEFICIALLY
NAME OF BENEFICIAL OWNER                                      OWNED(1)(2)         OWNED(1)
------------------------                                      ------------      ------------
<S>                                                           <C>               <C>
AXA Assurances I.A.R.D. Mutuelle............................   37,285,172(3)       20.21
  9 Place Vendome
  75001 Paris France
  1290 Avenue of the Americas
  New York, NY 10104
Putnam Investments..........................................   14,542,789(4)        7.88
  One Post Office Square
  Boston, MA 02109
George Soros................................................   11,998,094(5)        6.28
  c/o Soros Fund Management LLC
  888 Seventh Avenue, 31st Floor
  New York, NY 10106
David Dey...................................................       31,972          *
Roger W. Hale...............................................       34,490          *
Bernard McFadden............................................      100,572          *
Stewart J. Paperin..........................................       69,572          *
W. James Peet...............................................       33,572          *
Jean Salmona................................................       59,572          *
Frank V. Sica...............................................        1,572          *
Alan B. Slifka..............................................    4,548,699(6)        2.47
Adam Solomon................................................      122,129          *
Gerald W. Thames............................................    1,817,688(7)       *
H. Brian Thompson...........................................    1,139,389          *
Gerard J. Caccappolo........................................      496,500          *
Robert J. Amman.............................................      297,084          *
Robert A. Schriesheim.......................................      167,667          *
Hans Peter Kohlhammer.......................................       90,548          *
Other officers..............................................    1,923,418           1.04
All Directors and Executive Officers as a group (27
  persons)..................................................   10,934,444
          Total of above....................................   74,760,499
</TABLE>

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

 *  Less than 1%

(1) The percentage of ownership for each beneficial owner is based upon
    184,472,884 shares of GTS common stock issued and outstanding at December
    31, 1999 and the number of warrants and stock options in common stock held
    by such beneficial owner. Excluded from the calculation are: 33,210,047
    shares of common stock issued under the GTS' option plans; and 8,772,626
    shares of common stock pursuant to the exercise of stock option warrants.

(2) Includes shares of common stock issuable upon the exercise of stock options
    and stock warrants within 60 days of December 31, 1999.

                                       95
<PAGE>   97

(3) Ownership information, that represents holdings of several separately
    managed funds, is based on a Schedule 13G filed in February 2000 with the
    SEC. Number of shares as to which such holder has: sole voting power --
    12,472,532 shares; shared voting power -- 23,073,348 shares; sole
    dispositive power -- 37,189,669 shares; and shared dispositive
    power -- 87,303 shares.

(4) Ownership information, that represents holdings of several separately
    managed funds, is based on a Schedule 13G filed in February 2000 with the
    SEC. Number of shares as to which such holder has: shared voting
    power -- 187,971 shares; and shared dispositive power -- 14,542,789 shares.

(5) Ownership information, that represents holdings of several group members, is
    based on a Schedule 13G filed in February 2000 with the SEC. Number of
    shares as to which such holder has: sole voting power -- 11,998,094 shares;
    and sole dispositive power -- 11,998,094 shares. As indicated within the
    Schedule 13G, Mr. Soros may be deemed to have been the beneficial owner of
    11,998,094 common shares. The number consists of (a) 8,660,562 shares
    (including 6,666,666 shares subject to immediately exercisable warrants)
    held for the account of Open Society Institute, (b) 1,948,398 shares held
    for the account of Soros Hungary, (c) 1,313,698 shares held for the account
    of Soros Charitable Foundation, and (d) 75,436 shares held for the account
    of Soros Humanitarian.

(6) Includes 2,666,295 shares of common stock owned by Mr. Slifka, 1,139,876
    shares of common stock held in various trusts, options to purchase 33,572
    shares of common stock owned by Mr. Slifka, and 708,956 shares of common
    stock held by various Halcyon partnerships which are managed by Halcyon/
    Alan B. Slifka Management Company (over which Mr. Slifka disclaims
    beneficial ownership).

(7) Includes 691,000 shares of common stock held in the "Thames Family
    Foundation, Inc." and options to purchase 1,126,688 shares of common stock
    owned by Mr. Thames.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The Company has entered into a subscription agreement (the "Subscription
Agreement") dated as of April 6, 1999 with H. Brian Thompson, its Chairman and
Chief Executive Officer, in connection with Mr. Thompson's employment agreement
with the Company. The Subscription Agreement provides that Mr. Thompson purchase
$20 million of the Company's common stock valued at $27.17 per share, or a total
of 736,056 shares. The Subscription Agreement provides further that Mr. Thompson
pay for 368,028 of these shares for $10 million in cash and for 368,028 of these
shares using the proceeds of a loan in the principal amount of $10 million from
the Company. These arrangements were consummated in June 1999. In connection
with the loan, Mr. Thompson has delivered a secured promissory note to the
Company which bears interest at the Federal Mid-Term Rate and has a maturity of
six years.

     The Company has entered into an employment agreement with Mr. Thames,
Executive Vice Chairman of the Board of Directors. The agreement provides that
he will hold this position until at least the 2000 annual shareholders meeting
and that he will perform such other reasonable duties and exercise such other
power and authority as may be reasonably delegated by the Board of Directors.
The agreement commenced March 21, 1999 and expires on October 31, 2001, unless
extended. The agreement provides that Mr. Thames will receive an annual salary
of $400,000 and a bonus for the fiscal years 1999 and 2000, or pro rated portion
thereof, in an amount not less than fifty percent of his salary for such year.
In addition to salary and bonus, Mr. Thames is also eligible to participate in
the employee stock option plan, to receive standard health and insurance
benefits that are provided to employees of GTS, to receive certain other fringe
benefits and to be reimbursed for all reasonable expenditures incurred in the
execution of his duties. If the Board of Directors were to appoint Mr. Thames to
another position, he would continue to receive his salary and bonus and benefits
for the remaining term of the agreement. If Mr. Thames were terminated without
cause, as defined in the agreement, or resigned for good reason, as defined in
the agreement, during the twenty-four month period following a change of
control, as defined in the agreement, he would receive severance in an amount of
up to thirty-six months of his then-current salary, continuation of certain
benefits and accelerated vesting of all stock options that would have otherwise
vested prior to October 31, 2001. Mr. Thames' agreement includes noncompetition
and nonsolicitation clauses that are effective during the term of his agreement
and for a period of up to one year thereafter. In addition, the employment
agreement includes covenants of confidentiality and nondisclosure. Any dispute
arising under Mr. Thames' employment agreement must be resolved through
arbitration.
                                       96
<PAGE>   98

     Alan B. Slifka, the Vice Chairman of the board of directors, was paid
$66,666 in consulting fees in 1999. Bernard McFadden, a director of GTS, was
paid $100,000 in consulting fees in 1999.

     Halcyon/Alan B. Slifka Management Company LLC (formerly Alan B. Slifka and
Company), a company principally owned by Mr. Slifka, holds 287,756 stock options
to purchase shares Common Stock that were granted in 1991 pursuant to a stock
option agreement that is not subject to any stock option plan. The options have
an exercise price of $0.267 per share and are fully vested. Any of the stock
options that remain unexercised after November 30, 2001 shall lapse and become
void. Generally, in the event that Mr. Slifka ceases to be an employee or
nonemployee director of GTS, any of such unexercised stock options shall lapse
thirty days after such termination. The shares of Common Stock underlying such
options have been registered under a registration statement that has been
declared effective by the SEC.

     The Soros associates purchased $40 million of notes from us in 1996, which
notes bore interest at 10% per annum, in partial consideration of which (1) the
Soros associates received the right to designate, from time to time, one person
for nomination to the Board of Directors and (2) the affiliates received
warrants to purchase 8,888,886 shares of our common stock. Together with their
prior equity interests in GTS, these affiliates currently hold, on a fully
diluted basis (excluding shares underlying stock options), approximately 6.28%
of Common Stock. In accordance with the terms of the warrant agreement, the
exercise price of the warrants was reduced from $5.14 per share to $4.67 per
share as the outstanding debt had not been repaid prior to December 31, 1996. In
February 1998, we repaid the $40 million of notes, plus accrued interest, using
part of the proceeds of an offering of senior notes and the initial public
offering completed at that time. In addition, these affiliates collect a
monitoring fee of $40,000 per month. In 1999, the Soros associates exercised
warrants and 116,260 common shares were issued. Under certain agreements, these
affiliates have the right to co-invest with us in all of our new ventures
throughout Asia, excluding countries in the former Soviet Union, and pursuant to
this right, one of these affiliates holds a 25% interest in GTS China
Investments LLC.

                                    PART IV

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

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

          1  Financial Statements

          The following consolidated financial statements of the Company are
     included in Part II, Item 8 of this report:

        - Report of Ernst & Young LLP, Independent Auditors

        - Consolidated Balance Sheets as of December 31, 1999 and 1998

        - Consolidated Statements of Operations for each of the Three Years
          Ended December 31, 1999

        - Consolidated Statements of Cash Flows for each of the Three Years
          Ended December 31, 1999

        - Consolidated Statements of Changes in Shareholders' Equity for each of
          the Three Years Ended December 31, 1999

        - Notes to Consolidated Financial Statements

          2  Consolidated Financial Statement Schedules

          We have furnished Schedule II -- Valuation and Qualifying Accounts on
     Page 104.

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

                                       97
<PAGE>   99

     b) Reports on Form 8-K

<TABLE>
<CAPTION>
DATE OF REPORT                                   SUBJECT OF REPORT
--------------                                   -----------------
<S>                                    <C>
November 2, 1999.....................  Proposed offering of Global
                                       TeleSystems Europe B.V. 10.5% and 11%
                                       Senior Notes maturing 2006 and 2009,
                                       respectively.
</TABLE>

     c) Exhibits

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
        3.1**            -- Certificate of Incorporation of SFMT, Inc.
        3.2**            -- Certificate of Correction to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on October 8, 1993
        3.3**            -- Certificate of Ownership and Merger Merging San
                            Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
                            with the Delaware Secretary of State on November 3, 1993
        3.4**            -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on January 12, 1995
        3.5**            -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on February 22, 1995
        3.6**            -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on October 16, 1996
        3.7**            -- By-laws of SFMT, Inc.
        3.8**            -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on December 1, 1997
        3.9**            -- Form of Amended and Restated By-laws of Global
                            TeleSystems Group, Inc. supersedes By-laws of SFMT, Inc.
                            filed as Exhibit 3.7)
        3.10***          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on January 29, 1998.
        3.11***          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on February 9, 1998.
        3.12***          -- Certificate of Designation, of the Series A Preferred
                            Stock of the Company.
        3.13****         -- Certificate of Designation of the 7 1/4% Cumulative
                            Convertible Preferred Stock of Global TeleSystems Group,
                            Inc.
        3.14*            -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on June 18, 1999.
        4.1**            -- Form of Specimen Stock Certificate for Common Stock of
                            the Registrant
        4.2**            -- Indenture dated as of July 14, 1997 between the Company
                            and The Bank of New York (including the form of Senior
                            Subordinated Convertible Bond due 2000 as an exhibit
                            thereto)
        4.3**            -- Registration Rights Agreement, dated as of July 14, 1997,
                            between Global TeleSystems Group, Inc. and UBS Securities
                            LLC.
</TABLE>

                                       98
<PAGE>   100

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
        4.4**            -- Indenture dated as of August 19, 1997 between Hermes
                            Europe Railtel B.V. and The Bank of New York (including
                            the form of 11 1/2% Senior Note due 2007 as an exhibit
                            thereto)
        4.5**            -- Registration Rights Agreement dated as of August 19, 1997
                            between Hermes Europe Railtel B.V. and Donaldson, Lufkin
                            & Jenrette Securities Corporation, UBS Securities LLC,
                            and Lehman Brothers, Inc.
        4.6**            -- Form of Rights Agreement between Global TeleSystems
                            Group, Inc. and The Bank of New York as Rights Agent.
        4.7**            -- Indenture dated as of February 10, 1998 between Global
                            TeleSystems Group, Inc. and The Bank of New York
                            (including the form of 9 7/8% Senior Notes due 2005 as an
                            exhibit thereto).
       10.1**            -- Senior Note Purchase Agreement, dated as of January 19,
                            1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
       10.1(a)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
       10.1(b)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
       10.1(c)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 23, 1996
       10.1(d)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated September 16, 1996
       10.1(e)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 11, 1997
       10.1(f)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 29, 1997
       10.1(g)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
       10.2**            -- Registration Rights Letter Agreement, dated as of January
                            19, 1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
       10.3**            -- Warrant Agreement, dated as of January 19, 1996, among
                            Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
       10.4**            -- Joint Venture Letter Agreement, dated January 19, 1996,
                            among Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
       10.5              -- Intentionally Omitted
       10.6**            -- Registration Rights Letter Agreement, dated June 6, 1996,
                            among the Company, The Open Society Institute, Winston
                            Partners II LDC and Winston Partners II LLC
</TABLE>

                                       99
<PAGE>   101

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
       10.7**            -- Warrant Agreement, dated as of June 6, 1996, between
                            Global TeleSystems Group, Inc., The Open Society
                            Institute, Winston Partners II LDC and Winston Partners
                            II LLC
       10.8**            -- Senior Note Purchase Agreement, dated as of February 2,
                            1996, between Global TeleSystems Group, Inc. and Emerging
                            Markets Growth Fund, Inc.
       10.8(a)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996 (see Exhibit No. 10.1(b))
       10.8(b)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996
       10.8(c)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 25,
                            1996
       10.8(d)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            10, 1996
       10.8(e)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            16, 1996
       10.8(f)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated December
                            30, 1996
       10.8(g)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated May 13,
                            1997
       10.8(h)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 20,
                            1997
       10.8(i)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 11,
                            1997
       10.8(j)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 21,
                            1997
       10.8(k)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated August 14,
                            1997
       10.8(l)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            29, 1997
       10.9**            -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Emerging Markets Growth Fund, Inc.
       10.10**           -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Emerging Markets
                            Growth Fund, Inc.
       10.11             -- Intentionally Omitted
</TABLE>

                                       100
<PAGE>   102

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
       10.12**           -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Capital International Emerging Markets Funds
       10.13**           -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Capital International
                            Emerging Markets Funds
       10.14**           -- Restated and Amended Global TeleSystems Group, Inc.
                            Non-Employee Directors' Stock Option Plan
       10.15**           -- GTS-Hermes, Inc. 1994 Stock Option Plan
       10.16**           -- Restricted Stock Grant letter, dated as of January 1,
                            1995
       10.17*****        -- Employment Agreement dated as of April 1, 1999 between
                            the Company and H. Brian Thompson
       10.18*            -- Employment Agreement dated March 22, 1999 between the
                            Company and Robert Amman
       10.19*            -- Employment Agreement dated January 3, 1995 between the
                            Company and Gerard Caccappolo
       10.20*            -- Employment Agreement dated July 1, 1998 between Esprit
                            Telecom and Hans-Peter Kohlhammer
       10.21*            -- Employment Agreement dated February 22, 1999 between the
                            Company and Robert Schriesheim
       10.22**           -- SFMT, Inc. Equity Compensation Plan
       10.23**           -- Form of Non-Statutory Stock Option Agreement
       10.24**           -- Third Amended and Restated 1992 Stock Option Plan of
                            Global TeleSystems Group Inc. dated September 25, 1997
       10.25**           -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                            Option Grant
       10.26**           -- Agreement on the Creation and Functions of the Joint
                            Venture of EDN Sovintel, dated June 18, 1990
       10.27**           -- Stock Purchase Agreement among Global TeleSystems Group,
                            Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
                            Limited, and MTU-Inform, dated September 6, 1995
       10.28**           -- Certificate of Registration of Revised and Amended
                            Foundation Document in the State Registration of
                            Commercial Organizations, dated May 30, 1996
       10.29**           -- Agreement on the Creation and Functions of the Joint
                            Venture Sovam Teleport, dated May 26, 1992
       10.30**           -- Amended and Restated Joint Venture Agreement between GTS
                            Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
                            Erik Jennes, dated July 6, 1995
       10.31**           -- Amended and Restated Shareholders' Agreement between HIT
                            Rail B.V., GTS-Hermes, Inc., Nationale Maatschappu Der
                            Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
                            Hermes Europe Railtel B.V., dated July, 1997
       10.31(a)**        -- Shareholders' Agreement among the Hermes Europe Railtel
                            B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
                            Swed Carrier (incorporated by reference to Exhibit 10.1
                            to the Hermes Europe Railtel B.V.'s Registration
                            Statement on Form S-4 (File No. 333-37719) filed on
                            December 11, 1997) (supersedes the Amended and Restated
                            Shareholders' Agreement filed as Exhibit 10.31 to this
                            Registration Statement)
       10.32**           -- Company Agreement between The Societe National de
                            Financement, GTS S.A.M. and The Principality of Monaco,
                            dated September 27, 1995
</TABLE>

                                       101
<PAGE>   103

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
       10.33**           -- Joint Venture Agreement between SFMT-Hungaro Inc. and
                            Montana Holding Vagyonkezelo Kft., dated December 23,
                            1993
       10.34**           -- Joint Venture and Shareholders' Agreement among Gerard
                            Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
                            and Microsystem Telecom Rt., dated August 5, 1994
       10.35**           -- Agreement on the Establishment of Limited Liability
                            Company between SFMT-Czech, Inc. and B&H s.r.o., dated
                            July 12, 1994
       10.36**           -- Formation of the Equity Joint Venture between GTS and
                            SSTIC, dated April 12, 1995
       10.37**           -- Contract to Establish the Sino-foreign Cooperative Joint
                            Venture Beijing Tianmu Satellite Communications
                            Technology Co., Ltd, amended, by and between China
                            International Travel Service Telecom Co., Ltd. and
                            American China Investment Corporation, dated March 27,
                            1996
       10.38**           -- Joint Venture Contract between GTS TransPacific Ventures
                            Limited and Shanghai Intelligence Engineering, Inc.,
                            dated March 28, 1996
       10.39**           -- Agreement between Global TeleSystems Group, Inc. and
                            Cesia S.A., dated June 21, 1997
       10.40**           -- Consulting Agreement between SFMT, Inc. and Alan B.
                            Slifka, dated March 1, 1994
       10.41**           -- Consulting Agreement between Global TeleSystems Group,
                            Inc. and Bernard J. McFadden, dated August 15, 1996
       10.42**           -- Consulting Agreement between CESIA S.A. and Hermes Europe
                            Railtel B.V., dated June 20, 1997
       10.43***          -- Key Employee Stock Option Plan of Hermes Europe Railtel
                            B.V.
       21.1*             -- List of Subsidiaries of the Registrant
       23.1*             -- Consent of Ernst & Young LLP
       23.2*             -- Consent of PricewaterhouseCoopers
       23.3***           -- Report of PricewaterhouseCoopers Independent Accountants
       24.1*             -- Powers of Attorney (included on signature page to this
                            report)
       27.1*             -- Financial Data Schedule extracted from December 31, 1999
                            audited financial statements
       99.1******        -- The Further Restated Shareholders Agreement, dated
                            October 7, 1999 between FLAG Atlantic Holdings Limited
                            and GTS Transatlantic Holdings, Ltd. (Portions of this
                            Exhibit are subject to a request for confidential
                            treatment filed by GTS with the Commission.)
       99.2******        -- Bank Credit Agreement, dated as of October 8, 1999, among
                            FLAG Atlantic Limited, Barclays Capital, Westdeutshe
                            Landesbank Girozentrale, New York Branch, Dresdner Bank
                            AG, New York Branch, Barclays Bank Plc and the Lenders
                            listed therein. (Portions of this Exhibit are subject to
                            a request for confidential treatment filed by GTS with
                            the Commission.)
       99.3******        -- Shareholder Pledge Agreement, dated as of October 8,
                            1999, among GTS Transatlantic Holdings, Ltd., FLAG
                            Atlantic Holdings Limited and Barclays Bank Plc.
</TABLE>

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

*       Filed herewith.

                                       102
<PAGE>   104

**      Incorporated by reference to the correspondingly numbered Exhibit to
        Amendment No. 6 to the Company's registration statement on Form S-1
        dated February 5, 1998 (Commission File No. 333-36555)

***    Incorporated by reference to the correspondingly numbered Exhibit to the
       Company's Annual Report on Form 10-K for the Year Ended December 31,
       1998.

****   Incorporated by reference to the correspondingly numbered Exhibit to
       Amendment No. 1 dated June 4, 1999 to the Company's registration
       statement on Form S-3 (Commission File No. 333-78097)

*****  Incorporated by reference to Exhibit No. 10 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended March 31, 1999.

****** Incorporated by reference to the correspondingly numbered Exhibit to the
       Company's Current Report on Form 8-K filed with the Commission on
       February 8, 2000.

     (d) Schedules

     Schedule II -- Valuation and Qualifying Accounts. The other financial
statement schedules of the Company have been omitted because the information
required to be set forth therein is not applicable or is shown in the Financial
Statements or Notes thereto.

                                       103
<PAGE>   105

                                   SIGNATURES

     Pursuant to the requirements of the 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 County of
Arlington, Commonwealth of Virginia, on this 8th day of March, 2000.

                                            GLOBAL TELESYSTEMS GROUP, INC.

                                            By:    /s/ H. BRIAN THOMPSON
                                              ----------------------------------
                                              Name: H. Brian Thompson
                                              Title:  Chairman and Chief
                                                Executive Officer

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 8th day of March, 2000.

<TABLE>
<CAPTION>
                      SIGNATURE                                                  TITLE
                      ---------                                                  -----
<C>                                                       <S>
                /s/ H. BRIAN THOMPSON                     Chairman and Chief Executive Officer (Principal
-----------------------------------------------------       Executive Officer)
                  H. Brian Thompson

                 /s/ ROBERT J. AMMAN                      President and Director
-----------------------------------------------------
                   Robert J. Amman

              /s/ ROBERT A. SCHRIESHEIM                   Executive Vice President, Corporate Development and
-----------------------------------------------------       Chief Financial Officer (Principal Financial
                Robert A. Schriesheim                       Officer)

              /s/ JEFFREY H. VON DEYLEN                   Senior Vice President, Finance (Principal
-----------------------------------------------------       Accounting Officer)
                Jeffrey H. Von Deylen

                /s/ GERALD W. THAMES                      Executive Vice Chairman of the Board of Directors
-----------------------------------------------------
                  Gerald W. Thames

                 /s/ ALAN B. SLIFKA                       Vice Chairman of the Board of Directors
-----------------------------------------------------
                   Alan B. Slifka

                    /s/ DAVID DEY                         Director
-----------------------------------------------------
                      David Dey

                  /s/ ROGER W. HALE                       Director
-----------------------------------------------------
                    Roger W. Hale
</TABLE>

                                       104
<PAGE>   106

<TABLE>
<CAPTION>
                      SIGNATURE                                                  TITLE
                      ---------                                                  -----
<C>                                                       <S>
               /s/ BERNARD J. MCFADDEN                    Director
-----------------------------------------------------
                 Bernard J. McFadden

               /s/ STEWART J. PAPERIN                     Director
-----------------------------------------------------
                 Stewart J. Paperin

                                                          Director
-----------------------------------------------------
                    W. James Peet

                  /s/ JEAN SALMONA                        Director
-----------------------------------------------------
                    Jean Salmona

                  /s/ FRANK V. SICA                       Director
-----------------------------------------------------
                    Frank V. Sica

                                                          Director
-----------------------------------------------------
                    Adam Solomon
</TABLE>

                                       105
<PAGE>   107

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
COL. A                                       COL. B             COL. C              COL. D       COL. E
-----------------------------------------  ----------   -----------------------   ----------   ----------
                                                               ADDITIONS
                                                        -----------------------
                                           BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                           BEGINNING     COST AND      OTHER                      END
DESCRIPTION                                OF PERIOD     EXPENSES     ACCOUNTS    DEDUCTIONS   OF PERIOD
-----------                                ----------   ----------   ----------   ----------   ----------
<S>                                        <C>          <C>          <C>          <C>          <C>
Allowance for doubtful accounts at
  12/31/99...............................    9,533        37,560                    (2,956)      44,137
Allowance for doubtful accounts at
  12/31/98...............................    6,474         7,474                    (4,415)       9,533
Allowance for doubtful accounts at
  12/31/97...............................    1,040         5,318                      (178)       6,180
</TABLE>

     The beginning balance for 1998 does not match the ending balance for 1997;
the difference reflects the activity for GTS (Europe) Ltd. for the three month
period ended December 31, 1997. The Company's consolidated balance sheet as of
December 31, 1997 represents the audited historical balance sheet of GTS
(Europe) Ltd. as of September 30, 1997 combined with GTS's historical balance
sheet as of December 31, 1997.

                                       106
<PAGE>   108

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
        3.1**            -- Certificate of Incorporation of SFMT, Inc.
        3.2**            -- Certificate of Correction to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on October 8, 1993
        3.3**            -- Certificate of Ownership and Merger Merging San
                            Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
                            with the Delaware Secretary of State on November 3, 1993
        3.4**            -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on January 12, 1995
        3.5**            -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on February 22, 1995
        3.6**            -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on October 16, 1996
        3.7**            -- By-laws of SFMT, Inc.
        3.8**            -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc., filed
                            with the Delaware Secretary of State on December 1, 1997
        3.9**            -- Form of Amended and Restated By-laws of Global
                            TeleSystems Group, Inc. supersedes By-laws of SFMT, Inc.
                            filed as Exhibit 3.7)
        3.10***          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on January 29, 1998.
        3.11***          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on February 9, 1998.
        3.12***          -- Certificate of Designation, of the Series A Preferred
                            Stock of the Company.
        3.13****         -- Certificate of Designation of the 7 1/4% Cumulative
                            Convertible Preferred Stock of Global TeleSystems Group,
                            Inc.
        3.14*            -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems Group, Inc. filed
                            with the Delaware Secretary of State on June 18, 1999.
        4.1**            -- Form of Specimen Stock Certificate for Common Stock of
                            the Registrant
        4.2**            -- Indenture dated as of July 14, 1997 between the Company
                            and The Bank of New York (including the form of Senior
                            Subordinated Convertible Bond due 2000 as an exhibit
                            thereto)
        4.3**            -- Registration Rights Agreement, dated as of July 14, 1997,
                            between Global TeleSystems Group, Inc. and UBS Securities
                            LLC.
        4.4**            -- Indenture dated as of August 19, 1997 between Hermes
                            Europe Railtel B.V. and The Bank of New York (including
                            the form of 11 1/2% Senior Note due 2007 as an exhibit
                            thereto)
        4.5**            -- Registration Rights Agreement dated as of August 19, 1997
                            between Hermes Europe Railtel B.V. and Donaldson, Lufkin
                            & Jenrette Securities Corporation, UBS Securities LLC,
                            and Lehman Brothers, Inc.
        4.6**            -- Form of Rights Agreement between Global TeleSystems
                            Group, Inc. and The Bank of New York as Rights Agent.
</TABLE>
<PAGE>   109

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
        4.7**            -- Indenture dated as of February 10, 1998 between Global
                            TeleSystems Group, Inc. and The Bank of New York
                            (including the form of 9 7/8% Senior Notes due 2005 as an
                            exhibit thereto).
       10.1**            -- Senior Note Purchase Agreement, dated as of January 19,
                            1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
       10.1(a)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
       10.1(b)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated June 6, 1996
       10.1(c)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 23, 1996
       10.1(d)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated September 16, 1996
       10.1(e)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 11, 1997
       10.1(f)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
                            dated July 29, 1997
       10.1(g)**         -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.,
       10.2**            -- Registration Rights Letter Agreement, dated as of January
                            19, 1996, among Global TeleSystems Group, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
       10.3**            -- Warrant Agreement, dated as of January 19, 1996, among
                            Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
       10.4**            -- Joint Venture Letter Agreement, dated January 19, 1996,
                            among Global TeleSystems Group, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
       10.5              -- Intentionally Omitted
       10.6**            -- Registration Rights Letter Agreement, dated June 6, 1996,
                            among the Company, The Open Society Institute, Winston
                            Partners II LDC and Winston Partners II LLC
       10.7**            -- Warrant Agreement, dated as of June 6, 1996, between
                            Global TeleSystems Group, Inc., The Open Society
                            Institute, Winston Partners II LDC and Winston Partners
                            II LLC
       10.8**            -- Senior Note Purchase Agreement, dated as of February 2,
                            1996, between Global TeleSystems Group, Inc. and Emerging
                            Markets Growth Fund, Inc.
       10.8(a)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996 (see Exhibit No. 10.1(b))
</TABLE>
<PAGE>   110

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
       10.8(b)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 6,
                            1996
       10.8(c)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 25,
                            1996
       10.8(d)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            10, 1996
       10.8(e)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            16, 1996
       10.8(f)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated December
                            30, 1996
       10.8(g)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated May 13,
                            1997
       10.8(h)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated June 20,
                            1997
       10.8(i)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 11,
                            1997
       10.8(j)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated July 21,
                            1997
       10.8(k)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated August 14,
                            1997
       10.8(l)**         -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems Group, Inc.
                            and Emerging Markets Growth Fund, Inc., dated September
                            29, 1997
       10.9**            -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Emerging Markets Growth Fund, Inc.
       10.10**           -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Emerging Markets
                            Growth Fund, Inc.
       10.11             -- Intentionally Omitted
       10.12**           -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems Group, Inc. and
                            Capital International Emerging Markets Funds
       10.13**           -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems Group, Inc. and Capital International
                            Emerging Markets Funds
       10.14**           -- Restated and Amended Global TeleSystems Group, Inc.
                            Non-Employee Directors' Stock Option Plan
       10.15**           -- GTS-Hermes, Inc. 1994 Stock Option Plan
       10.16**           -- Restricted Stock Grant letter, dated as of January 1,
                            1995
</TABLE>
<PAGE>   111

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
       10.17*****        -- Employment Agreement dated as of April 1, 1999 between
                            the Company and H. Brian Thompson
       10.18*            -- Employment Agreement dated March 22, 1999 between the
                            Company and Robert Amman
       10.19*            -- Employment Agreement dated January 3, 1995 between the
                            Company and Gerard Caccappolo
       10.20*            -- Employment Agreement dated July 1, 1998 between Esprit
                            Telecom and Hans-Peter Kohlhammer
       10.21*            -- Employment Agreement dated February 22, 1999 between the
                            Company and Robert Schriesheim
       10.22**           -- SFMT, Inc. Equity Compensation Plan
       10.23**           -- Form of Non-Statutory Stock Option Agreement
       10.24**           -- Third Amended and Restated 1992 Stock Option Plan of
                            Global TeleSystems Group Inc. dated September 25, 1997
       10.25**           -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                            Option Grant
       10.26**           -- Agreement on the Creation and Functions of the Joint
                            Venture of EDN Sovintel, dated June 18, 1990
       10.27**           -- Stock Purchase Agreement among Global TeleSystems Group,
                            Inc, Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
                            Limited, and MTU-Inform, dated September 6, 1995
       10.28**           -- Certificate of Registration of Revised and Amended
                            Foundation Document in the State Registration of
                            Commercial Organizations, dated May 30, 1996
       10.29**           -- Agreement on the Creation and Functions of the Joint
                            Venture Sovam Teleport, dated May 26, 1992
       10.30**           -- Amended and Restated Joint Venture Agreement between GTS
                            Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
                            Erik Jennes, dated July 6, 1995
       10.31**           -- Amended and Restated Shareholders' Agreement between HIT
                            Rail B.V., GTS-Hermes, Inc., Nationale Maatschappu Der
                            Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
                            Hermes Europe Railtel B.V., dated July, 1997
       10.31(a)**        -- Shareholders' Agreement among the Hermes Europe Railtel
                            B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
                            Swed Carrier (incorporated by reference to Exhibit 10.1
                            to the Hermes Europe Railtel B.V.'s Registration
                            Statement on Form S-4 (File No. 333-37719) filed on
                            December 11, 1997) (supersedes the Amended and Restated
                            Shareholders' Agreement filed as Exhibit 10.31 to this
                            Registration Statement)
       10.32**           -- Company Agreement between The Societe National de
                            Financement, GTS S.A.M. and The Principality of Monaco,
                            dated September 27, 1995
       10.33**           -- Joint Venture Agreement between SFMT-Hungaro Inc. and
                            Montana Holding Vagyonkezelo Kft., dated December 23,
                            1993
       10.34**           -- Joint Venture and Shareholders' Agreement among Gerard
                            Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
                            and Microsystem Telecom Rt., dated August 5, 1994
       10.35**           -- Agreement on the Establishment of Limited Liability
                            Company between SFMT-Czech, Inc. and B&H s.r.o., dated
                            July 12, 1994
       10.36**           -- Formation of the Equity Joint Venture between GTS and
                            SSTIC, dated April 12, 1995
</TABLE>
<PAGE>   112

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
       10.37**           -- Contract to Establish the Sino-foreign Cooperative Joint
                            Venture Beijing Tianmu Satellite Communications
                            Technology Co., Ltd, amended, by and between China
                            International Travel Service Telecom Co., Ltd. and
                            American China Investment Corporation, dated March 27,
                            1996
       10.38**           -- Joint Venture Contract between GTS TransPacific Ventures
                            Limited and Shanghai Intelligence Engineering, Inc.,
                            dated March 28, 1996
       10.39**           -- Agreement between Global TeleSystems Group, Inc. and
                            Cesia S.A., dated June 21, 1997
       10.40**           -- Consulting Agreement between SFMT, Inc. and Alan B.
                            Slifka, dated March 1, 1994
       10.41**           -- Consulting Agreement between Global TeleSystems Group,
                            Inc. and Bernard J. McFadden, dated August 15, 1996
       10.42**           -- Consulting Agreement between CESIA S.A. and Hermes Europe
                            Railtel B.V., dated June 20, 1997
       10.43***          -- Key Employee Stock Option Plan of Hermes Europe Railtel
                            B.V.
       21.1*             -- List of Subsidiaries of the Registrant
       23.1*             -- Consent of Ernst & Young LLP
       23.2*             -- Consent of PricewaterhouseCoopers
       23.3***           -- Report of PricewaterhouseCoopers Independent Accountants
       24.1*             -- Powers of Attorney (included on signature page to this
                            report)
       27.1*             -- Financial Data Schedule extracted from December 31, 1999
                            audited financial statements
       99.1******        -- The Further Restated Shareholders Agreement, dated
                            October 7, 1999 between FLAG Atlantic Holdings Limited
                            and GTS Transatlantic Holdings, Ltd. (Portions of this
                            Exhibit are subject to a request for confidential
                            treatment filed by GTS with the Commission.)
       99.2******        -- Bank Credit Agreement, dated as of October 8, 1999, among
                            FLAG Atlantic Limited, Barclays Capital, Westdeutshe
                            Landesbank Girozentrale, New York Branch, Dresdner Bank
                            AG, New York Branch, Barclays Bank Plc and the Lenders
                            listed therein. (Portions of this Exhibit are subject to
                            a request for confidential treatment filed by GTS with
                            the Commission.)
       99.3******        -- Shareholder Pledge Agreement, dated as of October 8,
                            1999, among GTS Transatlantic Holdings, Ltd., FLAG
                            Atlantic Holdings Limited and Barclays Bank Plc.
</TABLE>

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

*       Filed herewith.

**      Incorporated by reference to the correspondingly numbered Exhibit to
        Amendment No. 6 to the Company's registration statement on Form S-1
        dated February 5, 1998 (Commission File No. 333-36555)

***    Incorporated by reference to the correspondingly numbered Exhibit to the
       Company's Annual Report on Form 10-K for the Year Ended December 31,
       1998.

****   Incorporated by reference to the correspondingly numbered Exhibit to
       Amendment No. 1 dated June 4, 1999 to the Company's registration
       statement on Form S-3 (Commission File No. 333-78097)

*****  Incorporated by reference to Exhibit No. 10 to the Company's Quarterly
       Report on Form 10-Q for the quarter ended March 31, 1999.

****** Incorporated by reference to the correspondingly numbered Exhibit to the
       Company's Current Report on Form 8-K filed with the Commission on
       February 8, 2000.