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


                                    FORM 10-K

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

(MARK ONE)
     |X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

             For the fiscal year ended December 31, 1997

     |_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
           SECURITIES EXCHANGE ACT OF 1934

             For the transition period from      to

                       COMMISSION FILE NUMBER: 000-21261

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

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


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


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

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

     INDICATE  BY CHECK  MARK  WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE  ACT OF
1934  DURING  THE  PRECEDING  12 MONTHS  (OR FOR SUCH  SHORTER  PERIOD  THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),  AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO

     INDICATE BY  CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S  KNOWLEDGE,  IN DEFINITIVE PROXY OR INFORMATION  STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [ ].

     THE AGGREGATE  MARKET VALUE OF THE VOTING STOCK HELD BY  NON-AFFILIATES  OF
THE REGISTRANT AS OF MARCH 20, 1998 WAS APPROXIMATELY $135,514,594.  AS OF MARCH
20, 1998,  23,061,857 SHARES OF THE REGISTRANT'S  COMMON STOCK, $0.01 PAR VALUE,
WERE OUTSTANDING.

     DOCUMENTS INCORPORATED BY REFERENCE. THE INFORMATION CALLED FOR BY PART III
IS INCORPORATED BY REFERENCE TO THE DEFINITIVE PROXY STATEMENT FOR THE COMPANY'S
1998 ANNUAL MEETING OF STOCKHOLDERS,  WHICH WILL BE FILED ON OR BEFORE APRIL 30,
1998.

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<PAGE>
                                TABLE OF CONTENTS
                                                                        PAGE
                                                                        -----
PART I..................................................................  1

     ITEM 1.   BUSINESS.................................................  1
               General..................................................  1
               Business Strategy........................................  2
               Market Opportunities.....................................  4
               Services.................................................  5
               The Viatel Network.......................................  6
               Circe Network............................................  7
               Sales and Marketing; Customers...........................  9
               Information Systems......................................  10
               Carrier Contracts........................................  11
               Competition..............................................  11
               Government Regulation....................................  12
               Employees................................................  22

     ITEM 2.   PROPERTIES...............................................  22

     ITEM 3.   LEGAL PROCEEDINGS........................................  22

     ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......  22

PART II.................................................................. 25

     ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                 STOCKHOLDER MATTERS..................................... 25

     ITEM 6.   SELECTED FINANCIAL DATA................................... 25

     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS.................... 27

     ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                  MARKET RISKS........................................... 44

     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 45

     ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE.................... 65

PART III................................................................. 65

     ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 65

     ITEM 11.  EXECUTIVE COMPENSATION.................................... 65

     ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                 OWNERS AND MANAGEMENT. ................................. 65

     ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 65

ITEM IV.................................................................. 65

     ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
                REPORTS ON FORM 8-K...................................... 65



<PAGE>
            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

                                     PART I

ITEM 1.   BUSINESS.

GENERAL

         Viatel,  Inc.  (together with its  subsidiaries and  predecessors,  the
"Company"  or "Viatel") is a rapidly  growing  international  telecommunications
company providing high quality, competitively priced, international and domestic
long distance telecommunications  services,  primarily to small and medium-sized
businesses,   carriers  and  resellers.  These  services  include  national  and
international  long  distance  telecommunication  services,  as well as enhanced
services such as toll free services,  calling cards and switched voice band data
services.  The  Company  established  an early  presence  in several key Western
European  countries  to  capitalize  on  the  opportunities  presented  by  full
deregulation of the telecommunications  industry. The Company currently operates
one of the largest alternative Pan-European networks, with international gateway
switching centers in New York and London, network points of presence ("POPs") in
30 cities,  direct  sales forces in nine  Western  European  cities and indirect
sales offices in more than 100 additional  locations in Western  Europe.  Today,
the Company provides  telecommunications  services in Belgium,  France, Germany,
Italy, Spain,  Switzerland,  The Netherlands and the United Kingdom. The Company
also provides  telecommunications services in certain countries in Latin America
(defined  for purposes of this Report to include  Central and South  America and
the United Mexican  States) and Asia and operates as a carriers'  carrier in the
United States and the United Kingdom. The Company's  telecommunications revenues
have grown from $32.3 million in 1995 to $73.0 million in 1997.

         The  Company's  mission is to build a  Pan-European  telecommunications
company  focusing on small and  medium-sized  businesses,  while becoming a high
quality,  low-cost provider of telecommunications  products and services through
the ownership of key network infrastructure. The Company believes that the small
and medium-sized  businesses  segment offers  significant  market  opportunities
because   it   has    traditionally    been   underserved   by   the   incumbent
telecommunications   operator   ("ITO")  and  is  likely  to  be   receptive  to
competitively  priced  bundled  service  offerings  by  new  entrants,  such  as
alternative  carriers,   global  consortia  of   telecommunications   operators,
international  carriers,  Internet  backbone  networks,  resellers,  value-added
networks and other service  providers  (collectively,  "New Entrants"),  such as
those offered by the Company. To service this customer base, to date the Company
has  established   sales  offices  in  nine  Western  European  cities  and  has
established indirect sales offices,  through arrangements with independent sales
representatives and telemarketing  agents, in more than 100 additional locations
in Western Europe. At December 31, 1997, the Company's customer base,  primarily
consisting of small and  medium-sized  businesses,  was 21,515,  of which 12,407
were located in Western Europe.

         The Company believes that network  ownership is critical to becoming an
high  quality,  low-cost  provider  and will  create the  necessary  platform to
provide a full array of  telecommunications  products and services to customers.
The Company has recently  initiated a program to own key elements of its network
infrastructure,  including  interests in fiber optic cable systems. By owning or
controlling  key  elements of its  network,  the Company  will be better able to
control service offerings,  quality, and transmission and other operating costs.
Ownership  of  network  facilities  is an  essential  element  in the  Company's
expansion  into new service  offerings such as data  products,  including  frame
relay, Internet services and asynchronous transfer mode ("ATM") services.

                                       1
<PAGE>

         As part of the Company's strategy to own or control key elements of its
network,  the  Company  is in the  process of raising  capital  to  construct  a
state-of-the-art  fiber optic ring which will connect London,  Paris,  Brussels,
Antwerp,  Rotterdam and Amsterdam (the "Circe Network").  The Circe Network will
be  a  high  quality,  high  capacity,  self-healing  ring,  utilizing  advanced
synchronous  digital  hierarchy  ("SDH")  and dense wave  division  multiplexing
("DWDM")  technologies.  If the Company is able to raise the funds  necessary to
construct the Circe  Network,  the Circe Network will  significantly  expand the
Company's revenue opportunities by enabling it to (i) provide a broader range of
products and services to retail customers,  (ii) provide  wholesale  services to
the  large  base  of  resellers  that  the  Company   expects  will  develop  as
deregulation  continues in Western  Europe and (iii)  capitalize  on the growing
demand for bandwidth intensive services in Europe.

         In order to complement  and  efficiently  utilize  capacity on Viatel's
network,  the Company sells  switched  minutes to wholesale  customers and other
resellers in the United States and the United Kingdom. The Company believes that
the  sale of  switched  minutes  to such  customers  is an  effective  means  of
achieving network efficiencies.

BUSINESS STRATEGY

         The  Company's  mission is to build a  Pan-European  telecommunications
company  focusing on small and  medium-sized  businesses,  while becoming a high
quality,  low-cost provider of telecommunications  products and services through
the ownership of key network  infrastructure.  The key elements of the Company's
strategy include:

         CAPITALIZE ON LARGE AND RAPIDLY DEREGULATING EUROPEAN MARKETS

         The Company's principal focus is on exploiting  opportunities presented
by rapidly deregulating  European markets. For 1996, the European  international
long distance market was the largest in the world with  approximately 28 billion
minutes.  The Company  estimates that, during 1997, the market for long distance
services  and voice band data in the  Western  European  countries  in which the
Company operates  represented  approximately  $59.6 billion,  with approximately
$45.0  billion  representing  national  long  distance and  approximately  $14.6
billion  representing  international long distance. A substantial portion of the
international  traffic  originating in Europe terminates in Europe or the United
States where the Company has international  gateway switches.  As liberalization
takes effect throughout  Western Europe,  the Company believes New Entrants will
play a significant role in penetrating these markets.

         LEVERAGE ESTABLISHED MARKET PRESENCE AND LOCAL DISTRIBUTION NETWORK

         The  Company  established  an  early  presence  in  Western  Europe  to
capitalize   on   the   opportunities   presented   by   deregulation   of   the
telecommunications  industry  in Europe.  As a result,  the  Company  has gained
substantial experience in the operational,  technical,  financial and logistical
issues  involved in building a network  and sales  force in Western  Europe.  To
date, the Company has established  sales offices in nine Western European cities
and  has  established   indirect  sales  offices,   through   arrangements  with
independent sales  representatives  and  telemarketing  agents, in more than 100
additional  locations  in  Western  Europe.  The  Company  believes  it is  well
positioned  to identify and  capitalize on increasing  market  opportunities  in
Western  Europe  and will  continue  to build and  enhance  its sales  force and
operations  in Europe over the next few years and add  products  and services as
telecommunications markets continue to deregulate.

         FOCUS ON SIGNIFICANT BASE OF SMALL AND MEDIUM-SIZED BUSINESSES

         The  Company  has  established  a retail  customer  base of  small  and
medium-sized  businesses  and intends to continue to focus its retail  marketing
efforts on this market segment. In most European markets, small and medium-sized
businesses  account for a significant  percentage of national and  international
calling  traffic and the Company expects this segment will continue to provide a
significant  opportunity  for the  Company.  In  1996,  small  and  medium-sized
businesses  represented,  on  average,  60.0%  of  the  total  company  revenues
generated  and, as of 1994,  approximately  66.0% of the total  workforce in the
European  Union  ("EU")  member  states.  The  Company  believes  that small and
medium-sized  businesses  are likely to be  receptive  to  competitively  priced
bundled service offerings by New Entrants, such as those offered by the Company,
because these businesses have  traditionally been underserved by the ITOs, which
offer their best rates and  services  primarily to  higher-volume  multinational
business customers.

                                       2
<PAGE>

         ENHANCE REVENUE OPPORTUNITIES THROUGH CIRCE NETWORK

         The Company believes that the Circe Network will  significantly  expand
the  Company's   ability  to  capitalize  on  opportunities   presented  by  the
deregulation of the European telecommunications market. First, the Circe Network
will  provide the  Company  with the ability to control the quality and scope of
services to retail customers,  while effectively competing on price. Second, the
Company    believes   that    deregulation   of   the    continental    European
telecommunications  market will lead to the creation of numerous  New  Entrants,
principally  consisting of  resellers,  as occurred in the United States and the
United Kingdom following deregulation of the telecommunications markets in those
countries.  The Circe Network will enable the Company to capture a greater share
of  the  expanding  Western  European  telecommunications  market  by  providing
wholesale  services to other New  Entrants.  Third,  the Company  believes  that
demand for data services will significantly outgrow existing capacity. The Circe
Network  will  enable the  Company  to service  the  expanding  need  created by
bandwidth intensive services.

         ESTABLISH LOW-COST POSITION THROUGH NETWORK OWNERSHIP AND CONTROL

         The Company  believes it is critical to own or control key  elements of
its network in order to be a low-cost  provider.  By owning or  controlling  key
elements  of its  network,  the Company  will be better able to control  service
offerings,  quality,  and transmission and other operating costs. As part of the
Company's  efforts to own key  portions  of its  network,  the  Company  (i) has
purchased  Indefeasible  Rights-of-Use  ("IRUs")  or  Minimum  Investment  Units
("MIUs") in digital  fiber  optic cable  systems,  (ii) has  purchased  POPs and
switches,  and (iii)  assuming  that the Company is able to raise the  necessary
funds,  will  construct the Circe  Network.  The Company also intends to acquire
additional  interests in submarine  fiber optic cable  originating in the United
Kingdom and connected to other EU member states in which the Company has a local
presence.  The Circe Network's  advanced fiber and transmission  electronics are
expected to provide lower  installation,  operating and  maintenance  costs than
older fiber optic systems  generally in commercial  use today.  In addition,  to
offset the construction costs of the Circe Network,  the Company intends to sell
IRUs on the  Circe  Network  for cash or in  exchange  for  IRUs on other  cable
systems.

         CAPITALIZE ON EXPANDING DATA NEEDS

         The  majority  of the  Company's  revenue  is  currently  derived  from
international long distance services.  As liberalization leads to more favorable
interconnection  rates in Western Europe,  the Company intends to offer national
long  distance  services  in  additional  Western  European  countries.  Network
infrastructure  ownership will facilitate the Company's entry into new products,
such as data products  including frame relay,  Internet and ATM services,  which
are more bandwidth and transmission  intensive.  According to industry  sources,
bandwidth  demand for data in the U.S. is  currently  growing  approximately  10
times faster than voice and the Company  expects this trend to develop in Europe
as competitively  priced capacity becomes  available.  The Company believes that
there will be  substantial  demand for data  products by small and  medium-sized
businesses,  and that a bundled service  offering of national and  international
data and voice services will be attractive to this targeted customer base.

         LEVERAGE NETWORK THROUGH CARRIER SALES

         In order to complement  and  efficiently  utilize  capacity on Viatel's
network,  the Company sells  switched  minutes to wholesale  customers and other
resellers in the United States and the United Kingdom. The Company believes that
the  sale of  switched  minutes  to such  customers  is an  effective  means  of
achieving  network  efficiencies.  The Company  believes that its acquisition of
Flat  Rate   Communications,   Inc.   ("Flat  Rate"),   a  United  States  based
international   telecommunications   company  that  markets  capacity  to  other
carriers,  further enhances the Company's network  efficiency,  builds scale and
provides  the Company  with the  critical  mass  necessary to compete in today's
competitive telecommunications markets.

         PURSUE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

    To date, the Company's  growth  primarily has been internally  generated and
managed.  In addition to  systematically  expanding the Company through internal
growth,  the Company  intends to expand its  services  and network  capabilities
through acquisitions,  investments and strategic alliances. The Company believes
that such  acquisitions,  investments  and strategic  alliances are an important
means of increasing network traffic volume and achieving lower termination costs
and desired economies of scale.

                                       3

<PAGE>

MARKET OPPORTUNITIES

         International telecommunications is one of the fastest growing segments
of the long distance  industry,  having experienced a compounded growth in total
minutes of 14% per annum from 1989 to 1996, and is expected to continue  growing
at a rate of approximately  13% per annum through the year 2000. Based upon this
estimate,  worldwide  international  long distance  traffic is projected to grow
from 70 billion  minutes in 1996 to over 114  billion  minutes by the year 2000.
For 1996, the European international long distance market was the largest in the
world with  approximately  28 billion  minutes or 40% of  international  calling
volume originating in Europe. A substantial  portion of the traffic  originating
in Europe  terminates  in Europe or the  United  States  where the  Company  has
international gateway switches.

<TABLE>
<CAPTION>
                                          INTERNATIONAL TRAFFIC PATTERNS

                                                                         EUROPE*         USA          OTHER
                                                                         -------         ---          -----
<S>                                                                      <C>             <C>          <C>

Belgium..............................................................     75.5%           3.7%        20.8%
Netherlands..........................................................     69.0            6.2         24.8
Germany..............................................................     42.7            6.0         51.4
France ..............................................................     53.5            5.7         40.8
Italy................................................................     54.4            9.1         36.5
Spain................................................................     53.9            4.1         42.0
United Kingdom ......................................................     36.8           14.4         48.8
-----------

* Europe-EU member states and Switzerland.
Source: TeleGeography 1997.
</TABLE>

         The Company  estimates  that,  during  1997,  the market for total long
distance  voice and voice band data in the Western  European  countries in which
the Company operates represented approximately $59.6 billion, with $45.0 billion
representing national long distance and approximately $14.6 billion representing
international  long distance.  In many EU member states,  the ability to provide
telecommunications  services  was  liberalized  on January 1, 1998.  The Company
believes that  regulatory  liberalization  in Western  Europe and  technological
advancements  eventually will lead to market developments  similar to those that
have   occurred  in  the  United  States  and  the  United   Kingdom   following
deregulation,  including an increase in both  international and national traffic
volume,  reduced prices,  increased  service  offerings and the emergence of New
Entrants.  By 1995,  New  Entrants had amassed  approximately  19% of the United
States long distance market,  from approximately 10% in 1984. In addition,  from
1991 to 1995,  the number of  competitors  in the United  Kingdom grew from 2 to
120.

         The Company  believes there is a shortage of  cross-border  capacity in
Europe.  Most  infrastructure in Europe is owned and operated by the ITOs. Under
the traditional system of carrying  cross-border  telecommunications  traffic in
Europe,  no  ITO  developed  end-to-end   cross-border  circuits.   Instead,  an
international  call  is  carried  by the  ITO  in the  country  where  the  call
originates  and is  passed  off to the ITO in the  country  in  which  the  call
terminates  pursuant to bilateral  agreements.  Cable systems have  historically
been built by a consortia of ITOs and certain  other  carriers  under the "Club"
system.  The Club  system has  traditionally  had no  incentive  to (i)  upgrade
capacity to provide  access to new carriers  since their  respective  needs were
met,  or (ii) sell  capacity on a  cost-effective  basis to other  carriers.  In
addition, landing stations associated with these Club systems have traditionally
been  controlled  by the ITO members and, in instances  where  capacity is sold,
other carriers have been required to negotiate "back haul" arrangements in order
to  achieve  access to the Club  systems.  The  Company  believes  the system of
bilateralism and the construction of cable systems by the "Club" has resulted in
a serious  shortage  of  cross-border  capacity in Europe.  Moreover,  growth in
bandwidth intensive services will further fuel the need for bandwidth. According
to  industry  sources,  the  bandwidth  demand for data in the United  States is
currently  growing at the rate  approximately  10 times  faster and the  Company
expects this trend to develop in Europe as competitively priced capacity becomes
available.

         There are currently two private  systems  carrying cross border traffic
currently in operation,  Ulysses, which is owned by WorldCom, Inc. ("WorldCom"),
and Europe Railtel B.V. cable system ("Hermes"). When completed, Ulysses will be

                                       4
<PAGE>

an  approximately  1,800  route  kilometer   Pan-European  fiber  optic  network
connecting  London,  Amsterdam,  Brussels  and  Paris.  Hermes is  currently  an
approximately  2,600 route  kilometer  fiber optic  network  connecting  London,
Rotterdam,  Amsterdam,  Antwerp,  Brussels,  Paris,  Dusseldorf  and  Frankfurt.
The Company  believes  that  neither  Ulysses nor Hermes are  currently  selling
capacity on an IRU basis to other carriers. However, Hermes is currently leasing
capacity to carriers and New Entrants at prices which are attractive compared to
those offered by the ITOs, but remain significantly higher than actual costs. In
addition to Hermes and  Ulysses,  Esprit  Telecom  Group plc is  continuing  its
Pan-European  build  out,  Fibernet  Group  plc has  built  a 35  city  network,
primarily  in the United  Kingdom,  and Level 3  Communications  is  planning to
launch a Pan-European network. Cable & Wireless has also announced its intention
to invest significant  resources in European  telecommunications  facilities and
other companies,  such as "Unisource" (an alliance among Telia of Sweden,  Swiss
Telecom PTT and KPN of The  Netherlands)  and "Global  One" (an  alliance  among
Sprint, France Telecom and Deutsche Telekom),  have announced their intention to
continue  to  focus  on the  European  telecommunications  market.  The  Company
believes  that the Circe Network will provide a valuable  opportunity  to market
capacity to other carriers on an attractive  cost-efficient IRU basis and to New
Entrants on an IRU or long-term lease basis.

     The Company  believes that a  substantial  part of the capacity on existing
routes  has a number of  deficiencies  including  (i) high  costs,  (ii) lack of
end-to-end quality control,  (iii) limited availability of bandwidth,  (iv) long
lead times for  provisioning,  (v) lack of  redundancy  and (vi) long delays for
restoration.  While there have been significant  reductions in leased line costs
as a result of deregulation,  these deficiencies are exacerbated by the increase
in demand for bandwidth from New Entrants, thereby resulting in artificially and
significantly  higher  costs.  The  Company  believes  there  is  a  significant
opportunity to provide cost-effective bandwidth to New Entrants.

SERVICES

         The Company  currently  provides  competitively  priced  long  distance
services with value-added  features that typically have not been provided by the
respective  ITO in many of the  countries  in which the  Company  operates.  The
Company's services include Voice Telephony (defined as the commercial  provision
for the public of the direct  transport  and  switching  of speech in  real-time
between public switched  network  termination  points,  enabling any user to use
equipment  connected to such a network  termination  point to  communicate  with
another  termination  point)  (where  legally   permissible),   virtual  private
networks, dedicated access for high volume users, calling cards, fax service and
the  provision  of switched  minutes to  wholesale  customers.  The  value-added
features  provided by the Company include  itemized and  multicurrency  billing,
abbreviated dialing and multiple payment methods. See "- The Viatel Network."

         The Company's principal services include:

         VIACALL - a service  permitting  domestic and international  calling to
more than 230 countries and territories through switched access. This service is
currently  marketed   exclusively  in  Germany,   the  United  Kingdom  and  The
Netherlands where the Company has full interconnection and a national operator's
license.

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

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

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

         VIAISDN - permits domestic and  international  calling to more than 230
countries  and  territories  through  switched  access via  Integrated  Services
Digital Network ("ISDN") lines. In Spain,  this service is restricted to fax and
voice band data pending the liberalization of the Spanish market.

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

                                       5
<PAGE>

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

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

         The Company  expects to begin offering data services  during the second
half of 1998. The Company currently anticipates that it will incur approximately
$20.0 million of capital expenditures in 1998 and approximately $10.0 million in
1999 in developing  such  services.  There can be no assurance  that the Company
will be able to launch data services in the second half of 1998 or thereafter or
that, if launched, such services will be successful.

         On January 1, 1998, the market for Voice  Telephony was  liberalized in
all EU member  states  where  the  Company  currently  does  business,  with the
exception of Spain. Seven EU member states, including Belgium, Germany and Italy
have been sued by the EC for their  failure to timely  implement  EU  directives
implementing the deregulation of Voice Telephony. See "- Government Regulation."

THE VIATEL NETWORK

         The  Company  currently  operates  one  of  the  largest   Pan-European
networks,  with international  gateway switching centers in New York and London,
which are connected by Company-owned digital fiber optic transmission facilities
and has developed an integrated digital, switch-based telecommunications network
with thirty  locations in Western  Europe  including  switches in Amsterdam (The
Netherlands),  Barcelona  and Madrid  (Spain),  Antwerp and Brussels  (Belgium),
Frankfurt  (Germany),  Milan and Rome (Italy) and Paris  (France) and additional
POPs as follows: Bilboa, Gerona, Majorca, Tarragona and Valencia (Spain); Leuven
(Belgium);   Bordeaux,   Lyon,   Marseille   and   Toulouse   (France);   Geneva
(Switzerland);  Rotterdam  (The  Netherlands);  Berlin,  Hamburg,  Stuttgart and
Wiesbaden (Germany);  Brescia, Florence, Genoa and Vicenza (Italy); connected by
leased, digital fiber optic transmission  facilities (together with the switches
located at its international  gateway switching center in London,  the "European
Network"). The European Network, together with the Company's switches located at
its  international  gateway  switching  center  in New York  and POPs in  Miami,
Florida and Omaha,  Nebraska is referred to as the "Viatel Network".  The Viatel
Network  employs four Nortel DMS 100e switches,  one Nortel DMS 300 switch,  six
Wyatt/Reuters  MRX-2000  switches  and three call  reorigination  switches.  The
Company  intends  to install  additional  POPs in cities  with both  significant
calling activity directed to the Company's switched-based cities and significant
potential  for  originating  and  terminating  international  and domestic  long
distance traffic as required for interconnection with other carriers.

         Access to the Company's  services is obtained either through  "switched
access" or "dedicated  access." Switched access requires the use of: (i) carrier
selection (e.g.,  "1623" in the Netherlands),  which requires the Company to pay
the ITO at a discounted  rate for the cost of accessing the Company's  services;
(ii) paid  access,  which  requires  the customer to pay the ITO for the cost of
accessing the Company's services;  (iii) callback, which enables the customer to
receive a return call providing a dial tone originated from the Company's Omaha,
Nebraska  switching  center;  (iv) ITF,  which  accesses  the  Company's  Omaha,
Nebraska  switching  center by direct  dial;  or (v) national  toll free,  which
accesses a local  switch in the  European  Network.  Customers  using  dedicated
access  are  connected  to a  Company  switch or POP by a  private  leased  line
connected to the customer's premises. Carrier selection and dedicated access are
the  Company's  access  method of  choice in  countries  where the  Company  has
achieved  full  interconnection  with the ITO.  At this time,  the  Company  has
interconnection  agreements  with the following  ITOs:  British  Telecom (United
Kingdom), KPN (The Netherlands) and Deutsche Telekom (Germany). The Company also
has  interconnection  agreements with the following  carriers:  Cable & Wireless
(United Kingdom),  Infostrada (with 32 POPs) (Italy) and ECN  Telecommunications
(with 28 POPs) (Germany).  Currently,  substantially  all of the Company's small
and medium-sized business customers use one or more forms of switched access.

         The  Company's  ownership  of switches  reduces  its  reliance on other
carriers,   enables   routing  of   telecommunications   traffic  over  multiple
transmission  paths,  aids in controlling  costs and permits the  compilation of
call record data and other customer  information.  See "Management's  Discussion
and Analysis of Financial  Condition  and Results of  Operations - Liquidity and
Capital Resources - Capital Expenditures; Commitments."

                                       6
<PAGE>

    THE  EUROPEAN  NETWORK.  The  European  Network  currently  consists  of  an
international  gateway  switching  center in  London  and  switches  in the nine
Western  European  cities  mentioned  above.  These cities were chosen as switch
locations due to the substantial number of international  calls originating from
such cities.  The European Network has been primarily used for call origination.
The Company  anticipates  increasing  use of the  European  Network to transport
calls in Western Europe. See "- Carrier Contracts."

    PRIVATE LINE  CIRCUITS.  The Company's  nine switches in Western  Europe are
currently  connected to its international  gateway switching center in London by
private line  circuits.  Private  line  circuits  are  permanent  point-to-point
connections for voice and data  transmissions and, when certain levels of volume
are reached,  are a less expensive  alternative to the public switched telephone
network ("PSTN"). The private line circuits connecting the Company's switches to
the  international  gateway  switching center in London are leased directly,  or
indirectly  through third parties,  from the ITOs in the countries in which such
calls originate.

         As part of the Company's concerted effort to convert leased capacity to
owned capacity for the purpose of improving  operating margins,  the Company has
continued  to  purchase  IRUs or MIUs in  digital  fiber  optic  cable  systems,
including IRUs in (i)  CANUS-1/CANTAT-3  (8.196 megabits per second ("Mb/s"),  a
transatlantic  cable  originating  in the United  States,  Canada and the United
Kingdom,  (ii) TAT-12/13 (8.196 Mb/s), a transatlantic  cable originating in the
United States,  the United Kingdom and France,  (iii) Atlantic Crossing 1 (155.5
Mb/s),  a  transatlantic  cable  originating in the United States and the United
Kingdom,  and (iv) Gemini (44.7 Mb/s), a transatlantic  cable originating in the
United States and the United  Kingdom,  and MIUs in  Fiberoptic  Link Around the
Globe (18.440  Mb/s),  a cable  originating  in, among other places,  the United
Kingdom,  Italy and Spain.  The  Company  also  intends  to  acquire  additional
interests in cross-channel  digital fiber optic cable  originating in the United
Kingdom  and  connected  to other EU member  states in which the  Company  has a
physical presence. These cables will be used for transmission of traffic between
the United States and Europe and within  Europe,  resulting in improved  service
quality at lower cost.

    SWITCHING  PLATFORMS.  The Viatel Network  utilizes  "intelligent  switches"
which incorporate  software designed to achieve least cost routing,  the process
by which the Company  enhances the routing of calls over the Viatel  Network for
more than 230 countries and territories. Least cost routing is designed to allow
calls that are not routed over the Viatel Network to be routed directly from the
Company's switches through the PSTN to their destinations at the lowest rates.

         The Viatel  Network  uses high  capacity  digital  switching  platforms
designed to provide  services  quickly and  cost-effectively.  The  switches are
modular and scaleable and incorporate among the most advanced  technologies such
as self-diagnosis ISDN, hierarchical call control and dynamic network management
software. These switches, currently consisting of four Nortel DMS 100e switches,
one Nortel DMS 300 switch,  six  Wyatt/Reuters  MRX-2000 switches and three call
reorigination  switches,  which  can also  provide  a bridge  between  older and
emerging  standards.  As the Viatel Network  continues to evolve,  the installed
base of switches can be augmented or upgraded easily to create a cost effective,
scaleable network.

         By combining the Company's  international  gateway switching centers in
New York and London  with its  transatlantic  fiber optic  cable  capacity,  the
Company  believes  that  it will be able  to  provide  customers  with  improved
quality, while lowering its transmission costs.

    NETWORK OPERATIONS  CENTERS.  The Company currently monitors the activity of
the Viatel  Network  from  Omaha,  Nebraska  in the United  States and London in
Europe.  The Company will monitor the activity of its network later in 1998 from
dual Network Operations Centers (each a "NOC") located in London and the greater
New  York   metropolitan   area.  These  NOC's  are  to  be  fully  fitted  with
sophisticated surveillance and control capability, fraud detection and real time
transmission  quality  enhancements.  The  Company's  Omaha,  Nebraska site will
continue  to house its back  office  systems  of support of NOC's and the Viatel
Network.  Each NOC will be capable of acting as a full backup to the other. Each
NOC will also allow "full view"  capability and will have the ability to perform
remote diagnostics and testing on key elements of the Viatel Network, including
the Circe Network, if constructed.

CIRCE NETWORK

         As part of the Company's strategy to own or control key elements of its
network  infrastructure,  the Company is currently  seeking  capital in order to
develop the Circe Network,  which will link London,  Paris,  Brussels,  Antwerp,

                                       7
<PAGE>

Rotterdam and Amsterdam.  There can be no assurance,  however,  that the Company
will be able to raise the funds  necessary  to  develop  the Circe  Network in a
timely  fashion,  if at all.  The Circe  Network  will be a high  quality,  high
capacity  bi-directional,  self-healing  ring,  utilizing  advanced SDH and DWDM
technologies.  The Circe Network is expected to have  approximately  1,850 route
kilometers,  including 320 route  kilometers of undersea fiber optic cable.  The
development and  operational  start-up of the Circe Network is estimated to cost
approximately $330.0 million,  based upon an existing route study.  Assuming the
necessary  funds are raised by mid-April  1998, the Company  expects to commence
construction  of the Circe Network in the Spring of 1998 and to place the system
in  operation  during  the first  quarter  of 1999.  The Circe  Network  will be
deployed along various rights-of-way,  including motorways,  railways, waterways
and pipelines  through a  combination  of new digs and the  acquisition  of dark
fiber. Key characteristics of the Circe Network will include:

                  STATE-OF-THE-ART   TECHNOLOGY.   The  Company   will   install
         state-of-the-art,  technologically  advanced  equipment  in  a  uniform
         configuration throughout the entire Circe Network, which will provide a
         Pan-European  SDH  self-healing   ring.  The  Circe  Network  will  use
         laser-generated  light to  transmit  bi-directionally  over fiber optic
         glass  strands  with an  initial  capacity  at 20  gigabits  per second
         ("Gb/s").  In connection with the  development and  construction of the
         Circe  Network,  the Company will be upgrading  its NOCs to enable near
         real time monitoring and reconfiguration of its network.

                  HIGH  SECURITY  AND  RELIABILITY.  The Circe  Network is being
         designed  for  high  security  and   reliability,   based  upon  (i)  a
         self-healing  system  that will  allow for  instantaneous  restoration,
         virtually eliminating down time in the event of a fiber cut, (ii) fiber
         cable  generally  installed in  high-density  polyethylene  conduits on
         terrestrial  portions of the system and (iii)  advanced  cable armoring
         techniques on the submarine portions of the system.

                  ADDITIONAL  CAPACITY  AND  FLEXIBILITY.  The  Circe  Network's
         high-density  network  architecture  may be upgraded,  without  service
         interruption,  to 160  Gb/s  (16  STM-64)  through  the use of DWDM and
         bi-directional  multi-wavelength optical amplifiers,  to support future
         demand for bandwidth  intensive data  applications such as frame relay,
         Internet and ATM services.  The Company is currently marketing capacity
         on the system to other telecommunications carriers and New Entrants. If
         constructed,  the Circe  Network  will enable the Company to expand the
         reach of its  existing  network to  additional  strategic  destinations
         through the  exchange of capacity on the Circe  Network for capacity on
         other fiber optic systems.

         The Company  began  planning the Circe  Network in the Fall of 1997 and
retained MK International  Limited ("MKI"), a subsidiary of WorldCom, to perform
a feasibility study and to propose a terrestrial route for the Circe Network. On
January 28, 1998, the Company received a preliminary  route study from MKI which
identifies  (i) the preferred  rights-of-way  in each country in which the Circe
Network  will be  constructed,  as well as  alternative  routing  options,  (ii)
procedures for obtaining all permits, licenses and other regulatory requirements
necessary  to allow the system to be  installed  along the  preferred  route and
(iii) construction  methodology and associated risk analysis. The existing route
study is flexible  and may be altered in order to reduce  construction  costs or
the time required to place the Circe Network in operation.

         On March 13, 1998, the Company  executed a binding letter of intent and
term sheet with  Bechtel  International,  Inc.  ("Bechtel"),  pursuant  to which
Bechtel  was engaged by the  Company to manage the  construction  of the system.
Under  the  terms  of  the  letter  of  intent,   Bechtel   will  have   overall
responsibility  for the procurement for, and the arranging and administering of,
the engineering,  construction,  commissioning and testing of the Circe Network.
For  its  services,  Bechtel  will  be  paid a fee  equal  to the sum of (i) its
Recoverable Costs (as defined), which include hourly costs for personnel,  other
direct costs such as costs  associated  with travel,  costs of all equipment and
all costs associated with consultants, subcontractors and other outside services
and  facilities,  the costs of all  equipment,  materials  and supplies  used or
consumed  in  the   performance  of  its  services  and  all  duties,   excises,
assessments,  levies, taxes, imposts and licenses arising out of the performance
of its services;  (ii) agreed upon fees upon the  completion of each of the four
major  segments  into  which  the  Circe  Network  has been  divided;  and (iii)
specified  fees upon the  acquisition of at least 95% of the  rights-of-way  and
wayleaves  required in each of the four  countries in which the Circe Network is
proposed  to be  constructed.

                                       8
<PAGE>

Under  the  terms  of  the  letter  of  intent,   Bechtel  has  committed  to  a
ready-for-service  date of December 31, 1998. In the event that Bechtel fails to
achieve a specified ready-for-service date for any of the four segments, it will
be subject to certain specified  liquidated damages in an amount up to the total
fee pool for the segment,  and if it  completes  the  construction  of a segment
prior to its  scheduled  ready-for-service  date,  Bechtel  will be  entitled to
certain agreed upon incentive payments.

         The Company has also executed a binding letter of intent and term sheet
with Alcatel Submarine  Networks ("ASN"),  dated March 18, 1998, under which ASN
has agreed to procure,  install and test, on a fixed price,  date certain basis,
optical fiber for the submarine portions of the Circe Network. In addition,  the
Company  has a  binding  letter  of  understanding  with  Nortel  Telecom,  Inc.
("Nortel"),  executed  on March 5,  1998,  for the  engineering,  manufacturing,
testing,  installation and  commissioning of transmission  equipment and related
network  management  systems for the Circe Network at a fixed price. Each of the
agreements with ASN and Nortel establishes  maximum contract prices and provides
for  the  payment  of  liquidated  damages  in the  event  that  the  respective
contractor fails to meet agreed upon ready-for-service  dates (November 30, 1998
in the  case of each  agreement  and  December  1998 in the case of each  Nortel
agreement).

         The  Company  intends  to employ  DWDM  technology,  which is among the
latest commercial advancements in optical physics, on the Circe Network. DWDM is
an advancement over basic wave division multiplexing. With DWDM technology, more
light waves can be transmitted  though fiber on the cable thereby permitting the
transfer  of greater  amounts of  information  at lower cost than with  previous
fiber optic  technology.  DWDM is a proven  technology  currently  utilized with
increasing frequency in the telecommunications industry. The Company's switching
platform is largly Nortel-based, and fully compatible with the electronics to be
utilized on the Circe  Network.  The  contemplated  package of electronics to be
purchased  from Nortel  includes  the INM  Network  management  system  which is
multi-vendor capable.

         If   constructed,   the  Circe   Network  will  replace  the  high-cost
low-bandwidth  leased lines  currently used by the Company to  interconnect  its
switches  in London,  Paris,  Amsterdam,  Antwerp  and  Brussels  and its POP in
Rotterdam.  Carriers purchasing IRUs will interconnect with the Circe Network at
optical  interconnection  points,  which will be strategically  located at sites
along the ring, permitting easy access to the system at minimal cost.

         If constructed, the operation of the Circe Network will be monitored by
the  Company's  NOCs to be located  in London  and in the New York  metropolitan
area. These NOCs will also control,  monitor and administer  switches throughout
the Viatel  Network and will provide  "full view"  capability  to the  Company's
maintenance staff, enabling the monitoring of the system, as well as the digital
switches, on a real-time basis.

SALES AND MARKETING; CUSTOMERS

         The  Company's   principal   target   market   consists  of  small  and
medium-sized  businesses.  This market  includes  trading  companies,  financial
institutions,   and   import-export   companies,   for   which   long   distance
telecommunications  service represents a significant business expense. Small and
medium-sized  businesses  constitute a large and growing portion of the European
economy and, in 1996, represented on average 60.0% of the total company revenues
generated in the EU member states and, in 1994, represented  approximately 66.0%
of the total  workforce.  The Company believes that this customer segment offers
significant market opportunities  because it has been traditionally  underserved
by the ITOs  and  small  and  medium-sized  businesses  are  more  likely  to be
receptive to  competitively  priced bundled  service  offerings by New Entrants,
such as those offered by the Company,  than larger size businesses.  The Company
also targets carriers and other resellers.

         From 1991 to 1994,  the  Company's  sales and  marketing  efforts  were
conducted by independent sales  representatives in each of its markets.  In late
1994,  the Company  began  establishing  its own direct  sales forces in certain
Western  European and Latin  American  markets to take greater  control over the
sales and marketing functions and to provide a higher level of customer service.
Currently,  the  Company has direct  sales  forces in the nine cities in Western
Europe in which it has  switches and has  established  indirect  sales  offices,
through  arrangements with independent sales  representatives  and telemarketing
agents, in more than 100 additional locations in Western Europe. The Company has
four sales  professionals  dedicated to marketing and  maintaining the Company's
relationships  with its  wholesale  customers  in the  United  States and in the
United Kingdom.  In Europe, the Company's sales and marketing staff is currently

                                       9
<PAGE>

divided into two  categories:  direct sales  representatives  and indirect sales
representatives.  Direct sales  representatives are responsible for face-to-face
sales efforts to accounts with $500 per month of revenue  potential and indirect
sales  representatives  are responsible for telesales to accounts with less than
$500 per month of revenue potential.

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

         The  Company's  independent  sales  representatives  are  retained on a
non-exclusive/commission-only  basis,  with commissions  being subject to charge
back for revenues not collectible by the Company.  The Company believes that its
relationship with its independent sale representatives is good.

         The Company has  recently  instituted  a sales force  training  program
which is designed to further educate the Company's sales personnel regarding the
Company's  products and  services  and to improve  their  marketing  skills.  As
liberalization of the telecommunications  markets in EU member states continues,
the  Company  anticipates  that it will  begin to  supplement  its sales  forces
through the expanded use of various marketing techniques,  including direct mail
and targeted advertising and promotional efforts. In addition, as regulatory and
marketing  conditions  warrant,  the  Company  may begin to utilize  partnership
marketing as an additional marketing tool.

         The Company  generally  prices its retail services at a discount to the
ITOs' prices in the various geographic markets.  The wholesale rates charged are
generally  priced at or slightly  below the market  price of the leading  United
States international facilities-based carriers, but the Company does not offer a
standard discount relative to any major carrier.

INFORMATION SYSTEMS

         The  Company   believes  that  integrated  and  reliable   billing  and
information   systems   are  key   elements   for  growth  and  success  in  the
telecommunications  industry.  Accordingly,  the  Company  has made  significant
investments to acquire and implement sophisticated information systems which are
designed to enable the Company to: (i) monitor and respond to customer  needs by
developing new and customized  services;  (ii) manage lease cost routing;  (iii)
provide  customized  billing  information;  (iv) provide  high quality  customer
service;  (v) detect and control fraud;  (vi) verify payables to suppliers;  and
(vii) rapidly  integrate new  customers.  The Company  believes that its network
intelligence,  billing and financial  reporting  systems  enhance its ability to
competitively  meet the increasingly  complex and demanding  requirements of the
international  and national long distance  markets.  While the Company  believes
that such systems are  currently  sufficient  for its  operations,  such network
intelligence,  selling and  financial  reporting  systems will  require  routine
upgrades  and ongoing  investments.  See "Item 7.  Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations  - Certain  Factors
Which May  Affect  the  Company's  Future  Results  -  Dependence  on  Effective
Information Systems; Year 2000 Technology Risks."

         The Company  currently has a turnaround time of  approximately 48 hours
for new account entry, subject to credit approval.  The Company's billing system
provides  multicurrency  billing,  itemized  call detail,  city level detail for
destination  reporting and electronic output for select accounts.  Customers are
provided  with  several  payment  options,   including   automated  credit  card
processing and automated direct debiting.

         The  Company  has  developed  software  to  provide  telecommunications
services and render  customer  support.  In certain cases,  the software used to
support  the  Company's  services  may  reside  outside  of  the  switches  and,
therefore,  is not reliant on a third party switch  manufacturer for upgrades or
support.  Each switch has a call detail recording  function which is designed to
enable the Company to: (i) achieve accelerated  collection of call records; (ii)
detect fraud and  unauthorized  usage; and (iii) permit rapid call detail record
analysis. See "- The Viatel Network - Switching Platforms."

         The  Company  also uses  proprietary  software  to assist in  analyzing
traffic  patterns  and  determining  network  usage  and busy  hour  percentage,

                                       10
<PAGE>

originating  traffic by switching  center,  terminating  traffic by supplier and
originating  traffic by  customer.  This data is utilized to provide  least cost
routing,  which may result in call traffic being  transmitted over the Company's
transmission   facilities,   other  carriers'   transmission   facilities  or  a
combination of such facilities. If traffic cannot be handled over the least cost
route due to overflow, the least cost routing system is designed to transmit the
traffic over the next least cost route.  The least cost routing  system  chooses
among the following  variables to minimize the cost of a long distance call over
15 different  suppliers and multiple choices of terminating carrier per country.
The  performance  of the least cost routing  system is verified based on a daily
overflow  report  generated by the Company's  network  traffic  management and a
weekly/monthly  average  termination  cost  report  generated  by the  Company's
billing system.  See "Item 7. Management's  Discussion and Analysis of Financial
Condition  and  Results of  Operations  - Certain  Factors  Which May Affect the
Company's  Future Results - Dependence on Effective  Information  Systems;  Year
2000 Technology Risks."

CARRIER CONTRACTS

         The Company has entered  into  contracts  to purchase  switched  minute
capacity  from  various  domestic  and  foreign  carriers  and  depends  on such
contracts for  origination  and  termination of traffic on the Viatel Network as
well as for  resale of such  capacity  to others.  Carrier  costs  constitute  a
significant  portion  of  the  Company's  variable  costs.   Pursuant  to  these
contracts,  the Company  obtains  guaranteed  rates,  which are  generally  more
favorable than otherwise would be available,  by committing to purchase switched
minute  minimums from such  carriers.  If the Company fails to meet its switched
minute minimum requirements under a carrier contract, it would still be required
to pay its minimum  monthly  commitment as a penalty.  The  Company's  aggregate
annual minimum commitments are approximately $14.0 million. The Company does not
believe  that the loss of any one  supplier  or  contract  would have a material
adverse  impact on the  Company's  business,  financial  condition or results of
operations. See "- Competition."

COMPETITION

         The international telecommunications industry is highly competitive and
is characterized  by substantial  on-going price declines.  For example,  France
Telecom has obtained  approval to reduce retail prices by 9% during each of 1997
and 1998 and 4.5% during each of 1999 and 2000.  Deutsche  Telekom has announced
that it intends to reduce retail long distance  prices by up to 40%.  Neither of
these ITOs has  reduced or is expected  to reduce  wholesale  prices to the same
extent.  These  pricing  policies  have  created  substantial  pressure  on  the
Company's  gross  margins.  The  Company's  success  depends upon its ability to
compete with other  telecommunications  providers in each of its markets.  These
providers include the ITO in each country in which the Company operates, such as
British  Telecom,  France  Telecom,  Belgacom  and  Telecom  Italia,  and global
alliances among some of the world's largest telecommunications carriers, such as
Uniworld, AT&T's World Partners alliance with Unisource,  "Concert" (an alliance
between British Telecom and MCI), Global One and the recently announced alliance
among  WorldCom,  MCI and  Telefonica  de Espana.  Other  potential  competitors
include cable communications companies,  wireless telephone companies,  electric
and other utilities with rights-of-way,  railways,  microwave carriers and large
end users which have private  networks.  The intensity of competition  and price
declines has increased over the past several years and the Company believes that
such competition and price declines will continue to intensify,  particularly in
Western Europe where liberalization of the telecommunications markets continues.
Many of the  Company's  current and  potential  competitors  have  substantially
greater  financial,  marketing  and other  resources  than the  Company.  If the
Company's  competitors devote significant  additional resources to the provision
of  international or national long distance  telecommunications  services to the
Company's target customer base of small and medium-sized businesses, such action
could  have a  material  adverse  effect on the  Company's  business,  financial
condition  and  results of  operations  and there can be no  assurance  that the
Company will be able to compete successfully.

         Because all of the  Company's  current and  intended  European  markets
(other than the United  Kingdom) have only recently  liberalized or still are in
the process of liberalizing the provision of Voice Telephony,  customers in most
of these markets are not  accustomed to obtaining  services from  competitors to
ITOs and may be reluctant to use emerging telecommunications  providers, such as
the Company.  In  particular,  the Company's  target  customer base of small and
medium-sized  businesses with  significant  international  calling needs, may be
reluctant to entrust their  telecommunications  needs to new operators  that are
believed to be unproven.  In addition,  in  continental  Europe,  certain of the
Company's  competitors  (including the ITOs) provide potential  customers with a

                                       11
<PAGE>

broader range of services than the Company can offer due to existing  regulatory
restrictions.

         Competition  for  customers  in  the  telecommunications   industry  is
primarily based on price and quality of services offered. The Company prices its
services primarily by offering discounts to the prices charged by ITOs and other
major  competitors.  However,  prices for international long distance calls have
decreased  substantially  over the past few  years in the  markets  in which the
Company  currently  maintains  operations  or in which it expects  to  establish
operations.  Some of the Company's  larger  competitors may be able to use their
greater  financial  resources to cause severe price competition in the countries
in which the Company  operates or expects to operate.  It appears  that  Western
European ITOs are responding to deregulation  more rapidly and aggressively than
occurred after  deregulation  in the United States and the United  Kingdom.  The
Company  expects that prices for its services  will continue to decrease for the
foreseeable future and that ITOs and other dominant telecommunications providers
will continue to improve their product  offerings.  The  improvement  in product
offerings and service  provisions by the ITOs, as well as the  liberalization of
Voice  Telephony  and  infrastructure  which has  commenced in certain EU member
states, could similarly have a material adverse effect on the competitiveness of
the Company to the extent that the Company is unable to provide  similar  levels
of offerings and services.  If the ITO in any jurisdiction  uses its competitive
advantages  to  their  fullest   extent,   the  Company's   operations  in  such
jurisdiction  would be adversely  affected.  Furthermore,  the marginal  cost of
carrying  calls over fiber optic cable is  extremely  low. As a result,  certain
industry  observers  have  predicted  that,  within a few  years,  there  may be
dramatic and substantial  price reductions and that long distance calls will not
be significantly more expensive than local calls. In addition, certain carriers,
including AT&T, are implementing plans to offer telecommunications services over
the Internet at substantially reduced prices. Any price competition could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         The Company  believes that the ITOs generally have certain  competitive
advantages  that the  Company  and  other  competitors  do not have due to their
control over local connectivity. The Company relies on the ITO for access to the
PSTN and the provision of leased  lines,  and the failure of the ITOs to provide
such access or leased lines at reasonable  pricing could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Item 7.  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operatios - Certain  Factors  Which May Affect the  Company's  Future
Results - Rapidly  Changing  Industry,  Technology  and  Customer  Requirements;
Significant  Price  Declines."  The  reluctance of some  national  regulators to
accept liberalizing  policies,  grant regulatory  approvals that would result in
increased  competition  for the local ITO and enforce access to ITO networks and
essential  facilities  could have a  material  adverse  effect on the  Company's
competitive  position.  There can be no assurance that the Company would be able
to  compete  effectively  in any of  its  markets.  See  "Item  7.  Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Certain  Factors  Which May Affect  The  Company's  Future  Results - "- Rapidly
Changing  Industry,  Technology  and Customer  Requirements;  Significant  Price
Declines."

GOVERNMENT REGULATION

         OVERVIEW.  National  and  local  laws  and  regulations  governing  the
provision  of   telecommunications   services  differ  significantly  among  the
countries in which the Company  currently  operates and intends to operate.  The
interpretation  and  enforcement of such laws and  regulations  varies and could
limit the Company's  ability to provide certain  telecommunications  services in
certain markets. There can be no assurance that future regulatory,  judicial and
legislative changes will not have a material adverse effect on the Company, that
domestic or  international  regulators or third parties will not raise  material
issues with regard to the Company's  compliance or noncompliance with applicable
laws  and  regulations  or that  other  regulatory  activities  will  not have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         INTERNATIONAL TRAFFIC. Under the World Trade Organization ("WTO") Basic
Telecom  Agreement  (the "WTO  Agreement"),  concluded on February 15, 1997,  69
countries  comprising  95% of the  global  market  for basic  telecommunications
services agreed to permit competition from foreign carriers.  In addition, 59 of
these   countries  have   subscribed  to  specific   procompetitive   regulatory
principles.  The WTO  Agreement  became  effective  on  February  5, 1998 and is
expected to be implemented by most signatory  countries in 1998,  although there
may be  substantial  delays.  The Company  believes that the WTO Agreement  will
increase opportunities for the Company and the Company's  competitors.  However,
the precise scope and timing of the  implementation  of the WTO Agreement remain

                                       12
<PAGE>

uncertain and there can be no assurance  that the WTO  Agreement  will result in
beneficial regulatory liberalization.

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

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

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

         REGULATORY FRAMEWORK. A summary discussion of the regulatory frameworks
in certain  geographic regions in which the Company operates or has targeted for
penetration is set forth below. This discussion is intended to provide a general
outline of the more relevant  regulations and current  regulatory posture of the
various jurisdictions and is not intended as a comprehensive  discussion of such
regulations  or  regulatory   posture.   Local  laws  and   regulations   differ
significantly among the jurisdictions in which the Company operates, and, within
such  jurisdictions,  the  interpretation  and  enforcement  of  such  laws  and
regulations can be unpredictable.

         EUROPEAN  UNION.  The EU  consists  of  the  following  member  states:
Austria,  Belgium,  Denmark,  Finland,  France, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom. The
EU was  established  by the Treaty of Rome and  subsequent  treaties.  EU member

                                       13
<PAGE>

states are required to implement  directives  issued by the European  Commission
("EC") and the European Council by passing national legislation. If an EU member
state fails to effect such  directives  with  national  (or, as the case may be,
regional,  community or local) legislation and/or fails to render the provisions
of such  directives  effective  within  its  territory,  the EC may take  action
against the EU member state,  including in proceedings before the European Court
of Justice,  to enforce the  directives.  Private parties may also bring actions
against EU member states for failures to implement such legislation.

         The EC and  European  Council  have  issued a number of key  directives
establishing    basic   principles   for   the    liberalization   of   the   EU
telecommunications   market.   The  general   framework  for  this   liberalized
environment  has been  set out in the EC's  Services  Directive  (the  "Services
Directive") and its subsequent amendments,  including,  in particular,  the Full
Competition  Directive  which was  adopted in March 1996 (the "Full  Competition
Directive"). This basic framework has been advanced by a series of harmonization
directives,  which include the so-called Open Network Provision  directives,  as
well as two additional  directives  adopted in 1997, the Licensing  Directive of
April 1997 and the  Interconnection  Directive of June 1997,  which  address the
achievement of universal service.

         The  Services  Directive  directed  EU  member  states  to  permit  the
competitive provision of all  telecommunications  services with the exception of
Voice Telephony (which does not include value-added  services and voice services
within closed user groups) and certain other  services that have been  gradually
liberalized through subsequent amendments to the Services Directive.  The EC has
generally  taken a narrow view of the services  classified  as Voice  Telephony,
declaring  that member states may not maintain  monopolies or special  operating
rights on voice services that (i) confer new value-added benefits on users (such
as alternative  billing methods),  (ii) are provided through dedicated  customer
access  (e.g.,  by leased  lines) or (iii) are limited to a group having  legal,
economic or professional ties.

         The Full Competition  Directive  amended the Services  Directive to set
January  1, 1998 as the date by which  all EU member  states  were  required  to
remove  all  remaining  restrictions  on  the  provision  of  telecommunications
services  and  telecommunications  infrastructure,  including  Voice  Telephony.
Certain  derogations from compliance with this timetable have been granted.  The
derogations  granted by the EC are as follows:  Luxembourg (July 1, 1998), Spain
(November 30, 1998),  Ireland (January 1, 2000),  Portugal (January 1, 2000) and
Greece (January 1, 2001).

         The Licensing  Directive  sets out framework  rules for the  procedures
associated  with the granting of national  authorizations  for the  provision of
telecommunications  services  and  for the  establishment  or  operation  of any
infrastructure   for  the   provision   of   telecommunications   services.   It
distinguishes between "general  authorizations," which should normally be easier
to obtain  since  they do not  require  an  explicit  decision  by the  national
regulatory authority, and "individual licenses." Individual licenses may only be
imposed  where the  licensee  is to  acquire  access to  scarce  resources  (for
example,  radio  spectrum)  or is to be subject  to  particular  obligations  or
benefits  from  particular  rights.  Accordingly,  EU member  states  may impose
individual   license   requirements  for  the  establishment  and  operation  of
facilities-based networks and for the provision of Voice Telephony,  among other
things.  Consequently,  operation of the  European  Network may require that the
Company be subject to an  individual  licensing  system rather than to a general
authorization in the majority of EU member states.

         The  Interconnection  Directive sets out the  regulatory  framework for
securing  in the EU the  interconnection  of  telecommunications  networks.  The
Interconnection   Directive  requires  member  states  to  remove   restrictions
preventing    negotiation   of   interconnection    agreements,    ensure   that
interconnection  requirements  are  non-discriminatory  and  transparent  and to
ensure  adequate and  efficient  interconnection  for public  telecommunications
networks and publicly available  telecommunications  services. Several EU member
states  have chosen to apply the  provisions  of the  Interconnection  Directive
within their  jurisdictions in such a way as to give more favorable treatment to
infrastructure providers and network operators than to switch-based carriers and
resellers.  Such  distinctions  must be objectively  justified on grounds of the
type of interconnection provided or because of relevant licensing conditions.

         The  Interconnection  Directive is due to be amended shortly to require
EU member  states  (except  those for whom  derogations  exist) to offer carrier
pre-selection  to their  customers by January 1, 2000,  and to introduce  number
portability  (the ability of end-users  to retain  their  numbers when  changing
carriers) for  subscribers  on the public  switched  network by January 1, 2000.
Carrier  pre-selection  is only  required to be made  available by operators who

                                       14
<PAGE>

enjoy significant  market power within the market for  interconnection  over the
fixed network.

         Each EU  member  state in which  the  Company  currently  conducts  its
business has a different  regulatory regime and such differences are expected to
continue.  The requirements  for the Company to obtain necessary  approvals vary
considerably from country to country.

         BELGIUM

         In December  1997,  the Belgian  Federal  Parliament  provided for full
liberalization  of the  telecommunications  sector on January 1, 1998.  However,
this law remains to be  implemented  by a  considerable  number of  implementing
Royal  Decrees to be fully  effective.  For instance,  the licensing  conditions
applicable  to  certain  carriers,   including  the  Company,   require  further
implementing Royal Decrees.

         In  the  interim,  there  is  a  provisional  licensing  system,  which
effectively represents a barrier for many operators wishing to enter the Belgian
market.  The  drafts  of  the  Royal  Decrees  containing  definitive  licensing
conditions  also  contain  stringent   requirements,   such  as  the  operator's
commitment to invest 400 million  Belgian  Francs or to deploy 500 kilometers of
transmission  infrastructure  within  three  years of the date  the  license  is
granted in order to be eligible for a public telecommunications network operator
license. Furthermore, the draft Royal Decrees relating to Voice Telephony and to
public   telecommunications   networks  each  contain  stringent   requirements,
including a contribution  of 1% of annual turnover in order to fund research and
development and other initiatives.

         Notwithstanding  these  requirements  (which  may  be  modified  by  EC
intervention),  the  Company  intends to file  applications  in Belgium  for the
provision of Voice Telephony and for the establishment and operation of a public
telecommunications  network.  The  portion of the Circe  Network  proposed to be
built  in  Belgium  is  expected  to  satisfy  the  infrastructure  requirements
described above.

         Belgium is one of the EU member  states  which  differentiates  between
interconnection   for   infrastructure   providers  and  network  operators  and
switch-based  carriers and resellers.  The  interconnection  tariffs of Belgacom
(Belgium's ITO), which has been officially approved by the Belgian Institute for
Postal  Services  and  Telecommunications   ("BIPT"),  provides  more  favorable
interconnection  rates for  infrastructure  providers and network operators than
for switch-based carriers and resellers.  If  the Circe Network is  constructed,
the Company expects to qualify for these more favorable rates.

         The  modified  Belgian  Telecommunications  Law also  provides  for the
creation  of a  Universal  Service  Fund,  to be managed  by the BIPT,  to which
operators  may be required to contribute  funds in proportion to their  revenues
from the Belgian  telecommunications market. However, the Universal Service Fund
system will not be activated before the year 2000, and then only insofar as: (i)
Belgacom claims a compensation for being the universal  service  provider,  (ii)
the BIPT considers that universal  service  provision  represents a net cost and
(iii) the Belgian  Federal  Government  takes a formal  decision to activate the
Universal Service Fund. From 1998 onwards, the BIPT will "dry-run" the universal
service costing model and keep operators informed of the contributions that they
may be required to make if and when the Universal Service Fund is activated.

         FRANCE

         In July 1996,  legislation  was  enacted  providing  for the  immediate
liberalization of all telecommunications activities in France, but maintaining a
partial  exception for the  provision of Voice  Telephony.  Voice  Telephony was
subsequently fully liberalized on January 1, 1998.

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

         In December 1997,  the Company filed an application  for a license as a
public  telecommunications  network  operator (under Article L33.1 of the French
Code de Postes et  Telecommunications)  and provider of Voice Telephony services
to  the  public   (under   Article  L34.1  of  the  French  Code  de  Postes  et
Telecommunications).  The timing for the granting of the actual license  remains
uncertain,  but should, in principle, not extend beyond the end of April 1998 as

                                       15
<PAGE>

required  by the  EU  Licensing  Directive  (a  draft  decree  implementing  the
Licensing Directive in France is currently undergoing formal public comment).

         Should the Company be granted  authorization to establish and operate a
public  telecommunications  network, it will be subject to certain  obligations,
most  notably  in terms of  non-discriminatory  treatment  of  customers  and an
obligation  to  accept  reasonable  requests  for  interconnection   from  other
carriers.

         France is also one of the EU member states which differentiates between
interconnection for public telecommunications network operators, holding a L33.1
license,   and  Voice  Telephony   providers,   holding  a  L34.1  license.  The
interconnection  tariffs  of France  Telecom  (France's  ITO),  which  have been
officially approved by ART, provide substantially more favorable interconnection
rates for public  telecommunications  network operators than for Voice Telephony
providers.

       GERMANY

         The German  Telecommunications  Act of July 25,  1996  liberalized  all
telecommunications  activities,  but postponed effective liberalization of Voice
Telephony  until  January 1, 1998.  The German  Telecommunications  Act has been
complemented by several  Ordinances.  The most  significant  Ordinances  concern
license fees, rate regulation,  interconnection,  universal service, frequencies
and customer protection.

         Under the German regulatory scheme, licenses can be granted within four
license classes.  A license is required for operation of transmission lines that
extend   beyond  the  limits  of  a  property  and  that  are  used  to  provide
telecommunications  services for the general public.  The licenses  required for
the operation of transmission  lines are divided into 3  infrastructure  license
classes: mobile  telecommunications  (license class 1); satellite (license class
2); and telecommunications services for the general public (license class 3).

         Beside the infrastructure  licenses,  an additional license is required
for  operation  of  Voice  Telephony  services  on the  basis  of  self-operated
telecommunications  networks  (license  class  4).  A class 4  license  does not
include the right to operate transmission lines.

         The Bundes Ministerium fur Post und Telekommunikation  ("BMPT"),  which
was replaced by the Regulierungsbehorde fur Telekommunikation und Post ("RegTP")
on January 1, 1998,  granted  the  Company a regional  class 3 and a  nationwide
class 4 license in December  1997.  According to the License Fees  Ordinance,  a
nationwide class 4 license costs a one-time fee of DM 3,000,000. The costs for a
territorial  class 3 license will be determined by RegTP and is dependent on the
population and the geographical area covered by the territorial class 3 license.
A nationwide territorial class 3 license costs DM 10,600,000.

         Licensees  that operate  transmission  lines crossing the boundary of a
property  have the right to install  transmission  lines on, in and above public
roads,  squares,  bridges and public waterways  without payment;  however,  when
installing  transmission  lines a planning  agreement  must be obtained from the
relevant authorities.

         Since the  Company  operates  a  telecommunications  network,  Deutsche
Telekom,  as a dominant  carrier,  is obligated to give to the Company favorable
interconnection rates. If the Company does not agree with the offered rates, the
Company can take the case to the RegTP who  decides  whether the rates are based
on objective criteria and are not discriminatory in nature. Since the Company is
not  a  dominant  carrier,  it  is  not  subject  to  the  same  interconnection
obligations.

       Several   complaints,  the   outcome of which may  affect  the  Company's
business, are currently pending before the RegTP or German courts concerning the
content  of the  standard  interconnection  offer  of  Deutsche  Telekom.  Since
Deutsche  Telekom and some of its major  competitors in Germany have been unable
to reach  agreement on  interconnection,  the BMPT has  established  provisional
resolution to these matters will take at least one year.

         Licensed  operators are under an  obligation to present their  standard
terms and conditions to the RegTP.  The RegTP may, based upon certain  criteria,
decide not to accept these terms and conditions.

                                       16
<PAGE>

         The  Company  may  become  subject  to  universal   service   financing
obligations.  Currently,  it is unlikely  that the universal  service  financing
system will be implemented in Germany in the foreseeable future.

         ITALY

         In July 1997 and September 1997, the Italian  authorities enacted basic
legislation and regulations to comply with the EU directives, including the full
liberalization  of public  telecommunications  networks  and Voice  Telephony by
January 1, 1998.  Among  other  provisions,  the Law of July 1997  created a new
regulatory authority,  Associazione  Italiana Sviluppo delle  Telecommunicazioni
("AISTEL").

         Although  the new  legislation  came into  effect  immediately  and the
Presidential  Decree of  September  1997 covers a wide range of areas  including
licensing,  interconnection,   access,  universal  service  and  numbering,  the
framework must be complemented by a number of implementation decrees.

         To date, only a small number of the required  decrees have been issued.
License  applications  can be filed with AISTEL,  but since January 1, 1998 only
three licenses to supply and install fixed telecommunications networks have been
granted.  Major uncertainties  remain with regard to the rules applicable in the
context of interconnection and universal service financing.  No assurance can be
provided  as to the  timing or the manner in which the  Company  will be able to
benefit from full  liberalization  in Italy.  The Company intends to apply for a
Voice Telephony license in Italy.

         THE NETHERLANDS

         In the  Netherlands  the  installation  and  operation of a cable-based
network for the purpose of public  telecommunications  is either  subject to (i)
licensing requirements which are currently confined to PTT Telecom (the ITO) and
two  licensed   infrastructure   operators,   EnerTel  and   Telfort,   or  (ii)
authorization by OPTA (Onafhankelijke post-en telecommunicatie autoriteit) under
Article 23 of The  Netherlands'  Telecommunications  Act (the "NTA").  Under the
proposed new Telecommunications Act, presented to The Netherlands' Parliament in
September 1997,  infrastructure  licensing (or  authorization)  requirements for
public   telecommunications   networks   will  be  abolished   and  replaced  by
registration  requirements with OPTA if adopted unamended.  The Company holds an
authorization based on Article 23 of the NTA which was granted in March 1997.

         Under the current NTA, PTT Telecom and the two infrastructure licensees
enjoy statutory  rights-of-way over third party land (public or privately owned)
against  payment of  compensation.  This statutory  privilege is not extended to
Article 23 NTA  authorization  holders which must  negotiate  rights-of-way  and
compensation with such third parties.  Under the proposed new Telecommunications
Act, this statutory privilege will be extended to all public  telecommunications
network owners.

         Under  Article  7 of the  NTA,  all  restrictions  on  providing  Voice
Telephony through a fixed  infrastructure were abolished effective July 1, 1997.
Holders of an authorization based on Article 23 of the NTA wishing to offer such
services to third  parties must register with OPTA which may allocate or reserve
numbers for third party service or the authorization  holder's own services. The
Company obtained such a registration in August 1997.

         PTT Telecom is under a statutory  obligation to provide leased lines to
anyone  against  payment.  In addition,  PTT Telecom and the two  infrastructure
licensees are under a statutory obligation to provide  interconnection to, inter
alia, holders of an authorization  under Article 23 of the NTA and foreign-based
network operators providing Voice Telephony and having access to end-users.  For
supervisory  purposes,  anyone wishing to obtain  interconnection  must register
with OPTA and then negotiate its own interconnection  agreement. In August 1997,
the  Company   registered   with  OPTA  for  this   purpose  and   concluded  an
interconnection  agreement with PTT Telecom in January 1998.  Under the proposed
new  Telecommunications  Act, a statutory  obligation  to  interconnect  will be
imposed upon operators having significant market power, such as PTT Telecom.

         The  proposed new  Telecommunications  Act will give full effect to all
remaining EU liberalization  directives and obligations in The Netherlands which
should have been implemented no later than January 1, 1998.  These include,  but
are not  limited to,  number  policy,  allocation,  and  portability;  universal
service  obligations and their financing;  privacy  protection;  and the general
competitive  environment.  If and when adopted,  the Company intends to seek all
appropriate registrations under the proposed new Telecommunications Act.

                                       17
<PAGE>

         SPAIN

         Spain  is one of the  five  countries  in the EU which  was  granted  a
derogation  for  implementation  of the  Directives to open its Voice  Telephony
market to  competition by January 1, 1998 until December 1, 1998. The government
has made  public  statements  about its intent to open the market by December 1,
1998  and   placed  a  draft  new   Telecommunications   Act  (Ley   General  de
Telecomunicaciones)  before  Parliament in June 1997. There can be no assurance,
however,  that such  liberalization will occur at a time or in a manner which is
advantageous to the Company.

         The Company intends to apply for a Voice Telephony  license in Spain as
and when the appropriate  procedures  have been published  (such  publication is
required by the EC by August 1, 1998).

         SWITZERLAND

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

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

         The Company  intends to register its  activities as a provider of Voice
Telephony   services  in  Switzerland  (in  accordance  with  the   notification
procedure)  and will consider  applying for a concession  as a  facilities-based
carrier.

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

         UNITED KINGDOM

         The  Telecommunications  Act 1984 (the "U.K. Act") provides a licensing
and  regulatory  framework  for  telecommunications  activities  in  the  United
Kingdom.  The  Secretary  of State for Trade and Industry at the  Department  of
Trade and  Industry  (the  "Secretary  of Trade") is  responsible  for  granting
licenses under the U.K. Act and for overseeing  telecommunications policy, while
the Director  General of  Telecommunications  (the  "Director  General") and his
office are  responsible,  among other  things,  for  enforcing the terms of such
licenses.  The Director General will recommend the grant of a license to operate
a telecommunications network to any applicant that the Director General believes
has a reasonable  business  plan,  the necessary  financial  resources and where
there are no other overriding considerations against the grant of a license.

         Since 1992,  the British  Government  has permitted  competition in the
provision  of "any to any"  international  services  over leased lines where all
calls  originate over the PSTN on certain  specified  routes.  From June 1995 to
December 1997, the Company's U.K. subsidiary, Viatel U.K. Limited ("Viatel UK"),
held an International Simple Resale license in the U.K. (the "ISR License"). The
ISR License entitled the Company to resell international message,  telephone and
private line  services.  All ISR Licenses  were revoked in December 1997 and all
holders were  required to re-apply to the  Secretary  of Trade to be  registered
under the new  International  Simple Voice  Resale  Standard  License  ("ISVR").
Viatel UK has  registered  under the ISVR  which  authorizes  the  provision  of
international  simple voice resale.  International  simple data resale and voice
calls  which pass over a PSTN at one end only can,  as before,  be  provided  by
systems run under a Telecommunications Class License.

         In December 1996, the British  Government  introduced the International
Facilities  License ("IFL") which  authorizes  holders to provide  international
telecommunications  services over their own international  infrastructure and/or
by making use of IRUs in  undersea  cables.  Viatel UK  acquired an IFL in April
1997. Although Viatel UK's IFL does not contain Code Powers.  Viatel UK recently
submitted a request  seeking an appropriate  amendment of its IFL to provide for
Code  Powers.  Code Powers can be attached to certain  licenses  and provide the
licensees  with the right to go to court to seek a court order that the licensee
be permitted to install, keep, maintain,  adjust, repair or alter infrastructure
on, over or under land.

                                       18
<PAGE>

         The U.K.  Statutory  Instrument  ("U.K.SI"),  which  implements  the EU
Interconnection  Directive,  specifies which U.K.  telecommunications  operators
have significant market power and includes  provisions for additional  operators
to acquire  significant market power or "relevant  connectable  systems status".
This status has the effect of applying the Interconnection  Directive provisions

(as enacted by the U.K.SI) to such operators.  Organizations  that have relevant
connectable systems status,  which includes the Company, are entitled to request
and receive  interconnection  from those  operators that have been determined by
the Director  General to be "well  established  operators."  British Telecom and
Kingston  Communications  have been so  determined  for all services and Cable &
Wireless  has  been so  determined  in  respect  of  international  services  on
virtually all routes.

         OTHER NEW MARKETS

         The Company's  ability to expand in other countries will be affected by
the degree to which  liberalization has been implemented in that country. If for
strategic  reasons  the  Company  decides  to build out  infrastructure  in each
particular market prior to full  liberalization and liberalization is delayed or
not fully  implemented,  the Company could sustain a loss on its  infrastructure
investment.

         LATIN  AMERICA  AND THE  PACIFIC  RIM.  Outside of the EU, the  Company
provides  its  customers  with  access to its  services  through the use of call
reorigination.  A substantial  number of countries have prohibited certain forms
of call  reorigination.  There can be no assurance that certain of the Company's
services and transmission  methods will not be or will not become  prohibited in
certain jurisdictions.

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

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

         As permitted under the terms of their concessions,  Telecom, Telefonica
and Telintar have requested extensions of their exclusive rights until 2000. The
President  of  Argentina  has  recently  announced  a new decree  extending  the
carriers'  exclusive  rights  for an  additional  period  ending  no later  than
November 1999. By November  1999, the government  will authorize a total of four
nationwide  providers  of  local,   domestic  long  distance  and  international
services,  including  Telefonica,  Telecom  and two  additional  consortia  each
comprised  of entities  already  licensed to provide  mobile  telephone or cable
television  services in Argentina.  By November  2000, the market is to be fully
open to competition.  The full  implications of this new policy,  as well as the
timing of its  implementation,  are uncertain.  Implementation of the new policy
must await resolution of certain procedural  questions  currently pending in the
Argentine courts, and the new decree itself may be subject to challenge.

         In addition  to the rights  granted to Telecom  and  Telefonica,  other
companies have been permitted to enter the Argentine  market to provide  private
networks for non-voice services, mobile services, including cellular and paging,
as well as  domestic  data  and  value  added  services.  There  are no  foreign
ownership restrictions for telecommunications services in Argentina.

         Value-added services may be competitively  provided and are essentially
deregulated.  Although a license must be obtained,  such  licenses are routinely
granted. Facilities for international value-added services must be obtained from
Telintar.  Currently,  call  reorigination  is legal in Argentina,  although the
established carriers have advocated  strenuously against it and the government's

                                       19
<PAGE>

view has changed from time to time,  and the  government  has  recently  ordered
Telecom and Telefonica to institute  significant rate rebalancing measures which
are likely to lessen the attractiveness of call reorigination.

         The  Company  has  been  operating  in  Argentina  since  1991  and has
developed  a  significant  customer  base.  The  Company  has  focused  on  call
reorigination, Internet-initiated international business-to-business service and
international  calling card  services.  The Company does not currently  hold any
licenses in Argentina.

         The Company is in the process of forming its own Argentine  subsidiary.
Once it is formed,  this  affiliate  will apply for a value-added  license which
will allow for the provision of value added services  domestically  and within a
limited scope internationally.

         BRAZIL. Brazil is in the process of privatizing its  telecommunications
sector  and  opening  the sector to  competitive  entry.  A 1995  Constitutional
amendment  removed the legal  monopoly  previously  enjoyed by Telebras  and its
affiliates  over all  public  telecommunications  services.  Privately  provided
wireless  services as well as value-added and private network services also have
been  permitted  to compete  with  Telebras.  Under a pair of new  telecom  laws
enacted in 1996 and 1997,  Brazil has further opened the telecom  sector.  A new
regulatory authority, named the Agencia Nacional de Telecomunicacoes  ("ANATEL")
has recently been constituted.

         Advisors have just been appointed to recommend a specific model for the
reorganization   and  privatization  of  Telebras  and  its  long  distance  and
international  affiliate  Embratel.  According  to  preliminary  plans  recently
announced,  Telebras, which consists of 27 regional companies,  most likely will
be divided into three regional holding companies. These companies initially will
probably be prohibited from providing  interregional and international services.
Embratel,  probably will be sold as a separate entity. The privatized  companies
most likely will be subject to  competition  from at least one new long distance
company to be authorized  right away.  New  concessions  also will be issued for
local service.

         In addition to reorganizing basic telecommunications  services,  Brazil
has established new classifications of services available for competitive entry.
Among the new service  classifications is "specialized  limited services," which
involves the provision of telephone,  telegraph, data transmission or other such
services to closed user groups of corporations. Specialized limited services are
authorized by permit,  which may be granted by competitive  bid. For the purpose
of conducting auctions,  proposed specialized service offerings may be deemed to
fall within one of three  possible  groups,  according to the  complexity of the
technology  involved,  the size of  population  proposed  to be  served  and the
sophistication  of the  infrastructure  involved.  The  government may limit the
number of permits that may be granted for technical or public  service  reasons.
The government also may decide to award a permit for specialized limited service
without conducting an auction.

         Value-added  services  are  not  considered  to  be  telecommunications
services  and  currently  can be provided  on a  completely  unregulated  basis,
without the  necessity  of  obtaining  a permit or a  concession.  However,  the
service provider must operate through a Brazilian company. Call reorigination is
not prohibited in Brazil.

         A foreign  ownership  limit of 49% has been retained in Brazil only for
cellular and satellite services. There are presently no foreign ownership limits
for limited services, including specialized limited services, or for value-added
services. The President retains the authority to impose foreign ownership limits
on other services.

                                     20
<PAGE>

         The Company is currently in the process of  incorporating  a subsidiary
in Brazil.  The Company services in Brazil currently include call  reorigination
and  international  calling cards and fax store and forward.  Once its Brazilian
subsidiary  is formed,  Viatel plans to offer such  services as well as to apply
for licenses to offer specialized limited services.

         COLOMBIA.  Under a new  Constitution  adopted in 1991, the principle of
private  provision of public  services was ratified in Colombia.  This paved the
way for both privatization of the state-owned long distance company, TELECOM, as
well  as the  competitive  entry  of  other  entities.  Specific  plans  for the
privatization  of TELECOM have faltered due to, among other things,  labor union
resistance.  However, the government has mandated that competition be introduced
in 1998. One competitor to TELECOM has been licensed,  and an additional company
is supposed to be licensed.

         In Colombia, there are approximately 35 local operating companies, many
municipally owned. TELECOM is the sole long distance and international  company.
Under  Colombian law, local service has been  completely  deregulated and may be
provided  without a concession  or license.  Other  telecommunications  services
require a concession or other authorization.

         Value-added  services are competitive,  but must be licensed.  There is
currently intense competition for value-added services,  and the market for data
communications  is one of the most  dynamic  segments of the  telecommunications
sector.

         Although Colombian law requires that all telecommunications services be
rendered by Colombian entities, foreign investment is not limited.

         Most of Viatel's customers in Colombia access the company via toll free
numbers.  Viatel  has  formed a  Colombian  subsidiary  and has been  awarded  a
value-added  services  license.  Viatel  is  working  on the  establishment  and
operation of a network to utilize the value-added services license.

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

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

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

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

     UNITED STATES.  The Company's  provision of international  service to, from
and through the United  States  generally is subject to  regulation  by the FCC.
Section 214 of the Communications Act requires a company to make application to,
and  receive   authorization   from,  the  FCC  to  provide  such  international
telecommunications  services.  In May  1994,  the  FCC  authorized  the  Company
pursuant to Section 214 of the  Communications  Act (the  "Section  214 Switched
Authorization") to resell public switched  telecommunications  services of other
U.S. carriers.  The Section 214 Switched Authorization requires that services be
provided in a manner that is consistent  with the laws of countries in which the

                                       21
<PAGE>

Company operates. The Company also has a license to resell international private
lines for the provision of switched  services  between the U.S. and the U.K. and
between  the U.S.  and  Canada.  Additionally,  in  September  1996 the  Company
received final approval for another  Section 214  authorization  from the FCC to
provide both  facilities-based  services and resale services (including both the
resale of switched services and the resale of private lines for the provision of
switched  services)  to  all  permissible   international  points.  Finally,  in
September 1996 the Company also received final approval for another  Section 214
authorization  from the FCC to  provide  facilities-based  service  between  the
United States and the United Kingdom over the CANUS-1 and CANTAT-3 cable systems
(the "Section 214 UK Facilities Authorization").

EMPLOYEES

         As of December  31,  1997,  the Company  had 280  full-time  employees,
approximately 147 of whom were engaged in sales, marketing and customer service.
None  of  the  Company's  employees  are  covered  by  a  collective  bargaining
agreement.   Management  believes  that  the  Company's  relationship  with  its
employees is good.

ITEM 2.       PROPERTIES.

         The Company  currently  occupies  approximately  14,000  square feet of
office  space at two  sites  in New  York  City,  which  serve as the  Company's
principal  executive office and an international  gateway switching center.  The
leases have an aggregate annual rental obligation of approximately  $357,000 and
expire on January  31,  2001 and May 31, 2007, respectively.  The  Company  also
leases  approximately  22,000  square feet of office  space in Omaha,  Nebraska,
which serve as the  Company's  operations  center and a switching  center.  This
lease has an annual rental  obligation of approximately  $120,000 and expires on
May 31, 2004.

         The Company also leases office space in various  cities in Europe where
it maintains  sales  offices  with annual rents  ranging from $17,000 in Rome to
$163,000 in Frankfurt (based on foreign currency  exchange rates in effect as of
January 31, 1998).  The Company's  aggregate  annual rental  obligations for its
European offices is approximately  $727,000 (based on foreign currency  exchange
rates in effect as of January 31, 1998).

ITEM 3.       LEGAL PROCEEDINGS.

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

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

None.

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information with respect to the executive
officers of the Company as of March 16, 1998.
<TABLE>
<CAPTION>

NAME                                   AGE                                  POSITION
-----                                  ---      --------------------------------------------------------------
<S>                                    <C>        <C>

Michael J. Mahoney...................  38       President, Chief Executive Officer and Director
Allan L. Shaw........................  34       Senior Vice President, Finance; Chief Financial Officer;
                                                 Treasurer and Director
Lawrence G. Malone...................  46       Senior Vice President, Global Sales and Marketing
Sheldon M. Goldman...................  38       Senior Vice President, Business Affairs; General Counsel and
                                                Secretary
Francis J. Mount.....................  56       Senior Vice President, Engineering and Network Operations

</TABLE>

    MICHAEL J. MAHONEY. Mr. Mahoney has served as Chief Executive Officer of the
Company since  September  1997, as President of the Company since September 1996
and as a  director  of the  Company  since  1995.  Mr.  Mahoney  was also  Chief
Operating  Officer  of the  Company  from  September  1996  to  September  1997,
Executive  Vice  President,  Operations  and Technology of the Company from July

                                       22
<PAGE>

1994 to September 1996 and Managing  Director,  Intercontinental  of the Company
from January 1996 to September  1996. From August 1990 to June 1994, Mr. Mahoney
was employed by SITEL  Corporation,  a  teleservices  company,  most recently as
President,  Information  Services  Group.  From August 1987 to August 1990,  Mr.
Mahoney was employed by URIX Corporation,  a manufacturer of  telecommunications
hardware and software, in a variety of sales and marketing positions.

    ALLAN L. SHAW. Mr. Shaw has served as Senior Vice  President,  Finance since
December  1997,  has  served as Chief  Financial  Officer of the  Company  since
January 1996 and as Treasurer of the Company since  September 1996. Mr. Shaw has
served  as a  director  of the  Company  since  June  1996.  Mr.  Shaw  was Vice
President,  Finance of the Company from January 1996 to December 1997.  Prior to
becoming the Company's Vice President,  Finance and Chief Financial Officer, Mr.
Shaw  served as  Corporate  Controller  of the  Company  from  November  1994 to
December  1995.  From  August 1987 to November  1994,  Mr. Shaw was  employed by
Deloitte & Touche  LLP,  most  recently  as a Manager.  Mr.  Shaw is a Certified
Public Accountant and a member of the American Institute, United Kingdom Society
and New York State Society of Certified Public Accountants.

    LAWRENCE G. MALONE.  Mr. Malone has served as Senior Vice President,  Global
Sales and  Marketing of the Company  since May 1997.  Mr.  Malone served as Vice
President and Managing Director,  Intercontinental of the Company from September
1996 to May 1997 and served as Vice President of Sales for Carriers/Wholesale of
the Company from January 1995 to September  1996. From December 1993 to December
1994,  Mr.  Malone was employed by Frame Relay  Technologies,  a  communications
equipment  manufacturer,  as Director of Sales.  From  December 1987 to November
1993,  Mr.  Malone  was  employed  by  Republic  Telcom  Systems,  a  voice/data
networking company, where he most recently served as Vice President of Sales and
Marketing.

    SHELDON  M.  GOLDMAN.  Mr.  Goldman  has  served as Senior  Vice  President,
Business  Affairs and General Counsel of the Company since December 1997.  Prior
to becoming Senior Vice President,  Business  Affairs and General  Counsel,  Mr.
Goldman served as Vice President, Business and Legal Affairs of the Company from
December 1996 to December 1997 and served as United  States  General  Counsel of
the Company from April 1996 to December  1996.  From January 1987 to March 1996,
Mr. Goldman was  associated  with the law firm of Wien,  Malkin & Bettex.  Since
March 1996, Mr.  Goldman has been Of Counsel to the law firm of Brief  Kesselman
Knapp & Schulman, LLP.

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

SENIOR MANAGEMENT

    FRED HUGHES.  Mr. Hughes has served as Vice  President,  Engineering  of the
Company since  December  1997.  From July 1994 to December  1997, Mr. Hughes was
Vice President, Operations-Europe of the Company. From August 1993 to July 1994,
Mr. Hughes served as Director of Telephony of the Company.  From January 1991 to
August 1993,  Mr.  Hughes was  President of  Communications  Services  Group,  a
Connecticut-based voice and data communications  consulting company. From August
1988 to January  1991,  Mr.  Hughes was  Director  of  Engineering  at  Millicom
Telecommunications Services, Inc.

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

                                       23
<PAGE>

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

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

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

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

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

    CATHERINE  W. MACK.  Ms. Mack has served as the  Company's  Director,  Human
Resources and  Administration  since January 1995. Prior to joining the Company,
Ms. Mack served as Manager, Global Compensation and Benefits Administration with
Avon  Products,  Inc.  from February  1993 to November  1994.  From July 1990 to
February 1993, Ms. Mack served in various human resources positions with Holiday
Inn Worldwide and from March 1987 to July 1990 was Manager,  Corporate Personnel
for RJR Nabisco, Inc.

    STEPHEN  GRIST.  Mr.  Grist has served as European  Finance  Director of the
Company  since  February  1998.  Prior to joining  the  Company,  Mr.  Grist was
employed  by  MiniCom  Pty  Ltd.,  a  privately  held  Australian  software  and
consulting  company,  from  October  1994 to  February  1998,  most  recently as
U.K./Europe Financial Controller.  From January 1989 to July 1994, Mr. Grist was
employed by Coopers & Lybrand,  Independent  Certified Public Accountants,  most
recently as a Senior Audit Manager. Mr. Grist has been a member of the Institute
of Chartered Accountants in England and Wales since December 1991.

CONSULTANT

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


                                       24

<PAGE>

                                     PART II

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

         Since  completion of the Company's  initial public  offering in October
1996 (the "IPO"),  the Company's  common  stock,  $0.01 par value per share (the
"Common  Stock") has been  traded on the Nasdaq  Stock  Market  under the symbol
"VYTL." As of March 16,  1998,  there were  approximately  23,011,913  shares of
Common  Stock  outstanding.  The Company  believes  that it has in excess of 400
beneficial  owners.  The  following  table sets  forth,  for each of the periods
indicated,  the high and low sales  prices per share of Common Stock as reported
on the Nasdaq National Market.

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

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

         To date,  the Company has never  declared or paid any cash dividends on
its Common  Stock and does not expect to do so in the  foreseeable  future.  The
Company  does not expect to generate any net income in the  foreseeable  future,
but anticipates that future earnings generated from operations,  if any, will be
retained to finance the expansion and continued development of its business. Any
future  determination  with  respect to the payment of  dividends  on its Common
Stock will be within the sole discretion of the Company's Board of Directors and
will  depend  upon,  among  other  things,  the  Company's   earnings,   capital
requirements, the terms of the existing indebtedness, applicable requirements of
the Delaware General Corporation Law, general economic conditions and such other
factors  considered  relevant by the Company's Board of Directors.  In addition,
the Company's  ability to pay cash dividends is currently  restricted  under the
terms of the  Indenture,  dated as of December 15, 1994, as amended  October 11,
1996 (as amended,  the "1994 Indenture"),  between the Company and United States
Trust Company of New York,  pursuant to which 15% Senior Discount Notes Due 2005
(the "1994  Notes")  were  issued.  The  Company is  currently  seeking to raise
approximately  $650.9  million  through  an  offering  of notes  and  shares  of
preferred stock (the  "Offering") to refinance the 1994 Notes, to fund a portion
of the  construction  and  operational  start-up of the Circe  Network,  to fund
certain other capital expenditures and for general corporate and working capital
purposes. In the event such financing is completed, the Company's ability to pay
dividends will be restricted under the terms of the indentures pursuant to which
such new debt securities are issued.

         Since September  30,   1997,  the  Company  has  used  approximately an
additional  $10.1  million of the net  proceeds  from the IPO for  purchase  and
installation  of machinery and equipment and  approximately  an additional  $2.3
million for  working  capital.  At  December  31,  1997,  the  Company  also had
approximately $3.4 million invested in short-term marketable securities.

ITEM 6.    SELECTED FINANCIAL DATA.

         The following  selected  Consolidated  Statement of  Operations,  Other
Financial Data and Balance Sheet Data as of and for the years ended December 31,
1993,  1994,  1995,  1996 and  1997  have  been  derived  from the  Consolidated
Financial  Statements of the Company and the notes related  thereto,  which were
audited by KPMG Peat Marwick LLP, Independent Certified Public Accountants.  The
consolidated  financial statements as of December 31, 1996 and 1997 and for each
of the years in the three-year  period ended December 31, 1997 and the report of
KPMG Peat Marwick LLP  thereon,  are  included  elsewhere  in this Report.  This
information should be read in conjunction with "Item 7. Management's  Discussion
and Analysis of Financial  Condition and Results of  Operations,"  the Company's
Consolidated  Financial  Statements,  including the notes thereto, and the other
financial data included elsewhere in this Report.

                                       25
<PAGE>
<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                              ----------------------------------------------------------------------
                                                                  1993         1994         1995         1996            1997
                                                                  ----         ----         ----         ----            ----
                                                                    (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S>                                                           <C>             <C>           <C>          <C>             <C>

STATEMENT OF OPERATIONS DATA:
   Telecommunications revenue...............................   $  21,393    $  26,268     $ 32,313   $  50,419        $  73,018
   Operating expenses:
      Costs of telecommunications services..................      18,159       22,953       27,648      42,130           63,504
      Selling, general and administrative...................       8,458       14,318       24,328      32,857           36,076
      Depreciation and amortization.........................         111          789        2,637       4,802            7,717
      Equipment impairment loss.............................           -            -          560           -                -
                                                               ----------    --------     ---------   ---------       ----------
       Total operating expenses.............................      26,728       38,060       55,173      79,789          107,297
                                                               ----------    ---------    ---------   ----------      ----------
   Operating loss...........................................      (5,335)     (11,792)     (22,860)     (29,370)        (34,279)
   Interest income..........................................          21          214        3,282        1,853           3,685
   Interest expense.........................................           -         (772)      (8,856)     (10,848)        (12,450)
   Share in loss of affiliate...............................        (142)        (145)         (42)         (10)              -
                                                               ----------     --------    ----------   ----------     ----------
   Net loss.................................................   $  (5,456)     $(12,495)   $(28,476)    $(38,375)       $ (43,044)
                                                               ==========     =========   ==========   ==========     ===========
   Net loss per common share, basic(1)......................   $    (0.77)    $  (1.22)   $  (2.09)    $  (2.47)       $   (1.90)
                                                               ===========    =========   ===========  ============    ==========
   Net loss per common share, diluted(1)....................   $    (0.77)    $  (1.22)   $  (2.09)    $  (2.47)       $   (1.90)
                                                               ===========    =========   ===========  ============    ===========
OTHER FINANCIAL DATA:
   EBITDA(2)................................................   $   (5,366)    $(11,148)   $(20,265)    $(24,578)        $(26,562)
   Net cash used in operating activities....................       (1,442)     (11,571)    (18,489)     (26,331)         (22,525)
   Net cash used in investing activities....................       (2,949)      (4,996)    (37,057)      (1,592)         (43,164)
   Net cash provided by (used in) financing activities......        6,329       80,984      (2,306)      94,772           11,286
   Capital expenditures.....................................        1,090        3,672      11,378        9,423           34,190

OTHER OPERATING DATA:
   Billable minutes (000s)..................................       10,899       14,981      25,932       62,249          140,918
   Average revenue per billable minute......................   $     1.87     $   1.70     $  1.23     $    .80          $   .51
   Average cost per billable minute.........................   $     1.67     $   1.53     $  1.04     $    .67          $   .44
   Switches(3)..............................................            2            2          10           13               14(4)
   Points of presence(3)....................................            3            3          11           13               33
   Customers(3).............................................        5,486        6,469       9,218       18,172           21,515

BALANCE SHEET DATA(3):
   Cash, cash equivalents and marketable securities.........       $2,327      $66,762     $35,066     $ 92,982         $ 47,142
   Property and equipment, net..............................        3,584        6,933      15,715       21,074           54,094
   Total assets.............................................       10,585       83,923      65,613      134,664          126,809
   Long-term debt, excluding current installments...........          866       59,955      67,283       77,904           99,609
   Stockholders' (deficiency) equity........................         (162)      10,985     (17,618)      38,483           (8,564)
-----------
</TABLE>

(1)      Net loss per share is computed on the basis  described in Note 1 of the
         Company's  Consolidated  Financial Statements.
(2)      As used herein,  "EBITDA" consists of earnings before interest,  income
         taxes and depreciation and  amortization.  EBITDA is a measure commonly
         used in the  telecommunications  industry to analyze  companies  on the
         basis of  operating  performance.  EBITDA is not a measure of financial
         performance  under generally  accepted  accounting  principles,  is not
         necessarily comparable to similarly titled measures of other companies,
         and  should  not be  considered  as an  alternative  to net income as a
         measure of performance  nor as an alternative to cash flow as a measure
         of liquidity.
(3)      Information presented as of the end of the periods indicated.
(4)      Consists of four Nortel DMS 100e  switches, one  Nortel DMS 300 switch,
         six  Wyatt/Reuters  MRX-2000  switches  and  three  call  reorigination
         switches.

                                       26
<PAGE>

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

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

OVERVIEW

         Since its  inception  in 1991,  the  Company  has  invested  heavily in
developing  the  ability to provide  international  telecommunications  services
within Western  Europe and in certain other  countries in Latin America and Asia
and in developing and expanding its market presence.  During the past six years,
the  Company  has made  substantial  investments  in  software  and back  office
operations, an administrative  infrastructure and a direct sales organization in
Western  Europe.  Furthermore,  the Company has created an extensive  commercial
telecommunications  network  for voice and voice  band data in  Western  Europe,
which the Company  believes is necessary to  effectively  render the services it
offers and intends to offer.  In the future,  if the  Company is  successful  in
raising the funds  necessary  to  construct  the Circe  Network,  the  Company's
revenues will be derived from three  primary  sources:  retail sales,  wholesale
sales and revenue from the sale of IRUs or capacity on the Circe  Network.  Each
revenue  source  will  have a  different  impact  on the  Company's  results  of
operations.  If  constructed,  the sale of IRUs or capacity on the Circe Network
will vary  substantially from period to period and result in fluctuations in the
Company's  operating  results.  For a  discussion  of the  effects  of the Circe
Network on  telecommunications  revenue and other line  items,  see "- The Circe
Network."

         TELECOMMUNICATIONS REVENUE

         Viatel's telecommunications revenue is currently based primarily on the
number of minutes of use billed by the Company or "billable  minutes"  and, to a
lesser extent,  on the  additional  services and products  provided  through the
Viatel Network.  While the Company provides both international and national long
distance   telecommunications   services,  the  Company  currently  derives  its
telecommunications   revenue   principally  from   international  long  distance
telecommunications  services.  The Company believes,  however, that revenue from
national long distance  telecommunications services will continue to increase as
a percentage of total telecommunications revenue.

         During the past three  years,  several  key trends  have  affected  the
composition  of the  Company's  telecommunications  revenue.  First,  a  growing
proportion of the  Company's  customers,  particularly  in Western  Europe,  now
access the Viatel  Network using paid local access  through the PSTN rather than
access through the Company using call  reorigination or ITF access.  This change
has reduced the Company's revenue per minute.  Second, the Company has continued
to expand its wholesale business, which represented approximately 6.2% and 16.5%
of total telecommunications  revenue for 1995 and 1996, respectively,  and 27.9%
of  total  telecommunications  revenue  for  1997.  Third,  Western  Europe  has
continued to become an  increasingly  important  market for the Company.  During
1997,  approximately  44.7%  of the  Company's  telecommunications  revenue  was
generated in Western Europe, as compared to approximately 41.9% of the Company's
telecommunications  revenue for 1996 and 38.2% for 1995. In contrast, despite an
increase of approximately 14.1% over 1996, telecommunications revenue from Latin
America  represented  approximately  22.2% of the  Company's  telecommunications
revenue  for  1997,  as  compared  to  approximately   28.4%  of  the  Company's
telecommunications  revenue for 1996. Historically,  significant portions of the
Company's  telecommunications  revenue  have been  derived  from Latin  America,
principally  from the  provision  of callback and ITF related  services.  During
1997, the Company continued to devote substantial  resources to the deregulating
EU market,  as demonstrated by the Company's  installation of 20 POPs in Western
Europe.

         The   Company   competes   with  other   telecommunications   providers
principally on the basis of price and quality of services provided.  The Company
prices its retail  services  generally  at a discount to the ITO's prices in the
various geographic markets.  The wholesale rates charged are generally priced at
or slightly  below the market price of the leading  United States  international
facilities-based  carriers,  but the Company does not offer a standard  discount
relative to any major carrier.

                                       27
<PAGE>

         The Company  has  experienced,  and expects to continue to  experience,
declining  revenue  per  minute  in all of its  markets,  in part as a result of
increasing worldwide  competition within the  telecommunications  industry.  For
example,  in France and Germany,  the respective ITO has recently taken steps to
substantially  reduce prices for retail domestic and international long distance
services. France Telecom has obtained approval to reduce prices of such services
by an average of 9% during 1998 and additional amounts thereafter,  and Deutsche
Telekom has announced that, subject to regulatory approval, it intends to reduce
prices on domestic and international retail long distance services by up to 40%.
The Company believes, however, that the impact on its results of operations from
such price decreases will be at least partially offset by, continuing  decreases
in the Company's  cost of providing  telecommunications  services,  particularly
those decreases  resulting from its continued  efforts to convert from leased to
owned capacity and to obtain cost effective interconnection  agreements, and the
introduction  of  new  products  and  services  as  the  applicable   regulatory
environment  permits.  There  can be no  assurance,  however,  that the  results
referred to in the foregoing forward looking statements,  including a decline in
the Company's cost of telecommunications services, can be achieved. See "Item 1.
Business -  Competition"  and " -  Substantial  Government  Regulation"  and " -
Certain  Factors Which May Affect the Company's  Future Results - Risks Relating
to the Circe  Network," "- Rapidly  Changing  Industry,  Technology and Customer
Requirements;  Significant  Price  Declines," and "- Risks  Associated  with the
Operation of the Viatel Network."

         The table set forth below  presents  the  Company's  telecommunications
revenue,  as a percentage of total  revenue,  from  different  regions (based on
where calls originated on the Viatel Network):

                                                   YEAR ENDED DECEMBER 31,
                                              --------------------------------
                                              1995          1996          1997
                                              ----          ----          ----
Western Europe............................    38.2%         41.9%         44.7%
North America.............................     6.6          16.9          21.9
Latin America.............................    37.6          28.4          22.2
Asia/Pacific Rim..........................    11.8          12.4          11.2
Other.....................................     5.8           0.4           0.0

         COST OF TELECOMMUNICATIONS SERVICE

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

         Network costs represent the costs of transporting calls over the Viatel
Network from its point of entry to its point of exit.  Network  costs  generally
consist of leased line rental costs, facility/network management costs and costs
associated  with  interconnection  with  facilities of ITOs.  Network costs will
decrease substantially if the Company is able to construct the Circe Network and
secure  infrastructure  ownership  on other  routes.  However,  there will be an
associated increase in depreciation and amortization  expense (which is included
in a different line item). See "- Depreciation and Amortization."

         Termination  costs  currently  represent the costs which the Company is
required to pay to other carriers from the point of exit from the Viatel Network
to the point of  destination.  Termination  costs are  generally  variable  with
traffic  volume and traffic mix. If a call is  terminated in a city in which the
Company  has a switch or POP,  the call is usually  transferred  to the PSTN for
local  termination.  If the call is to a location in which the Company  does not
have a switch or POP, then the call must be transferred to another  carrier with
which the Company is  interconnected.  The Company  utilizes  least cost routing
designed to terminate  traffic in the most cost  effective  manner.  The Company
believes that local  termination  costs should  decrease as the Company (i) adds
additional  switches and POPs, (ii) interconnects with additional ITOs and other
infrastructure   providers,   (iii)  additional   transmission   facilities  are
constructed or purchased, (iv) new telecommunications  service providers emerge,

                                       28
<PAGE>

and (v) in Western Europe, as EU member states implement and enforce regulations
requiring ITOs to establish rates which are set at the forward-looking, long run
economic   costs  that  would  be  incurred  by  an  efficient   provider  using
state-of-the-art  technology.  There can be no assurance  regarding  the results
referred to in the foregoing forward looking statements, including the extent or
timing  of  cost  decreases.  See  "Item  1.  Business  -  Competition"  and  "-
Substantial  Government  Regulation" and "- Certain Factors Which May Affect the
Company's  Future  Results - Risks  Relating to the Circe  Network,"  "- Rapidly
Changing  Industry,  Technology  and Customer  Requirements;  Significant  Price
Declines," and "- Risks Associated with the Operation of the Viatel Network."

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         The Company's  selling,  general and  administrative  expenses  include
commissions  paid  to  independent  sales  representatives  and  overhead  costs
associated with its headquarters,  back office and network  operations and sales
offices  in  seventeen   jurisdictions.   The  Company's  selling,  general  and
administrative expenses have continued to increase since the Company's inception
as the Company developed and expanded its business. The Company anticipates that
such expenses will continue to increase as the Company's business is expanded in
the future and as the Viatel Network is further developed and that such expenses
will   continue   to   be   incurred   in   advance   of   anticipated   related
telecommunications revenue.

         DEPRECIATION AND AMORTIZATION

         Depreciation  and  amortization  expense  includes  charges relating to
depreciation   of  property  and  equipment,   which  consists   principally  of
telecommunications-related  equipment such as switches and POPs,  IRUs and MIUs,
furniture and equipment, leasehold improvements, and amortization of intangibles
assets,  including goodwill and costs associated with acquired employee base and
sales forces. The Company depreciates its network over periods ranging from five
to 15 years and amortizes its intangible  assets over periods ranging from three
to seven years. The Company currently depreciates IRUs over a 15 year period but
may, in the future,  depreciate  IRU's over periods  ranging from 15 to 20 years
based  upon the  estimated  useful  life of the  systems.  The  Company  expects
depreciation and amortization expense to increase as the Company further expands
the Viatel Network. In particular, depreciation  will  substantially increase if
the Circe  Network is constructed by the Company,  at  least  until  significant
portions of such system are sold.

THE CIRCE NETWORK

         If constructed,  the Circe Network will have significant effects on the
Company's   future   results  of   operations.   The  Company  will   capitalize
substantially  all of the costs associated with designing and building the Circe
Network,  as well as the costs  associated  with  placing the system in service.
These costs are expected to be approximately $330.0 million,  although there can
be no  assurance  in  this  regard.  See  "Item  1.  Business  Competition"  and
"Substantial  Government Regulation" and "- Certain Factors Which May Affect the
Company's Future Results - Risks Relating to the Circe Network."

         The Company  intends to sell  interests in the Circe  Network on an IRU
basis.  Revenue from the IRUs will be  recognized  in the period when the IRU is
sold under a new line item that will be titled  "Capacity  sales  revenue."  The
related cost of sales will be reported in the period when the related revenue is
recognized.  With  respect  to any given  sale of an IRU,  the  related  cost of
capacity  sales will  generally  be equal to the total  capitalized  cost of the
Circe  Network  multiplied  by a fraction,  the  numerator  of which will be the
capacity of the IRU sold and the  denominator  of which will be the  capacity of
the portion of the Circe Network then available for service (i.e, "lit fiber").

         In addition, the Company expects to trade IRUs or capacity on the Circe
Network for IRUs or capacity on other cable systems that link strategic  Western
European  cities  not  served  by the  Circe  Network.  These  trades of IRUs or
capacity are expected to be non-monetary  exchanges and are not expected to have
a material  affect on the Company's  statement of  operations.  The Company will
also incur  selling,  general and  administrative  expenses  with respect to the
Circe Network that will not be capitalized and will affect the Company's results
of operations,  particularly while the Circe Network is being designed and built
in 1998 and placed into service in 1999 and will incur additional  operating and
maintenance expenses until capacity on the Circe Network is sold. As a result of
financing the Circe Network with debt, the Company will  capitalize a portion of
the interest  incurred  that relates to the Circe  Network until it is placed in
service and will incur substantial increases in interest expense thereafter.

                                       29
<PAGE>

RESULTS OF OPERATIONS

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

                                                  YEAR ENDED DECEMBER 31,
                                            ------------------------------------
                                             1995        1996           1997
                                             ----        ----           ----

Cost of telecommunications services........  85.6%       83.6%          87.0%
Selling, general and administrative........  75.3        65.2           49.4
Depreciation and amortization.............    8.2         9.5           10.6
EBITDA (loss).............................  (62.7)      (48.7)         (36.4)


1997 COMPARED TO 1996

         TELECOMMUNICATIONS  REVENUE.  Telecommunications  revenue  increased by
44.8% from $50.4  million on 62.2  million  billable  minutes  for 1996 to $73.0
million on 140.9 million billable minutes for 1997.  Telecommunications  revenue
growth for 1997 was generated  primarily  from  increased  traffic volume on the
European  Network (as defined  herein),  from  growth in the  Company's  carrier
business and, to a lesser extent,  increased traffic volume in Latin America and
the Pacific Rim.

         The overall  increase of 126.4% in billable  minutes  from 1996 to 1997
was  partially  offset by  declining  revenue per  billable  minute,  as average
revenue per billable minute declined by 36.3% from $.80 in 1996 to $.51 in 1997,
primarily because of (i) a higher percentage of lower-priced  intra-European and
national  long  distance  traffic  from the  European  Network  as  compared  to
intercontinental  traffic,  (ii) a higher  percentage  of  lower-priced  carrier
traffic as compared to retail traffic, (iii) reductions in certain rates charged
to retail  customers in response to pricing  reductions  enacted by certain ITOs
and other  carriers in many of the Company's  markets,  (iv) changes in customer
access  methods  and  (v)  foreign  currency   fluctuations.   See  "-  Cost  of
Telecommunications Services."

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

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

         The Company has  significantly  increased its carrier  business through
which it sells  switched  minutes to carriers and other  resellers at discounted
rates.  The carrier  business has enabled the Company to recover  partially  the
costs  associated  with  increased  capacity in advance of demand  within retail
markets.  Such  economy of scale has allowed the Company to use its network more
profitably for network  originations and terminations within Europe. The carrier
business represented approximately 27.9% of total telecommunications revenue and
approximately  46.1% of billable  minutes for 1997 as compared to  approximately
16.5% of total  telecommunications  revenue and approximately  35.2% of billable
minutes for 1996.  This  increase in  telecommunications  revenue  represents an
increase of approximately 147.0% over 1996.

         COST  OF  TELECOMMUNICATIONS   SERVICES.   Cost  of  telecommunications
services increased from $42.1 million in 1996 to $63.5 million in 1997 and, as a
percentage of telecommunications  revenue, increased from approximately 83.6% to
approximately 87.0% for 1996 and 1997, respectively.  The Company's gross margin
decreased  from 16.4% for 1996 to 13% for 1997.  This decrease was primarily due
to (i)  decreased  revenue  per minute  (resulting  from price  competition  and
foreign currency  fluctuations) which was not offset by corresponding  decreases

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<PAGE>

in  infrastructure  costs,  (ii)  increased  sales to carrier  customers  (which
generate  substantially lower margins),  and (iii) an increase in intra-European
and national  long  distance  traffic  compared to higher  margin  international
traffic.  This  decrease  in gross  margin is one of the  principal  reasons the
Company initiated a strategy to own key elements of its network  infrastructure.
Although  it did not  decrease as fast as revenues  per  minute,  the  Company's
average cost per billable minute  decreased from $.67 during 1996 to $.44 during
1997, a 34.3% decrease. This decrease,  which partially offset the effect of the
decline in average revenue per billable minute,  was  attributable  primarily to
(i) increased traffic being routed through the European Network, which increased
the  utilization  of fixed cost leased lines,  (ii) increased  switched  minutes
generated  by  the  Company's  carrier   business,   which  also  increased  the
utilization  of fixed cost leased lines,  and (iii)  changes in customer  access
methods.  Increased  European Network  utilization  helped reduce costs on a per
minute basis with respect to European long distance telecommunications services.

         Cost of telecommunications services increased in 1997 because of leased
line costs for additional  transmission  capacity and the accelerated rollout of
European  POPs.  These  costs  are  expected  to  decrease  as a  percentage  of
telecommunications  revenue as the Company continues its efforts to convert from
leased to owned  capacity.  The  Company  increased  its private  line  circuits
capacity by 311%, and as a result the fixed costs  associated  with the European
Network,  costs for private line  circuits  increased  from  approximately  $4.1
million  for  1996  (approximately  8.2%  of   telecommunications   revenue)  to
approximately $6.0 million for 1997  (approximately  8.2% of  telecommunications
revenue).  Due to the high cost of leased lines in Europe,  the Company believes
its use of private line circuits will decrease and such decrease will positively
impact the Company's  overall  gross margins as more minutes are routed  through
infrastructure owned by the Company. This benefit, however, is primarily limited
to calls that either  originate  or  terminate in a city where the Company has a
switch or POP,  because  otherwise the Company is required to transport the call
over the PSTN at higher transmission costs and reduced margins.

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

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

         DEPRECIATION AND AMORTIZATION.  Depreciation and amortization  expense,
which includes depreciation of the Viatel Network,  increased from approximately
$4.8 million in 1996 to approximately $7.7 million in 1997. The increase was due
primarily to the  depreciation  of equipment  related to network  expansion  and
fiber optic cable systems  placed in service during 1997.  Amortization  expense
will increase  substantially as a result of the further  expansion of the Viatel
Network, particularly, in the near term, from the Circe Network, if constructed.

         INTEREST.  Interest expense increased from approximately  $10.8 million
in 1996 to approximately  $12.5 million in 1997 due to the accretion of non-cash
interest  on the 1994  Notes not  payable  until  July 15,  2000,  at which time
semi-annual  interest  expense  will be  required  through  the January 15, 2005
maturity date.  Interest income  increased from  approximately  $1.9 million for
1996 to  approximately  $3.7  million  in 1997,  primarily  as a  result  of the
investment  of the net proceeds  from the IPO.  Interest  expense will  increase
substantially if the Company completes the Offering.

1996 COMPARED TO 1995

         TELECOMMUNICATIONS  REVENUE.  Telecommunications  revenue  increased by
56.0% from $32.3  million on 25.9  million  billable  minutes  for 1995 to $50.4
million on 62.2 million  billable minutes for 1996.  Telecommunications  revenue
growth  for 1996 was  generated  primarily  from  higher  traffic  volume on the
European  Network,  from growth in the  Company's  wholesale  business and, to a
lesser  extent,  from growth in traffic  volume in Latin America and the Pacific
Rim.

                                       31
<PAGE>

revenue per billable  minute  declined  35.0% from $1.23 in 1995 to $.80 in 1996
primarily  because of (i) a higher  percentage  of  lower-priced  intra-European
traffic  from the  European  Network,  (ii) a higher  percentage  of  low-priced
wholesale traffic, (iii) reductions in certain rates charged to retail customers
in response to pricing  reductions  enacted by certain  ITOs and (iv) changes in
customer access methods. See "- Cost of Telecommunications Services."

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

         In  order  to  utilize  excess  network   capacity,   the  Company  has
significantly  increased its wholesale  business through which it sells switched
minutes to carriers  and other  resellers at rates that are at a discount to the
rates  that the  Company  charges  its  retail  customers.  While the  wholesale
business has lower average gross margins than the Company's retail business, the
telecommunications  revenue  generated  from the  wholesale  business  partially
offsets  the fixed  costs  associated  with the Viatel  Network.  The  wholesale
business  represented  approximately 6.2% and 21.6% of total  telecommunications
revenue  and   billable   minutes,   respectively,   for  1995  as  compared  to
approximately 16.5% and 35.2% of total  telecommunications  revenue and billable
minutes,  respectively,  for 1996.  While  the  increase  in  telecommunications
revenue  represents an  approximately  320.0%  increase  over the  corresponding
period for 1995, a portion of this increase represents the migration of business
formerly conducted by the Company in Africa and the Middle East through indirect
sales  representatives  to carriers  which  purchase  switched  minutes from the
Company.

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

         Gross margins for 1996 were negatively impacted by increases in certain
costs related to the expansion of the Company's overall  transmission  capacity.
The  fixed  costs per  minute  are  expected  to  decrease  as a  percentage  of
telecommunications   revenue  as  traffic  volume  over  the  European   Network
increases.  As a result of obtaining  additional private line circuits capacity,
the costs associated with the European Network increased from approximately $2.0
million  for 1995  (approximately  6.3% of  telecommunications  revenue for such
period)  to  approximately  $4.1  million  for  1996   (approximately   8.2%  of
telecommunications revenue for such period).

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

         During 1996, the Company took a $1.3 million charge  associated  with a
corporate  restructuring  undertaken  during the year  principally  for employee
termination  and  relocation  costs and a charge for a portion of the  Company's
lease for its administrative  headquarters in London and an $.85 million expense

                                       32
<PAGE>

associated  with a French  arbitration  award  against  the  Company.  Had these
expenses not been incurred,  selling,  general and administrative expenses would
have decreased to  approximately  61.0%,  as a percentage of  telecommunications
revenue. Salary related selling, general and administrative expenses represented
approximately  51.2%  and 49.0% of total  selling,  general  and  administrative
expenses for 1995 and 1996, respectively.

         EBITDA LOSS.  EBITDA loss  increased  from $(20.3)  million for 1995 to
$(24.6) million for 1996. As a percentage of telecommunications  revenue, EBITDA
loss decreased from  approximately  (62.7)% in 1995 to approximately  (48.7)% in
1996.

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

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

         INTEREST. Interest expense increased from approximately $8.9 million in
1995 to  approximately  $10.8  million in 1996 due to the  accretion of non-cash
interest on the 1994 Notes.  Interest income was approximately  $3.3 million and
$1.9 million for 1995 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has incurred losses from operating  activities in each year
of operations since its inception and expects to continue to incur operating and
net losses for the next several years. Since inception, the Company has utilized
cash  provided by  financing  activities  to fund  operating  losses and capital
expenditures.  The  sources  of this cash have  primarily  been  private  equity
financing,  the proceeds from the sale of the 1994 Notes,  the proceeds from the
IPO and, to a lesser extent, equipment-based financing. As of December 31, 1997,
the  Company  had $47.1  million  of cash,  cash  equivalents  and other  liquid
investments.  Whether or not the  Circe  Network  is  constructed,  the  Company
believes that the remaining net proceeds from the IPO,  together with  equipment
financing,  will provide  sufficient funds for the Company to fund its operating
losses  and to fund  non-Circe  Network  related  capital  expenditures  for the
foreseeable  future.  However,  the  amount  of  the  Company's  future  capital
requirements  will depend on a number of factors,  including  the success of the
Company's business, the construction of the Circe Network, the rate at which the
Company  further  expands the Viatel  Network,  the types of  services  that the
Company offers,  staffing levels,  acquisitions and customer growth,  as well as
other factors that are not within the Company's control,  including  competitive
conditions,  government regulatory  developments and capital costs. In the event
that the Company's  plans or assumptions  change or prove to be inaccurate,  the
Company is unable to convert from leased to owned  capacity in  accordance  with
its current plans and equipment financing proves to be  insufficient to fund the
Company's  growth  in the  manner  and at the rate  currently  anticipated,  the
Company  may be  required  to  delay  or  abandon  some or all of the  Company's
development  and  expansion  plans  or the  Company  may  be  required  to  seek
additional sources of financing earlier than currently anticipated.

         The Company is  currently  conducting a tender offer for the 1994 Notes
(all $120.7 million principal amount at maturity have been irrevocably  tendered
and may not be withdrawn).  In connection with the refinancing of the 1994 Notes
and assuming the  extinguishment  of the 1994 Notes were  completed on March 31,
1998,  the  Company  estimates  that a one-time  charge of  approximately  $28.3
million  will be  incurred.  This  extraordinary  charge  relates  to the  early
extinguishment  of debt and is comprised of the  following:  (i) a $24.7 million
premium paid in connection  with the tender  offer,  (ii) a $0.3 million fee and
$0.7  million  of other  costs  associated  with the tender  offer,  and (iii) a
write-off of $2.6 million in unamortized deferred issuance and registration fees
associated with the 1994 Notes. The Company's  obligation to complete the tender
offer is condition upon its successful completion of the Offering.

                                       33
<PAGE>

         CAPITAL  EXPENDITURES;  COMMITMENTS.  The  development of the Company's
business has required  substantial capital  expenditures.  During 1995, 1996 and
1997,  the  Company  had  capital   expenditures,   including   acquisitions  of
businesses,  of  approximately  $11.4  million,  $9.4 million and $34.2 million,
respectively.  As of December  31, 1997 the  Company had entered  into  purchase
commitments  for network  upgrades,  minutes of use and other items  aggregating
approximately $11.8 million. In addition,  at December 31, 1997, the Company had
non-cancelable  capital  lease  commitments  of $1.0 million and  non-cancelable
operating  lease  commitments  of $5.9  million.  In  addition,  the Company has
minimum  volume  commitments  to purchase  transmission  capacity  from  various
domestic and foreign carriers aggregating approximately $13.8 million for fiscal
1998. See Note 13 to the Company's Consolidated Financial Statements,  contained
elsewhere in this Report. In connection with the Company's  license  application
in Germany,  the Company expects that it will be required to pay, during 1998, a
one-time  license fee in the amount of DM 13.6  million.  The Company has signed
various letters of intent relating to the Circe Network,  which currently commit
the Company to make certain  payments equal to the lesser of actual cost or $5.3
million.  The Company's  obligations with respect to such amounts are subject to
further reduction based on an obligation to mitigate damages if the arrangements
are terminated by the Company.  Assuming the Offering is completed,  the Company
expects to spend approximately $330.0 million to construct the Circe Network and
place it in service,  although  there can be no assurance  that the Company will
complete the  Offering or if the  Offering is  completed  that it will not spend
substantially more to complete the Circe Network.

         FOREIGN CURRENCY.  The Company has exposure to  fluctuations in foreign
currencies  relative to the U.S.  Dollar as a result of billing  portions of its
telecommunications  revenue  in local  currency  in  countries  where  the local
currency  is  relatively  stable,  while many of its  obligations,  including  a
substantial  portion of its transmission costs, are denominated in U.S. Dollars.
In countries with less stable  currencies,  such as Brazil, the Company bills in
U.S. Dollars. For 1997, approximately 41.3% of the Company's  telecommunications
revenue  was  billed in  currencies  other  than the U.S.  Dollar.  Furthermore,
substantially  all of the costs of  acquisition  and  upgrade  of the  Company's
switches  have  been,  and  will  continue  to  be,  U.S.   Dollar   denominated
transactions.

         With the  continued  expansion of the European  Network,  a substantial
portion of the costs associated with the European Network,  such as local access
charges and a portion of the leased  line costs,  as well as a majority of local
selling  expenses,  will be charged to the  Company  in the same  currencies  as
revenue is billed.  These developments  create a natural hedge against a portion
of the  Company's  foreign  exchange  exposure.  To  date,  much of the  funding
necessary to establish  the local  direct sales  organizations  has been derived
from   telecommunications   revenue   that  was  billed  in  local   currencies.
Consequently,  the Company's  financial position as of December 31, 1997 and its
results of operations for 1997 were not  significantly  impacted by fluctuations
in the U.S.  Dollar  in  relationship  to  foreign  currencies.  See " - Certain
Factors Which May Affect the Company's  Future Results - Risks  Associated  with
International Operations."

         YEAR 2000. In 1997, the Company conducted an evaluation of its computer
systems and  network for Year 2000  compliance.  Based on such  evaluation,  the
Company believes that its software and hardware systems are Year 2000 compliant.
The  Company  does not know  whether  the  computer  systems  of ITOs and  other
carriers on whose  services the Company  depends for  transmission  capacity are
Year 2000 compliant. If the computer systems of the ITOs and such other carriers
are not Year 2000  compliant,  it could  have a material  adverse  effect on the
Company's  business,  financial  condition  and  results of  operations.  See "-
Certain  Factors Which May Affect the Company's  Future  Results - Dependence on
Effective Information Systems; Year 2000 Technology Risks."

PROSPECTIVE ACCOUNTING PRONOUNCEMENTS

     Statement  of  Financial   Accounting   Standards  No.  130  ("SFAS  130"),
"Reporting   Comprehensive   Income,"  and  Statement  of  Financial  Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related  Information," were issued in June 1997. SFAS 130 establishes  standards
for reporting and display of  comprehensive  income and its components in a full
set of general purpose financial  statements.  This statement  requires that all
items  that  are  required  to  be  recognized  under  accounting  standards  as
components  of  comprehensive  income,  such as  foreign  currency  fluctuations
currently reported in stockholder's equity, be reported in a financial statement
that is displayed with the same prominence as other financial  statements.  SFAS
131 establishes  standards for the way public companies report information about
operating  segments  in annual  financial  statements  and  requires  that these

                                       34
<PAGE>

companies  report  selected  information  about  operating  segments  in interim
financial  reports issued to  shareholders.  It also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major
customers.  The  Company is required  to adopt both new  standards  in the first
quarter of 1998.

INFLATION

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

CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS

         At December 31,  1997,  the  Company's  total  indebtedness  (including
capitalized  lease  obligations) was  approximately  $103.0 million,  which will
increase  substantially  if the Offering is  completed.  The Company  expects to
incur  significant  additional  indebtedness  in the future.  See "- Substantial
Capital  Requirements."  The level of the  Company's  indebtedness  could have a
material  adverse  effect  upon the Company  such as,  without  limitation:  (i)
limiting the Company's ability to obtain additional  financing in the future for
working  capital,  capital  expenditures,  acquisitions  and  general  corporate
purposes,  (ii) requiring a substantial  portion of the Company's cash flow from
operations  (if any) to be  dedicated  to the  payment of the  principal  of and
interest  on its  indebtedness,  thereby  reducing  the funds  available  to the
Company for other purposes, (iii) making the Company more vulnerable to economic
downturns,  limiting its ability to withstand competitive pressures and reducing
its flexibility in responding to changing business and economic conditions, (iv)
restricting  its ability to take  advantage of business  opportunities,  and (v)
preventing  the Company from making  payments on  outstanding  indebtedness  and
senior equity securities.

         The ability of the Company to meet its debt service obligations will be
dependent upon the future  performance of the Company,  which,  in turn, will be
subject to the Company's successful  implementation of its strategy,  as well as
to financial,  competitive,  business, regulatory,  technical and other factors,
including  factors beyond the Company's  control.  If the Company is at any time
unable to generate sufficient cash flow from operations to meet its debt service
requirements,  it  may  be  required  to  refinance  all  or a  portion  of  its
indebtedness.  There  can be no  assurance  that any such  refinancing  would be
possible on terms that would be acceptable to the Company or that any additional
financing  could  be  obtained.  If such  refinancing  were not  possible  or if
additional financing were not available,  the Company could be forced to dispose
of assets under  circumstances  that might not be  favorable  to  realizing  the
highest price for such assets or to default on its  obligations  with respect to
its  indebtedness,  including  the Notes,  which would permit the holders of the
Notes to accelerate the maturity thereof.

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

         The  Company  commenced  operations  in  1991  and has  only a  limited
operating   history.   Furthermore,   the  liberalization  of  Western  European
telecommunications regulation since January 1, 1998 has dramatically changed the
telecommunications  market  in a number  of the EU  member  states  in which the
Company  operates.  The Company's  prospects  must be considered in light of the
risks,  expenses and difficulties  frequently  encountered by companies in their
early stage of development.

         To date, the Company has incurred  substantial  net losses and negative
EBITDA.  Net  loss for each of  1995,  1996 and 1997 was  approximately  $(28.5)
million, $(38.4) million and $(43.0) million,  respectively.  EBITDA for each of
1995,  1996 and 1997 was  approximately  $(20.3)  million,  $(24.6)  million and
$(26.6)  million,  respectively.  Over the last three  years,  the  Company  has
experienced   significant   increases  in  capital   expenditures  and  expenses
associated with the development and expansion of the Viatel Network. The Company
expects to incur operating and net losses, and negative EBITDA and negative cash
flow from  operating  activities  until at least  the year  2000.  However,  the
Company's  EBITDA losses and negative  cash flows are likely to continue  beyond
the year 2000 if the  Company  extends its  expansion  plans,  if retail  prices
decline faster than anticipated, interconnection rates and wholesale prices paid
by the Company do not decline as quickly as anticipated or because of any of the
other risks described  herein.  Accordingly,  there can be no assurance that the
Company  will  achieve  or sustain  profitability  or  positive  cash flows from
operating activities in the future. If the Company cannot achieve  profitability
or positive cash flows from operating  activities,  it may be unable to meet its

                                       35
<PAGE>

working capital or future debt service  requirements which would have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

RISKS RELATING TO THE CIRCE NETWORK

         The  Company's  success  is  dependent,  in part,  upon its  ability to
finance and construct the Circe  Network,  substantially  on budget and on time,
substantially  increase its traffic  volumes and sell IRUs and other capacity on
the Circe  Network.  The Company has budgeted  approximately  $330.0  million to
complete the Circe Network and will have  substantial  existing  commitments for
materials and labor, which may cost more than budgeted. However, the Company has
not  yet  completed  the  Offering  or  signed  definitive  agreements  for  the
construction of the Circe Network.  The successful  completion and/or use of the
Circe Network is  dependent,  among other  things,  on the Company's  ability to
complete the Offering and to: (i) enter into final  definitive  agreements  with
Bechtel,  ASN  and  Nortel  with  respect  to  the  engineering,   construction,
installation and testing of the Circe Network; (ii) obtain rights-of-way;  (iii)
obtain  appropriate  licenses  from  national  and local  governments;  and (iv)
effectively  manage the  construction  of the new fiber  routes.  The  Company's
binding  letter of intent with Nortel  includes  price terms,  ready-for-service
dates and specified  equipment  that Nortel will provide but is not a definitive
agreement  covering all the terms that are  customarily  addressed in definitive
agreements (such as warranties). The Company's binding letter of intent with ASN
covers price and payment terms,  ready-for-service  dates and project completion
incentives but needs to be replaced with a definitive  agreement.  The Company's
binding letter of intent with Bechtel covers cost incentives,  ready-for-service
dates  and  rights-of-way  incentives,  but  also  needs to be  replaced  with a
definitive  agreement.  The risk that rights-of-way cannot be obtained,  and the
cost thereof, will be borne entirely by the Company. In addition, the successful
construction  of the Circe  Network is  substantially  dependent  on third party
contractors retained by Bechtel.  Although the Circe Network, as proposed,  will
consist  primarily  of "new digs," it may also involve  acquisition  of existing
fiber for certain  segments,  including the United Kingdom and access and egress
to Paris and  those  segments  will have  substantially  fewer  fibers  than the
portions of the Circe Network that will be newly constructed.  Accordingly,  the
value of the Circe Network may be less than would be the case if it was entirely
a "new dig."

         The Company will generally not be able to terminate  calls over its own
network,  even  after  the  Circe  Network  is  built.  Therefore,  in  order to
effectively  use the Circe  Network,  it will need to be  interconnected  to the
existing  networks  of ITOs in four  separate  countries  (the  United  Kingdom,
France, Belgium and The Netherlands). Such interconnection is expected to entail
difficult  negotiations  with these  ITOs and may be  delayed.  Difficulties  or
delays with respect to any of the foregoing may  significantly  delay or prevent
the  completion  and/or use of the Circe  Network,  which  would have a material
adverse effect on the Company. The difficulties inherent in a large construction
project  such as the Circe  Network are  exacerbated  by the fact that the Circe
Network will be built in four separate  countries,  each with separate legal and
regulatory regimes and different languages,  and will involve submarine cable in
the North Sea and the English Channel.

         The Company must  complete  the Offering and must obtain  rights-of-way
and wayleaves in order to complete the Circe Network.  The Company does not have
any existing  rights-of-way or wayleaves on the routes it intends to use for the
Circe  Network.  Moreover,  the  Company  generally  has  no  right  to  acquire
rights-of-way.  While the Company believes that  rights-of-way will be available
at acceptable  costs and in a timely  manner,  there can be no assurance in this
regard.

         The Circe Network is also subject to construction risks,  including the
risks  of  cost  overruns  and  delays.   If  the  cost  of  the  Circe  Network
significantly  exceeds the Company's budget for the project, the Company will be
required  to obtain  additional  financing  or to abandon  or curtail  the Circe
Network. If the Company encounters  construction  delays, it will not be able to
route its traffic over owned  facilities as soon as it hopes,  which will have a
detrimental  effect on its ability to increase  traffic volumes and on its gross
margins. In addition,  construction delays could negatively effect the Company's
ability to sell IRU's or  capacity  to other  carriers  and delay or prevent its
qualification as an  "infrastructure  provider" or "network  operator" in France
(which are  entitled  to obtain  substantial  discounts  on  interconnection  in
France).

         The Company is aware that certain long distance  carriers and consortia
are expanding capacity in Europe and believes that other long distance carriers,
as well as potential New Entrants, are considering the construction of new fiber

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<PAGE>

optic and other long distance  transmission  networks.  For example, the Ulysses
cable system owned by WorldCom and the Hermes connect cities that will be linked
by the Circe Network.  In addition,  Esprit Telecom Group plc and Fibernet Group
are currently building out their Pan-European networks, and other companies such
as Level 3  Communications,  are planning to construct  fiber optic  networks in
Europe. As a result, there may be extreme pricing pressure with respect to sales
of IRUs or capacity on the Circe Network and transmission of calls between those
cities.  Any price  competition  could  have a  material  adverse  effect on the
Company's business,  financial condition,  results of operations and its ability
to  make  payments  on  its  outstanding  indebtedness  and  any  senior  equity
securities.  Since the cost of the actual fiber is a relatively small portion of
building  new  transmission  lines,  persons  building  such lines are likely to
install fiber that provides  substantially more transmission  capacity than will
be needed over the short or medium-term.  Further, recent technological advances
have shown the  potential  to greatly  expand the  capacity of existing  and new
fiber  optic  cable,  which  will add to  available  supply and  thereby  create
additional  pricing  pressure.  For example,  Lucent  Technologies Inc. recently
announced that it has developed new electronics that will substantially  improve
the  capacity  of fiber optic  cable.  Demand for  transmission  capacity in the
United States has recently been fueled by businesses  seeking data  transmission
capacity.  European  businesses are not currently using data transmission to the
same extent as U.S.  businesses.  If European  businesses  do not  substantially
increase  their demand for data services,  the Company's  ability to utilize the
Circe Network will be adversely  affected.  In addition,  the Company intends to
sell IRUs or capacity in the Circe Network to other carriers,  which will result
in competitors  having capacity on the Company's routes along the Circe Network,
which in turn will result in pricing  pressures with respect to traffic  carried
along these  routes.  If industry  capacity  expansion  results in capacity that
exceeds overall demand in general or along any of the Company's  routes,  severe
additional  pricing  pressure could develop.  Furthermore,  the marginal cost of
carrying  calls over fiber optic cable is  extremely  low. As a result,  certain
industry  observers  have  predicted  that,  within a few  years,  there  may be
dramatic and substantial  price reductions and that long distance calls will not
be  significantly  more expensive than local calls.  Such pricing pressure could
have a material  adverse  effect on the Company and its ability to make payments
on its outstanding indebtedness and any senior equity securities.

SUBSTANTIAL CAPITAL REQUIREMENTS

         In order to further  develop and expand the Viatel  Network,  including
the Circe  Network,  and to develop and expand new and  existing  services,  the
Company will require substantial additional capital. Future sources of financing
may include  additional  public and private debt and equity  offerings,  project
financing,  equipment  financings  and the sale of IRUs or capacity in the Circe
Network,  if it is  constructed.  There  can  be no  assurance  that  additional
financing  arrangements will be available on acceptable terms.  Moreover, if the
Offering is completed, the amount of the Company's substantial total outstanding
indebtedness  may  adversely  affect the Company's  ability to raise  additional
funds.

         The Company  believes that the net proceeds from the Offering,  project
financing,  equipment  financing  and the sale of IRUs and capacity on the Circe
Network will provide  sufficient funds for the Company to expand its business as
planned and to fund its operating  losses for at least the next 18 to 24 months.
However,  the amount of the Company's future capital requirements will depend on
a number of  factors,  including  the  success of the  Company's  business,  the
start-up  date of the  Circe  Network,  the rate at which  the  Company  further
expands  the Viatel  Network,  the types of services  that the  Company  offers,
staffing levels, acquisitions and customer growth, as well as other factors that
are  not  within  the  Company's  control,   including  competitive  conditions,
government  regulatory  developments  and capital  costs.  In the event that the
Company's  plans or  assumptions  change  or prove to be  inaccurate  or the net
proceeds of the Offering,  project financing,  equipment financings and proceeds
from the sale of IRUs or capacity on the Circe Network prove to be  insufficient
to  fund  the  Company's  growth  in  the  manner  and  at  the  rate  currently
anticipated,  the Company may be required to delay or abandon some or all of the
Company's development and expansion plans or the Company may be required to seek
additional sources of financing earlier than currently anticipated.

COMPETITION

         The international telecommunications industry is highly competitive and
is characterized  by substantial  on-going price declines.  For example,  France
Telecom has obtained  approval to reduce retail prices by 9% during each of 1997
and 1998 and 4.5% during each of 1999 and 2000.  Deutsche  Telekom has announced
that it intends to reduce retail long distance  prices by up to 40%.  Neither of

                                       37
<PAGE>

these ITOs has  reduced or is expected  to reduce  wholesale  prices to the same
extent.  These  pricing  policies  have  created  substantial  pressure  on  the
Company's  gross  margins.  The  Company's  success  depends upon its ability to
compete with other  telecommunications  providers in each of its markets.  These
providers include the ITO in each country in which the Company operates, such as
British  Telecom,  France  Telecom,  Belgacom  and  Telecom  Italia,  and global
alliances among some of the world's largest telecommunications carriers, such as
Uniworld, AT&T's WorldPartners' alliance with Unisource, Concert, Global One and
the recently  announced  alliance among WorldCom,  MCI and Telefonica de Espana.
Other potential  competitors include cable  communications  companies,  wireless
telephone companies, electric and other utilities with rights-of-way,  railways,
microwave  carriers  and  large end  users  which  have  private  networks.  The
intensity of competition and price declines have increased over the past several
years and the Company  believes that such  competition  and price  declines will
continue to intensify,  particularly in Western Europe where  liberalization  of
the  telecommunications  markets  continues.  Many of the Company's  current and
potential competitors have substantially greater financial,  marketing and other
resources  than the Company.  If the Company's  competitors  devote  significant
additional resources to the provision of international or national long distance
telecommunications  services to the Company's  target customer base of small and
medium-sized businesses, such action could have a material adverse effect on the
Company's business, financial condition and results of operations.

         Because all of the  Company's  current and  targeted  European  markets
(other than the United  Kingdom) have only recently  liberalized or still are in
the process of liberalizing the provision of Voice Telephony,  customers in most
of these markets are not  accustomed to obtaining  services from  competitors to
ITOs and may be reluctant to use emerging telecommunications  providers, such as
the Company.  In  particular,  the Company's  target  customer base of small and
medium-sized  businesses with  significant  international  calling needs, may be
reluctant to entrust their  telecommunications  needs to new operators  that are
believed to be unproven.  In addition,  in  continental  Europe,  certain of the
Company's  competitors  (including the ITOs) provide potential  customers with a
broader range of services than the Company can offer due to existing  regulatory
restrictions.

         Competition  for  customers  in  the  telecommunications   industry  is
primarily based on price and quality of services offered. The Company prices its
services primarily by offering discounts to the prices charged by ITOs and other
major  competitors.  However,  prices for international long distance calls have
decreased  substantially  over the past few  years in the  markets  in which the
Company  currently  maintains  operations  or in which it expects  to  establish
operations.  Some of the Company's  larger  competitors may be able to use their
greater  financial  resources to cause severe price competition in the countries
in which the Company  operates or expects to operate.  It appears  that  Western
European ITOs are responding to deregulation  more rapidly and aggressively than
occurred after  deregulation  in the United States and the United  Kingdom.  The
Company  expects that prices for its services  will continue to decrease for the
foreseeable future and that ITOs and other dominant telecommunications providers
will continue to improve their product  offerings.  The  improvement  in product
offerings and service  provisions by the ITOs, as well as the  liberalization of
Voice  Telephony  and  infrastructure  which has  commenced in certain EU member
states, could similarly have a material adverse effect on the competitiveness of
the Company to the extent that the Company is unable to provide  similar  levels
of offerings and services.  If the ITO in any jurisdiction  uses its competitive
advantages  to  their  fullest   extent,   the  Company's   operations  in  such
jurisdiction  would be adversely  affected.  Furthermore,  the marginal  cost of
carrying  calls over fiber optic cable is  extremely  low. As a result,  certain
industry  observers  have  predicted  that,  within a few  years,  there  may be
dramatic and substantial  price reductions and that long distance calls will not
be significantly more expensive than local calls. In addition, certain carriers,
including AT&T, are implementing plans to offer telecommunications services over
the Internet at substantially reduced prices. Any price competition could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         The Company  believes that the ITOs generally have certain  competitive
advantages  that the  Company  and  other  competitors  do not have due to their
control over local  connectivity.  The Company  relies on the ITOs for access to
the PSTN and the  provision  of leased  lines,  and the  failure  of the ITOs to
provide such access or leased lines at reasonable  pricing could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  The reluctance of some national  regulators to accept  liberalizing
policies,  grant regulatory approvals that would result in increased competition
for the local ITO and enforce  access to ITO networks and  essential  facilities
could have a material  adverse  effect on the  Company's  competitive  position.

                                       38
<PAGE>

There can be no assurance  that the Company will be able to compete  effectively
in any of its markets. See "Item 1. Business - Competition."

SUBSTANTIAL GOVERNMENT REGULATION

         OVERVIEW.  National  and  local  laws  and  regulations  governing  the
provision  of   telecommunications   services  differ  significantly  among  the
countries in which the Company  currently  operates and intends to operate.  The
interpretation  and  enforcement of such laws and  regulations  varies and could
limit the Company's  ability to provide certain  telecommunications  services in
certain markets. There can be no assurance that future regulatory,  judicial and
legislative changes will not have a material adverse effect on the Company, that
domestic or  international  regulators or third parties will not raise  material
issues with regard to the Company's  compliance or noncompliance with applicable
laws  and  regulations,  or that  other  regulatory  activities  will not have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations. See "Item 1. Business - Government Regulation."

         INTERNATIONAL TRAFFIC.  Under the WTO Agreement,  concluded on February
15,  1997,  69  countries   comprising  95%  of  the  global  market  for  basic
telecommunications  services agreed to permit competition from foreign carriers.
In addition,  59 of these countries have  subscribed to specific  procompetitive
regulatory  principles.  The WTO Agreement  became effective on February 5, 1998
and is expected to be implemented by most signatory  countries in 1998, although
there may be  substantial  delays.  The Company  believes that the WTO Agreement
will  increase  opportunities  for the  Company and the  Company's  competitors.
However, the precise scope and timing of the implementation of the WTO Agreement
remain  uncertain  and there can be no  assurance  that the WTO  Agreement  will
result in beneficial regulatory liberalization.

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

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

found by the FCC to comply  with the  benchmarks  or has been  determined  to be
equivalent.  The Company,  however,  will require prior FCC approval in order to
provide  resold  private  lines to any  country  in  which it has an  affiliated
carrier  that has not been found by the FCC to lack market  power.  Many parties
have  appealed the  International  Settlement  Rates Order to the U.S.  Court of
Appeals for the D.C.  Circuit or have filed petitions for  reconsideration  with
the FCC. These  proceedings  are still  pending.  The Company cannot predict the
outcome of this appeal and its possible impact on the Company.

         Increasing    regulatory     liberalization    in    many    countries'
telecommunications  markets now permits more  flexibility in the way the Company

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<PAGE>

can  route  calls.  Although  certain  FCC  rules  limit  the way in which  some
international calls can be routed, the Company does not believe that its network
configuration,  specifically  the way in which  traffic  is routed  through  its
facilities in the United Kingdom, is specifically prohibited by or undermines in
any way the intent of these rules. It is possible,  however,  that the FCC could
find that the  Company's  network  configuration  violates  these rules.  If the
Company were found to be in violation of these routing restrictions,  and if the
violation  were  sufficiently  severe,  it is possible that the FCC could impose
sanctions and penalties upon the Company.

         CALL  REORIGINATION.  In addition,  outside the EU the Company provides
its customers with access to its services through the use of call reorigination.
A  substantial  number  of  countries  have  prohibited  certain  forms  of call
reorigination.  There can be no assurance that certain of the Company's services
and  transmission  methods  will  not be or not  become  prohibited  in  certain
jurisdictions  and,  depending on the  jurisdictions,  services and transmission
methods  affected,  there could be a material  adverse  effect on the  Company's
business, financial condition and results of operations. See "Item 1. Business -
Government Regulation."

         UNSETTLED NATURE OF REGULATORY ENVIRONMENT. The Company has pursued and
expects to  continue  to pursue a strategy  of  providing  its  services  to the
maximum extent it believes  permissible  under  applicable laws and regulations.
The  Company's  provision of services in Western  Europe may also be affected if
any EU member state imposes greater restrictions on non-EU international service
than on such service  within the EU.  There can be no assurance  that the United
States or foreign  jurisdictions will not adopt laws or regulatory  requirements
that will adversely affect the Company. Additionally,  there can be no assurance
that future United States or foreign regulatory, judicial or legislative changes
will not have a material  adverse  effect on the Company or that  regulators  or
third  parties  will not raise  material  issues  with  regard to the  Company's
compliance  with  applicable  laws or  regulations.  If the Company is unable to
provide the services it is  presently  providing or intends to provide or to use
its  existing or  contemplated  transmission  methods,  due to its  inability to
receive or retain formal or informal approvals for such services or transmission
methods,  or for any other reason  related to regulatory  compliance or the lack
thereof,  such  events  could have a material  adverse  effect on the  Company's
business, financial condition and results of operations. See "Item 1. Business -
Government Regulation."

         Since January 1, 1998,  the Company,  as well as its U.S.  competitors,
have been required to make  FCC-mandated  contributions  to a universal  service
fund to subsidize  telecommunications  services for low-income persons,  schools
and libraries,  and rural health care providers.  These  contributions are based
upon the Company's gross revenues. The amount of these contributions for 1998 is
unclear,  as is whether the rate for these contributions will escalate in future
years. There can be no assurance that the Company will be able fully to pass the
cost of these contributions on to its customers or that doing so will not result
in a loss of customers.

         EUROPEAN  IMPLEMENTATION.  The national governments of EU member states
are  required  to pass  legislation  to  liberalize  the  markets  within  their
countries to give effect to European Commission ("EC") directives.  This applies
not  only  to the  liberalization  requirements  set out in EC  directives  that
already have been adopted,  but will also apply to  requirements to be contained
in those  directives  which  still  remain to be adopted  by the  Council of the
European  Communities.  In addition,  some EU member states have  inconsistently
and, in some instances,  unclearly implemented EC telecommunications directives,
which could limit, constrain or otherwise adversely affect the Company's ability
to  provide  certain  services.   Furthermore,   national  governments  may  not
necessarily pass legislation  enacting an EC directive in the form required,  if
at all, or may pass such regulations only after a significant delay. In November
1997, the EC commenced  proceedings  against seven EU member  states,  including
Belgium,   for  failure  to  fully  implement   certain  EU   telecommunications
directives.  Even if a national government enacts appropriate regulations within
the time frame established by the EU, there may be significant resistance to the
implementation of such legislation from ITOs, regulators, trade unions and other
sources.  For example,  in France, the  telecommunications  union has stated its
objection  to the current  move towards  liberalization.  The above  factors and
other potential obstacles to liberalization could have a material adverse effect
on the  Company's  operations  by  preventing  the Company  from  expanding  its
operations as currently  intended,  as well as a material  adverse effect on the
Company's business, financial condition and results of operations.

RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTATION OF GROWTH STRATEGY

         The Company's  rapid growth has placed,  and is expected to continue to

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<PAGE>

place, a significant  strain on the Company's  administrative,  operational  and
financial  resources and has increased  demands on its systems and controls.  In
addition,  there  can  be  no  assurance  that  the  Company  will  be  able  to
successfully  add  services or expand its  geographic  markets or that  existing
regulatory  barriers  to its  current  or future  operations  will be reduced or
eliminated.  As the Company  increases  its services and expands its  geographic
markets,  there will be additional  demands on the Company's  customer  support,
sales and marketing  and  administrative  resources and network  infrastructure.
There can be no  assurance  that the  Company's  administrative,  operating  and
financial  control systems and  infrastructure  will be adequate to maintain and
effectively  monitor  future  growth  or  that  the  Company  will  be  able  to
successfully  attract,  train and manage  additional  employees.  The failure to
continue  to upgrade  the  Company's  administrative,  operating  and  financial
control  systems and  infrastructure  or the occurrence of unexpected  expansion
difficulties  could have a material  adverse  effect on the Company's  business,
financial  condition and results of  operations.  See "- Dependence on Effective
Information Systems; Year 2000 Technology Risks."

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

         There  are  certain  risks  inherent  in  conducting  an  international
business,  including  regulatory  limitations  restricting  or  prohibiting  the
provision  of  the  Company's   services,   unexpected   changes  in  regulatory
requirements, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing  foreign  operations,  longer payment cycles,  problems in
collecting  accounts  receivable,  political  risks,  fluctuations  in  currency
exchange   rates,   foreign   exchange   controls  which  restrict  or  prohibit
repatriation   of  funds,   technology   export  and  import   restrictions   or
prohibitions,  delays from  customs  brokers or  government  agencies,  seasonal
reductions in business  activity  during the summer months in Europe and certain
other parts of the world,  and potentially  adverse tax  consequences  resulting
from operating in multiple  jurisdictions  with different tax laws. For example,
regulatory  limitations  restricting or prohibiting the Company's  operations in
Latin  America,  including  regulations  in certain  countries  prohibiting  the
provision of services  through the automatic  callback access method utilized by
the Company, have contributed to the Company's decision to discontinue or modify
certain of its services in such  countries.  Existing or future  regulations  in
other countries could also have similar consequences.

         Since its  inception  in 1991,  the  Company  has  invested  heavily in
developing  its  ability to provide  international  telecommunications  services
within  Western  Europe and other  deregulating  markets and in  developing  and
expanding  its  market  presence  including,  entering  into the  national  long
distance  telecommunications  markets  in  Spain,  Italy  and  Germany.  If  the
Company's operations in Western Europe expand as expected, an increasing portion
of the Company's  revenue and expenses will be denominated  in currencies  other
than U.S.  dollars,  and  changes  in  exchange  rates  will  likely  affect the
Company's  results of operations.  Furthermore,  international  rates charged to
customers  are  likely to  decrease  in the  future  for a variety  of  reasons,
including  increased  competition  between existing carriers,  New Entrants into
geographic  markets in which the  Company  operates  or  intends to operate  and
additional  strategic  alliances  or joint  ventures  among large  international
carriers that facilitate targeted pricing and cost reductions.  Depending on the
countries  involved,  any or all of the foregoing  factors could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  In addition,  there can be no assurance that laws or administrative
practices  relating to taxation,  foreign exchange or other matters in countries
within which the Company operates will not change.  Any such change could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.  See "- Substantial Government Regulation,  "- Results of
Operations - Liquidity and Capital  Resources - Foreign  Currency," and "Item 1.
Business - Government Regulation."

RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES

         The Company may seek to acquire  customer  bases and  businesses  from,
make  investments in, or enter into strategic  alliances with,  other companies.
Any future  acquisitions,  investments,  strategic  alliances or related efforts
will be accompanied by the risks commonly encountered in such transactions. Such

risks  include,   among  others,  the  difficulty  of  identifying   appropriate
acquisition  candidates,  the  difficulty of  assimilating  the  operations  and
personnel of the acquired  entities,  the potential  disruption of the Company's
ongoing business, the inability of management to capitalize on the opportunities
presented by acquisitions,  investments or strategic  alliances,  the failure to
successfully  incorporate  licensed or acquired  technology  and rights into the
Company's  services,  the  failure  to  maintain  uniform  standards,  controls,

                                       41
<PAGE>

procedures and policies, and the impairment of relationships with employees as a
result of changes in management and ownership.  Additionally, in connection with
an acquisition,  the Company may experience rates of customer attrition that are
significantly  higher than the rate of  customer  attrition  which it  generally
experiences.  Further, to the extent that any such transaction involves customer
bases or businesses  located outside the United States,  the  transaction  would
involve the risks  associated  with  international  operations.  There can be no
assurance that the Company would be successful in overcoming  these risks or any
other  problems  encountered  with such  acquisitions,  investments or strategic
alliances. See "- Risks Relating to the Circe Network," "- Risks Associated with
International  Operations," "- Risks Associated with the Operation of the Viatel
Network,"  and "Item 1.  Business  - Business  Strategy  - Pursue  Acquisitions,
Investments and Strategic Alliances."

RAPIDLY CHANGING  INDUSTRY,  TECHNOLOGY AND CUSTOMER  REQUIREMENTS;  SIGNIFICANT
PRICE DECLINES

         The telecommunications industry is changing rapidly due to, among other
factors,  liberalization,  privatization  of ITOs,  technological  improvements,
expansion of  telecommunications  infrastructure  and the  globalization  of the
world's  economies  and free trade.  Such changes may happen at any time and can
significantly  affect the Company's  operations from period to period. There can
be no  assurance  that one or more of  these  factors  will not have  unforeseen
effects  which could have a material  adverse  effect on the Company.  There can
also be no assurance,  even if these factors turn out as  anticipated,  that the
Company  will be able to implement  its  strategy or that its  strategy  will be
accepted in this rapidly evolving market.

         The   telecommunications   industry  is   characterized  by  rapid  and
significant  technological  advancements,  introductions  of  new  products  and
services  utilizing new  technologies,  increased  availability  of transmission
capacity  and  increased   utilization  of  the  Internet  for  voice  and  data
transmission.  As new  technologies  develop,  the  Company  may be  placed at a
competitive  disadvantage  and  competitive  pressures  may force the Company to
implement such new  technologies at substantial  cost. In addition,  competitors
may  implement  new  technologies  before the Company is able to implement  such
technologies,  allowing  such  competitors  to  provide  enhanced  services  and
superior  quality  compared to those  provided by the  Company.  There can be no
assurance that the Company will be able to respond to such competitive pressures
and implement such  technologies on a timely basis or at an acceptable cost. One
or more of the technologies  currently utilized by the Company,  or which it may
implement in the future,  may not be  preferred  by its  customers or may become
obsolete.  If the  Company  is  unable  to  respond  to  competitive  pressures,
implement new technologies on a timely basis,  penetrate new markets in a timely
manner in response to changing market conditions or customer requirements, or if
new or enhanced  services  offered by the  Company do not achieve a  significant
degree of market acceptance, any such event could have a material adverse effect
on the Company's business, financial condition and results of operations.

         Prices for  international  long distance calls  historically  have been
kept artificially high in part by above-cost  international settlement rates and
have allowed carriers to enjoy  artificially high gross margins on international
calls.  However, many observers believe that, given the negligible marginal cost
to a  facilities-based  carrier of carrying an international  call and given the
emergence of competition in many countries,  the  international  settlement rate
system is in the process of collapsing and that the price of international calls
will not be  sufficiently  more expensive than domestic long distance  calls. In
addition,  the Interconnection  Directive,  which became effective on January 1,
1998,  requires EU operators with significant  market power to charge cost-based
and  non-discriminatory  prices for transmission of cross-border  traffic.  This
will have an effect on settlement  rates with countries and territories  outside
the EU and may also contribute to the collapse of the  international  settlement
rate system. For the foregoing reasons,  substantial price reductions have begun
to be reflected in international rates, particularly the rates charged for calls
between countries where competition exists. For example,  Sprint has reduced its
rates on certain calls between the United States and the United  Kingdom to $.10
per minute. This represents a steep decline from rates charged for such calls as
recently as several  years ago and the Company  expects  rates on  international
calls, particularly between the United States and Western Europe, to continue to

decline  significantly.  Furthermore,  the FCC  has  adopted  the  International
Settlement  Rate  Order,  which  is  designed  to  bring  downward  pressure  on
international telephone rates by requiring U.S. carriers to pay lower settlement
rates to their correspondent foreign carriers.

         Industry observers predict that telephone charges will be less affected
by the distance a call is carried,  particularly with the possible increased use

                                       42
<PAGE>
of voice  services  over the  Internet.  As a  consequence,  the  Company  would
experience a substantial  reduction in its gross margin on  international  calls
which,  absent a substantial  increase in billable minutes of traffic carried or
charges for  additional  services,  would have a material  adverse effect on the
Company's business,  financial condition and results of operations. In addition,
France Telecom and Deutsche  Telekom have recently taken steps to  substantially
reduce retail prices,  in excess of reductions in wholesale prices, in an effort
to protect their market share and deter  competitors,  such as the Company.  See
"Item 1. Business - Competition" and "- Competition."

RISKS ASSOCIATED WITH THE OPERATION OF THE VIATEL NETWORK

         The Company's success is dependent on the seamless technical  operation
of the  Viatel  Network  and on the  management  of  traffic  volumes  and route
selection  over the  network.  Furthermore,  as the  Company  expands the Viatel
Network to increase both its capacity and reach, and as traffic volume continues
to increase,  the Company will face increasing demands and challenges in running
and managing the network,  including its circuit capacity and traffic management
systems. The Viatel Network is subject to several risks which are outside of the
Company's control, such as the risk of damage to software and hardware resulting
from fire,  power loss,  natural  disasters  and general  transmission  failures
caused by a number of additional  factors.  Any failure of the Viatel Network or
other systems or hardware that causes significant interruptions to the Company's
operations could have and a material  adverse effect on the Company's  business,
financial condition and results of operations. The Company's operations are also
dependent on its ability to successfully integrate new and emerging technologies
and equipment into the Viatel  Network,  which could increase the risk of system
failure  and result in further  strains  upon the Viatel  Network.  The  Company
attempts to minimize customer  inconvenience in the event of a system disruption
by routing  traffic to other  circuits and switches  which may be owned by other
carriers. However, prolonged or significant system failures, or difficulties for
customers in accessing and maintaining connection with the Viatel Network, could
seriously damage the reputation of the Company and result in customer  attrition
and  financial  losses.  Additionally,  any  damage to the  Company's  switching
centers in Omaha, Nebraska could have a material adverse effect on the Company's
ability to monitor and manage the network  operations and generate accurate call
detail reports.

         The expansion  and  development  of the Viatel  Network will entail the
significant  expenditure of resources in projecting growth in traffic volume and
routing preferences and determining the most cost-effective means of growing the
Viatel Network, for example,  through variable or fixed lease arrangements,  the
purchase  of IRUs or MIUs on digital  fiber  optic  cables or digital  microwave
equipment,  or the  construction  of  transmission  infrastructure.  Failure  to
project  traffic  volume and route  preferences  correctly or to  determine  the
optimal means of expanding the Viatel  Network would result in less than optimal
utilization  of the Viatel  Network and could have a material  adverse effect on
the Company's business, financial condition and results of operations.
See "Item 1. Business - The Viatel Network."

DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS; YEAR 2000 TECHNOLOGY RISKS

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

         While the Company  believes that its software and hardware  systems are
Year 2000  compliant,  there can be no assurance until the Year 2000 occurs that
all systems will then function adequately. The Company does not know whether the
computer  systems  of ITOs and other  carriers  on whose  services  the  Company
depends for  transmission  capacity  are Year 2000  compliant.  If the  computer
systems  of the ITOs and such other  carriers  are not Year 2000  compliant,  it
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

RELIANCE ON THIRD PARTIES FOR LEASED CAPACITY AND INTERCONNECTION ARRANGEMENTS

         Other than IRUs and MIUs in certain  digital  fiber optic  cables,  the
Company does not currently own any  telecommunications  transmission lines. As a
result, the Company depends upon other facilities-based carriers,  virtually all
of  which  are  competitors  of  the  Company.   The  Company  currently  leases
transmission lines from, among others,  British Telecom,  Cable & Wireless,  and
the respective ITO in each country in which the Company  operates.  In addition,

                                       43
<PAGE>
the Company's  ability to connect  customers to the Viatel  Network is dependent
upon the  Company's  ability  to secure  interconnection  agreements,  providing
access and egress into and from the PSTN, with the respective ITO in each market
in which  the  Company  operates.  The  Company  currently  has  interconnection
agreements with Cable & Wireless, British Telecom, in the United Kingdom, KPN in
The   Netherlands,   Infostrada   in  Italy  and   Deutsche   Telekom   and  ECN
Telecommunications in Germany, and expects to secure additional  interconnection
agreements in certain  other EU member  states in which the Company  operates as
liberalization  continues. The Company expects to encounter strong resistance to
its efforts to obtain economical interconnection agreements. Even if the Company
obtains such agreements,  the actual  interconnection of the Viatel Network with
the ITOs is expected to involve  disputes and delays.  There can be no assurance
that the Company will be successful in securing such interconnection  agreements
and actual interconnection in a satisfactory or timely manner.

         The Company currently leases capacity for point-to-point  circuits with
fixed  monthly  payments  and buys minutes of use  pursuant to  agreements  with
maximum   twelve-month   terms  and  is  vulnerable  to  changes  in  its  lease
arrangements,  capacity  limitations  and  service  cancellations.  These  lease
arrangements present the Company with high fixed costs, while revenues generated
by the  utilization  of these  leases  will vary  based on  traffic  volume  and
pricing.  Accordingly,  if the Company is unable to generate  sufficient traffic
volume over  particular  routes or is unable to charge  appropriate  rates,  the
Company  could  fail to  generate  revenue  sufficient  to meet the fixed  costs
associated  with the lease and may incur  negative gross margins with respect to
such  routes.   Although  the  Company   believes  that  its   arrangements  and
relationships with other carriers generally are satisfactory,  the deterioration
or termination of the Company's  arrangements and relationships with one or more
carriers could have a material  adverse effect on the Company's cost  structure,
service  quality,   network  coverage,   financial   condition  and  results  of
operations.  See  "Item  1.  Business  - The  Viatel  Network"  and  "-  Carrier
Contracts."

DEPENDENCE ON CARRIER CUSTOMERS

         Revenues  derived from  carrier  customers  accounted  for 27.9% of the
Company's  revenues  during 1997. Such revenues are produced by a limited number
of carrier customers.  Accordingly, the loss of revenue from one or more carrier
customers  could have a material  adverse  effect upon the  Company's  business,
financial condition and results of operations.

         Carrier  customers are  extremely  price  sensitive,  generate very low
margin  business and often choose to move their  business  based solely on small
price changes. In addition, smaller carrier customers generally are perceived in
the  telecommunications   industry  as  presenting  a  higher  risk  of  payment
delinquency or non-payment than other customers. While the Company believes that
its credit  criteria  enables it to reduce its  exposure  to the higher  payment
risks  generally  associated with carrier  customers,  no assurance can be given
that such criteria will afford adequate protection against such risks.

VARIABILITY OF OPERATING RESULTS

         The Company's  quarterly operating results have fluctuated in the past,
primarily  as a result  of the  evolution  of the  Company's  business,  and may
fluctuate  significantly  in the  future as a result of a  variety  of  factors,
including:  (i) pricing  changes;  (ii)  changes in the mix of services  sold or
channels  through which those  services are sold;  (iii) changes in user demand,
customer terminations of service,  capital expenditures and other costs relating
to the expansion of the Viatel Network;  (iv) the start-up of the Circe Network;
(v) the timing and costs of any  acquisitions  of customer bases and businesses,
services or technologies; (vi) the timing and costs of marketing and advertising
efforts;  (vii) the effects of government regulation and regulatory changes; and
(viii) specific economic  conditions in the  telecommunications  industry.  Such
variability  could have a material  adverse  effect on the  Company's  business,
financial  condition and results of  operations.  Any  significant  shortfall in
demand for the Company's services in relation to the Company's expectations,  or
the  occurrence of any other factor which causes  revenue to fall  significantly
short of the Company's  expectations,  would also have a material adverse effect
on the Company's  business,  financial  condition and results of operations.  In
addition,  the  uncertainty of revenue growth coupled with  substantial  planned
increases in operating  expenses and the  continued  evolution in the  Company's
transmission methodology from switchless resale to use of the Viatel Network may
result in substantial quarterly fluctuations in the Company's operating results.
See "- Limited Operating History;  Substantial Net Losses and Negative Cash Flow
from  Operations;  Expected  Future  Net  Losses  and  Negative  Cash  Flow from
Operations."

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

              Not currently applicable to the Company.

                                     44
<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following statements are filed as part of this Report:

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

Independent Auditors' Report......................................      46

Consolidated Balance Sheets as of December 31, 1996 and 1997......      47

Consolidated Statements of Operations for the Years Ended
     December 31, 1995, 1996 and 1997.............................      48

Consolidated Statements of Stockholders' Equity (Deficiency)for the
     Years ended December 31, 1995, 1996 and 1997.................      49

Consolidated Statements of Cash Flows for the Years ended
     December 31, 1995, 1996 and 1997.............................      50

Notes to Consolidated Financial Statements for the Years
     Ended December 31, 1995, 1996 and 1997.......................      51

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


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


                                       45

<PAGE>



                          INDEPENDENT AUDITORS' REPORT





The Board of Directors and Stockholders
Viatel, Inc:

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

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Viatel,  Inc. and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted  accounting
principles. Also in  our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.


                                          /s/ KPMG PEAT MARWICK LLP


New York, New York
March 4, 1998, except as to note 13(c),
  which is as of March 18, 1998






                                       46
<PAGE>
<TABLE>
                          VIATEL, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1997

                                                                                                      1996                1997
                                                                                               -------------------  ----------------
                                            ASSETS
<S>                                                                                            <C>                     <C>

Current Assets:
   Cash and cash equivalents................................................................          $75,796,102        $21,095,635
   Marketable securities, current ..........................................................            8,181,332          3,499,691
   Trade accounts receivable, net of allowance for doubtful accounts of $602,000 and
      $1,041,000, respectively .............................................................            8,542,305         10,980,737
   Other receivables........................................................................            4,402,944          6,505,875
   Prepaid expenses ........................................................................              789,307          1,347,814
                                                                                                     -------------      ------------

      Total current assets..................................................................           97,711,990         43,429,752
                                                                                                     -------------      ------------

Marketable securities, non-current .........................................................            9,004,075         22,546,591
Property and equipment, net.................................................................           21,074,417         54,093,748
Deferred financing and registration fees, net of accumulated amortization of $742,000 and
   $1,121,000, respectively ................................................................            3,046,897          2,668,541
Intangible assets, net .....................................................................            1,973,910          1,670,251
Other assets ...............................................................................            1,853,161          2,400,315
                                                                                                    --------------      ------------
                                                                                                     $134,664,450       $126,809,198
                                                                                                    ==============      ============


                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
   Accrued telecommunications costs ........................................................          $11,915,671        $16,899,194
   Accounts payable and other accrued expenses..............................................            5,916,223         15,232,939
   Current installments of notes payable....................................................                    -          3,099,454
   Current installments of obligations under capital leases.................................               96,064            273,469
   Commissions payable......................................................................              349,646            258,533
                                                                                                     -------------       -----------
      Total current liabilities ............................................................           18,277,604         35,763,589
                                                                                                     -------------       -----------
Long term liabilities:
   Senior discount notes, less discount of $42,945,967 and $30,845,388, respectively........           77,754,033         89,854,612
   Notes payable, excluding current installments............................................                    -          7,684,963
   Obligations under capital leases, excluding current installments.........................              149,983            569,719
   Equipment purchase obligation............................................................                    -          1,500,000
                                                                                                     -------------       -----------
      Total long term liabilities ..........................................................           77,904,016         99,609,294
                                                                                                     -------------       -----------

Commitments and contingencies
Stockholders' equity (deficiency):
   Preferred Stock, $.01 par value. Authorized 1,000,000 shares, no shares issued and
      outstanding...........................................................................                    -                  -
   Common Stock, $.01 par value. Authorized 50,000,000 shares, issued and outstanding
      22,513,226 and 22,635,267 shares, respectively .......................................              225,132            226,353
   Additional paid-in capital...............................................................          125,236,410        125,661,323
   Unearned compensation ...................................................................            (130,080)           (65,040)
   Cumulative translation adjustment .......................................................            (862,458)        (5,356,474)
   Accumulated deficit .....................................................................         (85,986,174)      (129,029,847)
                                                                                                    --------------   ---------------
      Total stockholders' equity (deficiency)...............................................           38,482,830        (8,563,685)
                                                                                                    --------------   ---------------
                                                                                                     $134,664,450       $126,809,198
                                                                                                    ==============   ===============
          See accompanying notes to consolidated financial statements.

                                       47

<PAGE>

                                           VIATEL, INC. AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                   YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997



                                                                             1995                    1996                  1997
                                                                        ---------------       ----------------      ----------------
<S>                                                                       <C>                     <C>                   <C>

Telecommunications revenue ..........................................    $ 32,313,293          $ 50,418,694          $ 73,018,004
                                                                         --------------        ----------------     ----------------

Operating expenses:
Costs of telecommunications services ................................      27,648,340            42,130,308            63,504,031
Selling, general and administrative expenses.........................      24,327,537            32,856,785            36,075,778
Depreciation and amortization........................................       2,636,787             4,801,624             7,717,236
Equipment impairment loss............................................         560,419                     -                     -
                                                                         ----------------       ---------------        -------------
      Total operating expenses.......................................      55,173,083             79,788,717           107,297,045
Other income (expenses):
Interest income......................................................       3,281,926              1,852,323             3,685,711
Interest expense ....................................................      (8,856,317)           (10,848,025)          (12,450,343)
Share in loss of affiliate ..........................................         (41,530)                (9,625)                    -
                                                                         -----------------      ----------------       -------------
      Net loss.......................................................    $(28,475,711)          $ (38,375,350)         $(43,043,673)
                                                                         =================      ================       =============
      Net loss per common share, basic ..............................    $      (2.09)          $       (2.47)         $      (1.90)
                                                                         =================      ================       =============
      Net loss per common share, diluted ............................    $      (2.09)          $       (2.47)         $      (1.90)
                                                                         ==================     =================      =============
      Weighted average common shares outstanding ....................      13,640,980               15,514,479           22,620,178
                                                                         ==================     =================      =============
</TABLE>



        See accompanying notes to the consolidated financial statements.



                                       48





<PAGE>
<TABLE>
<CAPTION>


                          VIATEL, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                                   NUMBER OF
                       NUMBER OF   CLASS A
                       COMMON      COMMON               CLASS A  ADDITIONAL                  CUMULATIVE
                       STOCK       STOCK      COMMON    COMMON    PAID-IN       UNEARNED    TRANSLATION  ACCUMULATED
                       SHARES      SHARES     STOCK      STOCK    CAPITAL     COMPENSATION  ADJUSTMENT     DEFICIT      TOTAL
                       --------    ---------  ------    ------   -------       -----------  -----------  -----------    -----
<S>                    <C>          <C>       <C>       <C>      <C>           <C>              <C>       <C>            <C>

Balance at January
   1, 1995.......... 10,716,135   2,904,846  $107,161  $29,048   $29,982,211    $   -       $  1,523     $(19,135,113)  $10,984,830
Issuance of
   restricted
   common stock.....     20,000       -           200     -          116,800    (78,000)      -              -              39,000
Foreign currency
      translation
     adjustment....        -          -            -      -             -             -     (166,199)         -            (166,199)
Net loss...........        -          -            -      -             -             -         -         (28,475,711)  (28,475,711)
                     -----------  ----------- ---------- -------   ------------  ---------  ---------      ------------ ------------

Balance at December
   31, 1995........  10,736,135   2,904,846    107,361   29,048     30,099,011   (78,000)   (164,676)     (47,610,824)  (17,618,080)

Issuance of
   restricted
   common stock.....     66,666        -           667     -           389,333    (52,080)       -               -          337,920
Issuance of common
   stock, net of
   $9,541,954 issue
     costs..........  8,667,000        -        86,670     -        94,375,376         -         -               -       94,462,046
Conversion of Class
   A common stock
   to common stock..  2,904,846   (2,904,846)   29,048   (29,048)          -           -         -               -            -
Stock options
   exercised........    138,579        -         1,386      -          372,690         -         -               -          374,076
Foreign currency
   translation
   adjustment.......       -           -           -        -              -           -      (697,782)          -         (697,782)
Net loss ...........       -           -           -        -              -           -          -        (38,375,350) (38,375,350)
                     -----------  ------------ ---------- -------    -----------  ----------- -----------  ------------ ------------
Balance at December
   31, 1996......... 22,513,226        -       225,132      -       125,236,410    (130,080)  (862,458)     (85,986,174) 38,482,830
Stock options
   exercised........    122,041        -         1,221      -           424,913         -          -              -         426,134
Earned compensation.       -           -           -        -              -          65,040       -              -          65,040
Foreign currency
   translation
   adjustment.......       -           -           -        -              -            -    (4,494,016)          -      (4,494,016)
Net loss............       -           -           -        -              -            -           -       (43,043,673)(43,043,673)
                     -----------  ----------- ----------  ------   -----------   -----------  ----------  --------------  ----------
Balance at December
31, 1997.........    22,635,267        -      $226,353    $ -      $125,661,323  $(65,040)   $(5,356,474) $(129,029,847)$(8,563,685)
                     ===========  =========== ==========  ======   ============  ===========  =========== ==========================

          See accompanying notes to consolidated financial statements.

</TABLE>

                                       49



<PAGE>

<TABLE>
<CAPTION>
                          VIATEL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

                                                                            1995                    1996                   1997
                                                                    ----------------------  ---------------------  ----------------
<S>                                                                 <C>                       <C>                    <C>

Cash flows from operating activities:
   Net loss......................................................        $    (28,475,711)      $    (38,375,350)     $ (43,043,673)
   Adjustments to reconcile net loss to net cash used in operating
      activities:
      Depreciation and amortization..............................               2,636,787              4,801,624          7,717,236
      Interest expense on senior discount notes..................               8,773,438             10,783,468         12,478,935
      Accrued interest income on marketable securities...........                (714,468)              (369,761)        (2,002,089)
      Provision for losses on accounts receivable................               1,229,473              2,224,953          2,733,220
      Share in loss of affiliate.................................                  41,530                  9,625                -
      Earned compensation .......................................                  39,000                337,920             65,040
      Deferred financing and registration costs..................                (460,032)                     -                -
      Equipment impairment loss..................................                 560,419                      -                -
   Changes in assets and liabilities:
      Increase in accounts receivable............................              (2,127,611)            (6,057,936)        (6,220,589)
      Increase in prepaid expenses and other receivables.........              (2,593,863)            (1,013,989)        (1,479,665)
      Increase in other assets and intangible assets.............                (991,345)              (315,056)        (1,021,891)
      Increase in accrued telecommunications costs, accounts
        payable, accrued expenses and commissions payable........               3,592,930              1,643,858          8,248,754
                                                                     ----------------------  ---------------------  ----------------
        Net cash used in operating activities....................             (18,489,453)           (26,330,644)       (22,524,722)
                                                                     ----------------------  ---------------------  ----------------

   Cash flows from investing activities:
      Purchase of property, equipment and software...............             (11,377,850)             (9,423,191)      (34,190,052)
      Purchase of marketable securities..........................             (55,495,423)            (30,571,006)      (49,097,155)
      Proceeds from maturity of marketable securities............              30,078,399              38,807,045        40,123,514
      Investment in affiliate ...................................                (262,214)               (101,904)           -
      Issuance of notes receivable...............................                      -                 (303,227)           -
                                                                     ----------------------  ---------------------  ----------------
      Net cash used in investing activities......................             (37,057,088)             (1,592,283)      (43,163,693)
                                                                     ---------------------   ---------------------  ----------------

   Cash flows from financing activities:
      Borrowings on notes payable................................                      -                      -          11,120,672
      Proceeds from issuance of Common Stock.....................                      -               94,836,122           426,134
      Payments under capital leases..............................              (1,306,453)                (63,885)         (524,859)
      Repayment of notes payable.................................                (999,463)                    -            (336,255)
      Borrowings under bank credit line .........................                      -                      -             600,000
                                                                     ---------------------   --------------------    ---------------
      Net cash (used in) provided by financing activities........             (2,305,916)              94,772,237        11,285,692
                                                                     ---------------------   --------------------    ---------------
Effects of exchange rate changes on cash.........................                  25,757                 11,878           (297,744)
                                                                     ---------------------   --------------------    ---------------
Net (decrease) increase in cash and cash equivalents.............             (57,826,700)            66,861,188        (54,700,467)
Cash and cash equivalents at beginning of year ..................              66,761,614              8,934,914         75,796,102
                                                                     ---------------------   --------------------    ---------------
Cash and cash equivalents at end of year.........................     $         8,934,914    $        75,796,102     $   21,095,635
                                                                     ======================  ====================    ===============
Supplemental disclosures of cash flow information:
   Interest paid.................................................     $            58,040    $            64,557     $      134,409
                                                                     ======================  ====================    ===============

   Equipment acquired under capital lease obligations............     $                -     $           309,933     $    1,122,000
                                                                     ======================  ====================    ===============

</TABLE>


          See accompanying notes to consolidated financial statements.

                                       50
<PAGE>




                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A) DESCRIPTION OF BUSINESS

         Viatel, Inc. (the "Company")  is  an  international  telecommunications
company providing  international  and domestic long distance  telecommunications
services, primarily to small and medium-sized business carriers and resellers.

         (B) PRINCIPLES OF CONSOLIDATION

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

         (C) CASH AND CASH EQUIVALENTS

         The  Company's  policy is to maintain  its  uninvested  cash at minimum
levels. Cash equivalents, which include highly liquid debt instruments purchased
with a maturity of three months or less,  were  $71,765,458  and  $8,204,924  at
December 31, 1996 and 1997, respectively.

         (D) REVENUE

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

         (E) PROPERTY AND EQUIPMENT

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

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

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

         (F) INTANGIBLE ASSETS

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

                                       51
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

         (G) INCOME TAXES

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

         (H) FOREIGN CURRENCY TRANSLATION

         Foreign  currency  assets  and  liabilities  are  translated  using the
exchange  rates in effect at the balance sheet date.  Results of operations  are
translated using the average exchange rates prevailing  throughout the year. The
effects of exchange rate fluctuations on translating foreign currency assets and
liabilities  into U.S.  dollars are accumulated as part of the foreign  currency
translation  adjustment in stockholders'  equity.  Gains and losses from foreign
currency  transactions  are  included  in selling,  general  and  administrative
expenses in the period in which they occur.  For the years  ending  December 31,
1995,  1996 and 1997,  the  Company  experienced  $107,846  in foreign  exchange
transaction gains and $10,637 and $858 in foreign exchange  transaction  losses,
respectively.

         (I) NET LOSS PER SHARE

         The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128,  "Earnings Per Share" ("SFAS 128"),  for year-end 1997.  SFAS
128,  which  supersedes  APB Opinion No. 15,  "Earnings Per Share" was issued in
February 1997. SFAS 128 requires dual presentation of basic and diluted earnings
per share ("EPS") for complex capital structures on the face of the statement of
operations.  Basic EPS is computed by  dividing  income or loss by the  weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from the exercise or conversion of securities into common
stock. Per share amounts for 1996 and 1995 have been  retroactively  restated to
give effect to SFAS 128 and were not different  from EPS measured  under APB No.
15.

         Net loss and weighted  average  shares  outstanding  used for computing
diluted  loss per common  share were the same as that used for  computing  basic
loss per common share for each of the years ended  December  31, 1995,  1996 and
1997.

         The  Company had  potentially  dilutive  common  stock  equivalents  of
474,137,  969,836 and 1,052,200 for the years ended December 31, 1995,  1996 and
1997,  respectively,  which were not included in the  computation of diluted net
loss per common share because they were antidilutive for the periods presented.

                                       52
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997



(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         (J) CONCENTRATION OF CREDIT RISK

         Financial   instruments  that   potentially   subject  the  Company  to
concentration of credit risk consist primarily of temporary cash investments and
trade   receivables.   The  Company  restricts   investment  of  temporary  cash
investments to financial  institutions  with high credit  standing.  The Company
does not believe there is any  concentration of credit risk on trade receivables
as a result of the large and diverse nature of the Company's  worldwide customer
base.

         (K) RECLASSIFICATIONS

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

         (L) USE OF ESTIMATES

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

         (M) ADDITIONAL ACCOUNTING POLICIES

         Additional accounting policies are incorporated into the notes herein.

         (N) STOCK OPTION PLAN

         Prior to January 1, 1996,  the Company  accounted  for its stock option
plan in accordance  with the provisions of Accounting  Principles  Board ("APB")
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees,"  and  related
interpretations. As such, compensation expense was recorded on the date of grant
only if the current market price of the  underlying  stock exceeded the exercise
price.  On January 1, 1996, the Company  adopted SFAS No. 123,  "Accounting  for
Stock-Based  Compensation,"  which permits entities to recognize as expense over
the  vesting  period  the fair  value of all  stock-based  awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions  of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based  method, as defined in SFAS No. 123, had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide  the pro forma  disclosure  required by SFAS No. 123.
See Note 11.

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

         The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived  Assets and for Long-Lived Assets to Be Disposed Of" on
January  1,  1996.  SFAS  121  requires  that  long-lived   assets  and  certain
identifiable  intangibles be reviewed for impairment  whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying  amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired,  the
impairment to be recognized is measured by the amount

                                       53
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997


(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

by which the carrying  amount of the assets exceed the fair value of the assets.
Assets to be disposed of are  reported  at the lower of the  carrying  amount or
fair  value  less  costs to sell.  Adoption  of SFAS 121 did not have a material
impact on the Company's financial position, results of operations, or liquidity.

(2) INVESTMENTS IN DEBT SECURITIES

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

         The amortized  cost of debt  securities  classified as held to maturity
are adjusted for amortization of premiums and accretion of discounts to maturity
over the estimated  life of the  security.  Such  amortization  and interest are
included in interest  income.  There were no  securities  classified  as held to
maturity as of December 31, 1996 or 1997.

         The  following is a summary of the fair value of  securities  available
for sale at December 31, 1996 and 1997:

<TABLE>
<CAPTION>
                                                                                1996                1997
                                                                          ------------------  ------------------
<S>                                                                       <C>                  <C>


             Corporate debt securities...................................        $9,131,726         $13,481,881
             U.S. Treasury obligations...................................         6,932,280           2,027,510
             Federal agencies obligations................................         1,121,401          10,536,891
                                                                          -------------------    ---------------
                   Total.................................................       $17,185,407         $26,046,282
                                                                          ==================     ===============
</TABLE>

         Unrealized  gains or losses on  securities  classified as available for
sale are not material at December 31, 1996 and 1997.

         Securities  available  for sale at  December  31,  1997 by  contractual
maturity are shown below:


         Due within one year................................        $3,499,691
         Due after one year through two years ..............         1,027,799
         Due after two years................................        21,518,792
                                                              ------------------
             Total..........................................       $26,046,282
                                                              ==================

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

                                       54
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997



(3) PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                                   1996              1997
                                                                            -----------------   --------------
<S>                                                                            <C>                <C>

         Communications system.............................................      $20,514,213      $43,321,912
         Fiber optic cable systems.........................................          309,933        1,431,933
         Leasehold improvements ...........................................        2,122,911        3,254,515
         Furniture, equipment and other....................................        4,750,137        8,923,806
         Construction in progress .........................................          100,962       10,093,614
                                                                                -------------     -----------
                                                                                  27,798,156       67,025,780
         Less accumulated depreciation and amortization....................        6,723,739       12,932,032
                                                                                --------------    -----------
                                                                                $21,074,417       $54,093,748
                                                                                ==============    ===========
</TABLE>

         At December 31, 1996 and 1997,  construction  in progress  represents a
portion of the current  expansion of the European  Network.  For the years ended
December 31, 1995, 1996 and 1997, $508,600, $66,500 and $163,000,  respectively,
of interest was capitalized with respect to this project.

(4) INTANGIBLE ASSETS

         Intangible assets consist of the following as of December 31:
<TABLE>
<CAPTION>

                                                                                    1996              1997
                                                                              ------------------  -------------
<S>                                                                             <C>                 <C>

       Acquired employee base and sales force in place......................        $1,607,225     $1,607,225
       Goodwill ............................................................           474,065        474,065
       Purchased software ..................................................         1,157,467      1,493,546
       Other................................................................           374,539        849,276
                                                                                ---------------     -----------
                                                                                     3,613,296      4,424,112
       Less accumulated amortization........................................         1,639,386      2,753,861
                                                                                ===============    ============
                                                                                    $1,973,910     $1,670,251
                                                                                ================   ============
</TABLE>

                                       55

<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997



(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

         Accounts payable and accrued  expenses  consists of the following as of
December 31:
<TABLE>
<CAPTION>

                                                                                    1996              1997
                                                                             ----------------  ---------------
<S>                                                                             <C>              <C>

         Accounts payable....................................................      $  870,875      $ 5,972,722
         Accrued expenses....................................................       3,792,657        3,252,750
         Accrued capital expenditures........................................               -        4,738,902
         Accrued compensation and benefits...................................       1,252,691        1,268,565
                                                                                ----------------   ------------
                                                                                   $5,916,223      $15,232,939
                                                                                ================   ============
</TABLE>

(6) LINE OF CREDIT AND LETTERS OF CREDIT

         The Company has a revolving line of credit agreement which provides for
secured  borrowings of up to $2.3 million.  Borrowings under this line of credit
agreement can be made under either of the following interest rate formulas:  (i)
the  lending  institution's  prime rate or (ii) the LIBOR rate plus two  hundred
basis points.  The Company had $0.6 million and no borrowings  under the line of
credit agreement at December 31, 1997 and 1996,  respectively.  The terms of the
line of credit  agreement  include,  among other  provisions,  requirements  for
maintaining  defined  levels of  securities  and  other  liquid  collateral.  At
December 31, 1997,  standby letters of credit of approximately $1.6 million have
been issued under this line of credit agreement.

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

(7) LONG TERM LIABILITIES

         (A) SENIOR DISCOUNT NOTES

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

         The notes are redeemable at the Company's  option, in whole or in part,
at any time on or after  January 15, 2000 until  maturity at  redemption  prices
that  range from 110% to 100% of the notes'  face value plus  accrued  interest.
Upon a change of  control,  the Company is required to make an offer to purchase
the  notes at a  purchase  price  equal to 101% of their  accreted  value,  plus
accrued interest,  if any. The notes contain certain covenants that, among other
things,  limit the ability of the Company  and  certain of its  subsidiaries  to
incur indebtedness, make pre-payments of certain indebtedness and pay dividends.

         On December 31,  1997,  the Company  estimated  the fair value of these
notes to be  $98,371,000.  The estimate is based on quoted market prices for the
notes.
                                       56

<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997


(7) LONG TERM LIABILITIES (CONTINUED)

         On March 3, 1998, the Company  commenced a tender offer to purchase all
of the  outstanding  1994 Notes and a consent  solicitation to eliminate most of
the  covenants  in  the  indenture   relating  to  the  1994  Notes.  The  total
consideration to be paid for the 1994 Notes will be determined by reference to a
fixed spread of 100 basis points over the yield to maturity of the United States
Treasury 6.375% Notes Due January 15, 2000.  Assuming the  extinguishment of the
1994 Notes is  completed  on March 31,  1998,  the Company  expects to record an
extraordinary  loss  of  approximately   $28.3  million  related  to  the  early
extinguishment   of  debt  comprised  of  the   following:   (i)  a  premium  of
approximately  $24.7  million,  (ii)  approximately  $2.6 million in unamortized
deferred financing and registration  fees, and (iii)  approximately $1.0 million
of other  associated  costs.  The tender offer is subject to  completion  of the
offering of Units, consisting of Senior Notes Due 2008 and shares of convertible
redeemable preferred stock of the Company. See Note 15.

         (B) EQUIPMENT FINANCING

         In  November  and  December  1997,  the Company  entered  into Loan and
Security Agreements with Charter Financial,  Inc.  ("Charter") pursuant to which
the Company  borrowed an  aggregate of $11.1  million.  Repayment of these loans
commenced  on  either  December  1997 or  January  1998   and are  repayable  in
thirty-two or thirty-six  successive  monthly  installments.  Under the terms of
these  arrangements,   the  Company  is  required  to  satisfy  certain  EBITDA,
unrestricted cash and tangible net worth  requirements.  Obligations under these
Loan and Security  Agreements  are secured by the grant to Charter of a security
interest in certain designated  telecommunications  equipment.  A portion of the
payment  obligations  under these  borrowing  arrangements  are also  secured by
letters of credit issued by The Chase Manhattan Bank.

         (C) EQUIPMENT PURCHASE OBLIGATION

         Equipment  purchase  obligation  represents  the long term  portion  of
accrued capital  expenditures which will be financed in 1998. In connection with
the  financing  of such  equipment,  which was  delivered  to the Company in the
fourth  quarter of 1997,  the Company has entered into an agreement with Charter
which is expected  to contain  substantially  similar  terms and  provisions  as
previous  equipment  financings.  The  Company  expects  such  financing  to  be
completed in the second quarter of 1998.

(8) STOCKHOLDERS' EQUITY

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

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

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

                                       57
<PAGE>

                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997


(9) INCOME TAXES

         The statutory  Federal tax rates for the years ended December 31, 1995,
1996 and 1997 were 35%.  The  effective  tax rates were zero for the years ended
December  31, 1995,  1996 and 1997 due to the Company  incurring  net  operating
losses for which no tax benefit was recorded.

         For Federal and foreign income tax purposes, the Company has unused net
operating loss  carryforwards  of  approximately  $93.9 million expiring in 2007
through 2012. The availability of the net operating loss carryforwards to offset
income in future years is restricted  as a result of the  Company's  issuance of
its  Common  Stock and as a result of future  sales of  Company  stock and other
events.

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

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                        --------------------------------------
                                                                              1996                1997
                                                                        -----------------  -------------------
<S>                                                                       <C>                    <C>

         Accounts receivable principally due to
           allowance for doubtful accounts .......................        $   352,000       $   587,000
         OID Interest not deductible in current period ...........          6,914,000        11,149,000

         Federal net operating loss carryforwards.................         21,432,000        29,093,000
         Foreign net operating loss carryforwards.................          1,242,000         3,777,000
                                                                         -----------------  -------------
            Total gross deferred tax assets .................              29,940,000        44,606,000

         Less valuation allowance ................................        (29,940,000)      (44,606,000)
                                                                         -----------------  --------------
            Net deferred tax assets..........................             $         -        $        -
                                                                         =================  ==============
</TABLE>

         In  assessing  the  realizability  of deferred  tax assets,  management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  The ultimate  realization of deferred
tax assets is dependent  upon the generation of future taxable income during the
periods in which  those  temporary  differences  become  deductible.  Management
considers the scheduled  reversal of deferred tax liabilities,  projected future
taxable income,  and tax planning in making these  assessments.  During 1996 and
1997,  the  valuation   allowance  increased  by  $13,610,000  and  $14,666,000,
respectively.

(10) SEGMENT DATA

         The information below summarizes export sales by geographic area.

<TABLE>
<CAPTION>
                                                             1995                1996                1997
                                                       ------------------  ------------------  -----------------
<S>                                                       <C>                  <C>                <C>

         Latin America............................       $12,093,771         $14,401,901        $16,240,483
         Asia/Pacific Rim ........................         4,375,412           6,159,507          8,198,705
         Middle East..............................           554,139              77,832              1,403
         Africa ..................................         1,207,225              78,833                  -
         Other....................................           369,425             267,446                  -
                                                       ------------------  ------------------  ----------------
                                                         $18,599,972         $20,985,519        $24,440,591
                                                       ==================  ==================  ================

</TABLE>
                                       58
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997



(10) SEGMENT DATA (CONTINUED)

         The information below summarizes the results of operations and selected
balance sheet data for the Company's European geographic segment.
<TABLE>
<CAPTION>

                                                                     1995                 1996                1997
                                                               ------------------   ------------------  ------------------
<S>                                                             <C>                     <C>                <C>

        Revenue........................................         $11,601,000          $19,917,000         $32,647,000
        Operating loss.................................          11,076,000           14,753,000          17,092,000
        Capital expenditures...........................           9,959,000            6,475,000          25,544,000
        Depreciation expense...........................             243,000            2,258,000           4,019,000

                                                                                        DECEMBER 31,
                                                               -----------------------------------------------------------
                                                                     1995                 1996                1997
                                                               ------------------   ------------------  ------------------

        Identifiable assets............................         $10,216,000          $15,103,000         $55,949,000

</TABLE>

(11) STOCK OPTION PLAN

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

         The Stock  Incentive  Plan provides for the issuance of up to a maximum
of  2,333,333  shares  of  Common  Stock and is  currently  administered  by the
Compensation  Committee  of the Board of  Directors.  Under the Stock  Incentive
Plan,  the option price of any ISO may not be less than the fair market value of
a share of Common  Stock on the date on which the option is granted.  The option
price of an NQSO may be less than the fair market  value on the date the NQSO is
granted if the Board of Directors so determines.  An ISO may not be granted to a
"ten  percent  stockholder"  (as such term is  defined  in  Section  422A of the
Internal  Revenue  Code) unless the exercise  price is at least 110% of the fair
market  value of the Common Stock and the term of the option may not exceed five
years  from the date of  grant.  Common  Stock  subject  to a  restricted  stock
purchase or bonus agreement is transferable  only as provided in such agreement.
The maximum term of each stock option  granted to persons other than ten percent
stockholders is ten years from the date of grant.

         The per share  weighted  average  fair value of stock  options  granted
during  1996 and 1997 was $2.29 and  $5.99,  respectively,  on the date of grant
using the Black-Scholes option pricing model with the following assumptions: (1)
a risk free interest  rate of 5.5% in 1996 and 1997,  (2) an expected life of 10
years for both 1996 and 1997, (3) volatility of approximately 35.9% for 1996 and
52.2% for 1997 and (4) an annual dividend yield of 0% for both 1996 and 1997.


                                       59
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997



(11) STOCK OPTION PLAN (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                1995             1996             1997
                                                          ---------------  ---------------  ---------------

<S>                                                         <C>                <C>              <C>
         As reported net loss (in 000s)...............        $(28,476)        $(38,375)        $(43,044)
         Pro forma net loss (in 000s).................         (28,642)         (38,986)         (44,171)
         As reported net loss per share...............           (2.09)           (2.47)           (1.90)
         Pro forma net loss per share.................           (2.10)           (2.51)           (1.95)

</TABLE>


         Pro forma net loss reflects only options  granted during 1995, 1996 and
1997.  Therefore,  the full impact of  calculating  compensation  cost for stock
options  under SFAS No. 123 is not  reflected  in the pro forma net loss amounts
because compensation cost is reflected over the options' vesting period of three
years and compensation  cost for options granted prior to January 1, 1995 is not
considered.

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

<TABLE>
<CAPTION>
                                                                              WEIGHTED
                                                                               AVERAGE
                                                                              EXERCISE       NUMBER OF
                                                                               PRICES          SHARES
                                                                               -------       ---------
<S>                                                                            <C>           <C>

        Outstanding at January 1, 1995...................................       $3.13          392,654
        Granted..........................................................        5.85          177,654
        Forfeited........................................................        3.80          (96,171)
                                                                                --------      ---------
        Outstanding at December 31, 1995.................................        4.01          474,137
        Granted..........................................................        6.75          822,265
        Forfeited........................................................        5.77         (187,987)
        Exercised........................................................        2.70         (138,579)
                                                                                --------      ---------
        Outstanding at December 31, 1996.................................        6.18          969,836
        Granted..........................................................        8.61          428,194
        Forfeited........................................................        6.68         (197,135)
        Expired..........................................................        5.46          (26,654)
        Exercised........................................................        3.49         (122,041)
                                                                                --------      ----------
        Outstanding at December 31, 1997.................................        7.40         1,052,200
                                                                                ========      ==========

</TABLE>


                                       60
<PAGE>




(11)  STOCK OPTION PLAN  (CONTINUED)

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

<TABLE>
<CAPTION>
                                            OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                    ------------------------------------------------------------   -------------------------------------------
                                                WEIGHTED               WEIGHTED                                       WEIGHTED
  RANGE OF                NUMBER                AVERAGE                 AVERAGE                  NUMBER                AVERAGE
 EXERCISE             OUTSTANDING AT            REMAINING               EXERCISE              EXERCISABLE AT          EXERCISE
  PRICES            DECEMBER 31, 1997            LIFE                   PRICE               DECEMBER 31, 1997          PRICE
----------------   -------------------------------------------------------------   --------------------------------------------
<S>                 <C>                         <C>                    <C>                  <C>                       <C>

$0.75  - $ 3.50           3,947                  6 Years                0.75                   3,947                    0.75
 3.51  -   5.75          62,931                  7 Years                3.74                  62,931                    3.74
 5.76  -   8.75         555,179                  9 Years                5.93                 369,443                    5.85
 8.76  -  12.00         430,143                 10 Years                9.84                 132,548                    9.68
                   ------------------                               ------------           ----------              -------------
                      1,052,200                                         7.40                 568,869                    6.47
                   ==================                               ============           ==========              ==============
</TABLE>

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

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

         In addition,  prior to the adoption of the Stock  Incentive  Plan,  the
Board of Directors  authorized  the  issuance of up to 233,333  shares of Common
Stock as  compensation  to  employees  and  consultants  of the Company of which
219,639 are available for issuance at December 31, 1997.

(12) EQUIPMENT IMPAIRMENT LOSS

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

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

(13) COMMITMENTS AND CONTINGENCIES

         (A) LEASES

         At December 31, 1997,  the Company was committed  under  non-cancelable
operating and capital  leases for the rental of office space and for fiber optic
cable systems.

                                       61
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997



(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

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

1998...............................          $349,098         $1,211,500
1999...............................           271,456          1,054,882
2000...............................           201,825            997,279
2001...............................           184,228            639,008
2002...............................                 -            464,991
Thereafter.........................                 -          1,534,057
                                          ----------------   ----------------
                                            1,006,607         $5,901,717
                                                             ================
Less interest costs................           163,419
                                          ----------------
                                             $843,188
                                          ================

         Total rent expense amounted to $948,826,  $1,530,889 and $1,326,433 for
the years ended December 31, 1995, 1996 and 1997, respectively.

         (B) CARRIER CONTRACTS

         The  Company  has  entered  into  contracts  to  purchase  transmission
capacity from various domestic and foreign  carriers.  By committing to purchase
minimum volumes of transmission  capacity from carriers,  the Company is able to
obtain guaranteed rates which are more favorable than those generally offered in
the marketplace.  The minimum volume commitments are approximately $13.8 million
for the year ending  December 31, 1998. The Company is involved in disputes with
carriers  arising in the ordinary course of business.  The Company  believes the
outcome of all current disputes will not have a material effect on the Company's
financial position or results of operations.

         (C) PURCHASE COMMITMENTS

         The Company is continually upgrading and expanding the European Network
and its switching facilities.  In connection therewith,  the Company has entered
into purchase commitments to expend approximately $11.8 million.

         The Company is developing a fiber-optic ring which will connect London,
Paris,  Brussels,  Antwerp,  Rotterdam and Amsterdam (the "Circe  Network").  In
connection  with the Circe Network,  the Company has signed  various  letters of
intent which currently  commit the Company to make certain payments equal to the
lesser of actual cost or $5.3 million. The Company's obligations with respect to
such  amounts are subject to further  reduction  based on an  obligation  of the
vendor to mitigate  damages if the  arrangements  are terminated by the Company.
The Company  does not  believe  that such  arrangements,  if  terminated  by the
Company prior to April 6, 1998, will result in Company expenditures in excess of
$630,000.


                                       62
<PAGE>



                          VIATEL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1995, 1996 AND 1997



(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)

         (D) LETTERS OF CREDIT

         The Company has outstanding irrevocable letters of credit in the amount
of $1.6 million at December 31, 1997. These letters of credit  collateralize the
Company's  obligations  to third  parties.  The fair  value of these  letters of
credit approximates  contract values based on the nature of the fee arrangements
with the issuing bank.

         (E) EMPLOYMENT CONTRACTS

         The Company has employment  contracts with certain  officers at amounts
generally equal to such officers' current levels of compensation.  The Company's
remaining  commitments  at December 31, 1997 for the next three years under such
contracts aggregates approximately $477,000.

         (F) LITIGATION

         In   connection   with  the   Company's   transition  to  direct  sales
organizations in Europe, the Company's former  independent sales  representative
in Madrid,  Spain  commenced  an  arbitration  proceeding  before  the  American
Arbitration Association in New York claiming a breach of contract by the Company
and seeking  $5.8  million in damages.  In May 1997,  the Company  settled  this
matter for an  aggregate  cost,  including  legal fees,  of  approximately  $0.8
million and exchanged mutual  releases.  This settlement was charged to selling,
general and administrative expenses during 1997.

(14) REGULATORY MATTERS

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

(15) SUBSEQUENT EVENTS

         (a)  On   February   27,   1998,   the  Company   acquired   Flat  Rate
Communications, Inc. ("Flat Rate"), a long distance telecommunications reseller,
for $5.0 million of cash,  375,000  shares of the  Company's  common stock and a
contingent  payment  based upon  operating  results for the twelve  month period
ending February 28, 1999 which will range from zero to $21.0 million in cash and
zero to 1.0  million  shares of common  stock.  The  Company  will  record  this
acquisition  under the purchase  method of accounting.  If this  acquisition had
occurred at January 1, 1997, total telecommunications  revenue, net loss and net
loss per  share  would  have  been  $101,753,000  and  $44,769,000,  and  $1.95,
respectively.

         (b) To finance the tender  offer  commenced  by the Company on March 3,
1998 and to fund certain  proposed capital  expenditures  and general  corporate
purposes, the Company is proposing to raise approximately $650.9 million through
an  offering  of  units,  consisting  of  Senior  Notes  Due 2008 and  shares of
convertible redeemable preferred stock of the Company.


                                       63
<PAGE>

<TABLE>
<CAPTION>


                          VIATEL, INC. AND SUBSIDIARIES
                SCHEDULE II - VALUATIONS AND QUALIFYING ACCOUNTS

                                                               Additions
                                               Balance at      charged to                                    Balance
                                                beginning      costs and                        Other        at end
                Description                     of period       expenses      Retirements      changes      of period
---------------------------------------         ---------      ----------     -----------      -------      ---------
<S>                                               <C>          <C>            <C>               <C>          <C>

Reserves and allowances deducted
 from asset accounts:

Allowances for uncollectible accounts
   receivable

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

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

     Year ended December 31, 1997                602,000       2,733,000       2,294,000            -      1,041,000

Allowances for asset impairment

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

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

     Year ended December 31, 1997                560,000            -               -               -        560,000



</TABLE>










                                       64

<PAGE>




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

None.


                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

     The information appearing under the captions  "Proposal  1 --  Election  of
Directors,"  "Certain  Transactions"  and "Section  16(a)  Beneficial  Ownership
Reporting  Compliance"  in the  Company's  Proxy  Statement  for its 1998 Annual
Meeting of Stockholders (the "1998 Proxy  Statement") is incorporated  herein by
reference.

ITEM 11.      EXECUTIVE COMPENSATION.

     Information  appearing  under the caption "Executive Compensation"  in  the
1998 Proxy Statement is incorporated herein by reference.

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

     Information  appearing  under the caption "Security Ownership of Beneficial
Owners and  Management" in the 1998 Proxy  Statement is  incorporated  herein by
reference.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Information  appearing under the caption "Certain Transactions" in the 1998
Proxy Statement is incorporated herein by reference.


                                     PART IV

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

     (A)      1.      FINANCIAL STATEMENTS.

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

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

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

     (B) REPORT ON FORM 8-K.

              The Company  did not file any  Current  Reports on Form 8-K during
              the fourth quarter of 1997.


                                       65
<PAGE>



     (C) Index to Exhibits.

              The  following  is a list of all  Exhibits  filed  as part of this
Report:
<TABLE>
<CAPTION>


   EXHIBIT NO.                                          DESCRIPTION OF DOCUMENTS
--------------                                         -------------------------
<S>                                                   <C>

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       67
<PAGE>




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

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

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

   10.12                  -   Employment  Agreement between the Company and Michael J. Mahoney.+

   10.13                  -   Amended Stock Incentive Plan (incorporated  herein by reference to Exhibit 10.31 to the
                              Company's  Form  10-Q  for the  fiscal  quarter  ended  September  30,  1997,  File No.
                              000-21261).*+

   10.14                  -   Employment  Agreement  between the Company  and Allan L. Shaw.+

   10.15                  -   Employment Agreement between the Company and Sheldon M. Goldman.+

   21.1                   -   Subsidiaries of the Company.

   23.1                   -   Consent of KPMG Peat Marwick LLP.

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

   27.1                   -   Financial Data Schedule.
----------

     *   Incorporated herein by reference.
     +   Management contract or compensatory plan or arrangement.


</TABLE>

                                       68
<PAGE>



                                   SIGNATURES

    Pursuant  to the  requirements  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned,  thereunto duly authorized, in the City and State
of New York, on the 27th day of March, 1998.

                                  VIATEL, INC.


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


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

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities indicated on the 27th day of March, 1998.

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

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


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

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


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








                                       69
<PAGE>



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

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

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

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

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

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

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


</TABLE>


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<PAGE>

<TABLE>

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

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

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

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

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

</TABLE>

                                       71
<PAGE>




<TABLE>

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

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

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

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

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

   10.12  -   Employment   Agreement  between  the  Company  and  Michael  J.
              Mahoney. +

   10.13  -   Amended Stock Incentive Plan (incorporated  herein by reference
              to  Exhibit  10.31 to the  Company's  Form 10-Q for the  fiscal
              quarter ended September 30, 1997, File No. 000-21261).*+

   10.14  -   Employment  Agreement  between  the  Company  and Allan L. Shaw. +

   10.15  -   Employment Agreement between the Company and Sheldon M. Goldman. +

   21.1   -   Subsidiaries of the Company.

   23.1   -   Consent of KPMG Peat Marwick LLP.

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

   27.1   -   Financial Data Schedule.

</TABLE>
----------

     *   Incorporated herein by reference.
     +   Management contract or compensatory plan or arrangement.



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