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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-K
      [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

                        COMMISSION FILE NUMBER: 0-23717

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

<TABLE>
<S>                                            <C>
                   DELAWARE                                      94-3068423
           (State of incorporation)                (I.R.S. Employer Identification Nos.)
</TABLE>

                          4121 WILSON BLVD., 7TH FLOOR
                           ARLINGTON, VIRGINIA 22203
                    (Address of principal executive offices)

                                 (703) 236-3100
                     (703) 258-3401 (AFTER APRIL 15, 2001)
                        (Registrant's telephone number)

          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
   Common Stock, par value $0.10 per share                New York Stock Exchange
       Preferred Share Purchase Rights                    New York Stock Exchange
</TABLE>

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

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

     The aggregate market value of the voting stock of Global TeleSystems, Inc.
held by non-affiliates on December 31, 2000 was approximately $148,525,712. On
February 28, 2001, there were outstanding approximately 203,869,538 shares of
Common Stock of Global TeleSystems, Inc.

<TABLE>
<CAPTION>
              ITEM OF FORM 10-K                     DOCUMENTS INCORPORATED BY REFERENCE
              -----------------                     -----------------------------------
<C>                                            <S>
      Part III, Item 10, 11, 12, and 13        Proxy Statement* (excluding therefrom the
                                               subsections entitled "Report of the
                                               Compensation Committee of the Board of
                                               Director" and "Performance Graph")
             Part IV, Item 14(c)               Exhibits
</TABLE>

* Refers to the definitive Proxy Statement of Global TeleSystems, Inc., to be
  filed pursuant to Regulation 14A, relating to the Annual Meeting of
  Stockholders of Global TeleSystems, Inc. to be held on June 14, 2001.

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                            GLOBAL TELESYSTEMS, INC.

                                   FORM 10-K
                          YEAR ENDED DECEMBER 31, 2000

                               TABLE OF CONTENTS

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                                                                         PAGE
                                                                         ----
<S>       <C>                                                            <C>
                                   PART I
ITEM 1.   Business....................................................     2
ITEM 2.   Properties..................................................    46
ITEM 3.   Legal Proceedings...........................................    46
ITEM 4.   Submission of Matters to a Vote of Security Holders.........    47

                                   PART II

ITEM 5.   Market for the Company's Common Equity and Related
            Stockholder Matters.......................................    47
ITEM 6.   Selected Financial Data.....................................    48
ITEM 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................    49
ITEM 8.   Consolidated Financial Statements and Supplementary
            Information for the Company...............................    62
ITEM 9.   Changes In and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................    96

                                  PART III

ITEM 10.  Directors and Executive Officers of the Company.............    96
ITEM 11.  Executive Compensation......................................    96
ITEM 12.  Security Ownership of Certain Beneficial Owners and
            Management................................................    96
ITEM 13.  Certain Relationships and Related Transactions..............    96

                                   PART IV

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form
            8-K.......................................................    96
SIGNATURES............................................................   103
</TABLE>

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                                     PART I

ITEM 1. BUSINESS

IMPLEMENTATION OF THE NOVEMBER 2000 RESTRUCTURING AND OTHER RECENT DEVELOPMENTS

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

     In connection with the Restructuring, the Company will focus on its core
competency of providing broadband services to traditional carriers, Internet
service providers, application service providers, other Web-centric entities and
data intensive pan-European corporations. The objective of the Restructuring is
to position the Company as a data and Internet services-only provider, which
business the Company expects will have positive operating results, although
there can be no assurance in this regard. As part of the Restructuring, the
Company reorganized into four "stand alone" business units -- GTS Broadband
Services (which was rebranded "Ebone" in January 2001); GTS Business Services;
GTS Central Europe; and Golden Telecom, Inc. ("Golden Telecom") -- and announced
that it intended to sell the portion of its Business Services focused on serving
small-to-medium-sized enterprises ("SME's") and providing voice and voice-based
services. The Business Services units are primarily comprised of the Company's
wholly owned subsidiary, Global TeleSystems (Europe) Limited, formerly Esprit
Telecom Group plc ("Esprit" or "GTS (Europe) Ltd"). The Company also announced
its intention to sell its Central European operations, which provide voice and
data services in Hungary, Poland, the Czech Republic, Slovakia and Romania. The
Company expects to retain its transborder fiber optic network in that region.
The Company engaged Credit Suisse First Boston, an investment bank, to assist in
the sale of both the Business Services and Central European businesses.

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

     As a result of the Restructuring initiative, the Company recorded a $988.5
million charge within its statements of operations in the fourth quarter 2000.
Of the $988.5 million, $942.5 million represents non-cash items due to the
write-off of goodwill and intangibles and fixed assets, due to impairment of the
respective

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assets. The remaining $46.0 million is comprised of transaction related costs
(professional advisors), contract termination penalties and severance for
personnel.

  AGREEMENT TO SELL CERTAIN OF THE COMPANY'S SHARES IN GOLDEN TELECOM

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

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

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

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

     If the Minimum Purchase Condition is fulfilled, during the Lock-up Period
the Company will not be permitted to sell the shares of Golden Common Stock
owned by it unless the following procedures are followed: the Company must
notify the Stock Option Parties of the Company's intent to sell such shares at
least 30 days prior to consummating the sale of such shares. The Stock Option
Parties will then have

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(i) fifteen days after receiving such notice to notify the Company of the Stock
Option Parties' decision to purchase a number of the shares which the Company
proposes to sell in the following allocations -- Alfa Telecom up to 88%, Capital
Global up to 4%, and Barings up to 8% (provided that each of the Stock Option
Parties shall have the option to purchase any shares which the other Stock
Option Parties do not purchase), and (ii) if the Stock Option Parties have not
consummated their purchase of such shares within sixty days after receiving the
Company's notice, the Company will be entitled to consummate the sale to the
third party.

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

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

     The Company currently holds two promissory notes dated October 5, 1999 of
Golden Telecom evidencing $6.25 million in subordinated debt. The notes bear
interest at 14% per annum and are due on October 5, 2006. Golden Telecom is not
required to pay accrued interest on the notes until October 5, 2001. Under the
Golden Purchase Agreement, as of the Closing the final maturity date of the
notes will be changed to one year after the Closing and no payments will be
required under such notes until such final maturity date. Other terms and
conditions of the notes will remain the same.

     Under the Shareholders Agreement (the "Shareholders Agreement"), to be
entered into at the Closing by and among Golden Telecom, the Company, and the
Stock Option Parties, the Company will agree to irrevocably and unconditionally
assign and transfer to Alfa Telecom, with effect from the Closing, certain
registration rights relating to the shares of Golden Common Stock that the
Company had prior to the Closing.

     Under the Shareholders Agreement, the Stock Option Parties shall have the
right to have up to six members elected to Golden Telecom's Board of Directors
and the Company shall have the right to have one member elected to Golden
Telecom's Board of Directors. The Company's representation on the Golden Telecom
Board of Directors will be reduced to zero Board seats (and the Stock Option
Parties shall have the right to jointly appoint the Company's director) upon the
first to occur of (i) the Stock Option Parties purchasing at least $150 million
of shares of Golden Common Stock from the Company and (ii) such time as the
Company shall own shares of Golden Common Stock aggregating fewer than 4% of all
of the issued and outstanding shares of Golden Common Stock. Pursuant to the
Shareholders Agreement, if any "Event of Default" occurs under the Note, Alfa
Telecom will cause the directors designated by it to resign immediately and the
Company will have the right to designate such number of directors as will
constitute a majority of the Board of Directors of Golden Telecom.

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

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

     In order to ensure that certain actions relating to Esprit, including
defaults on certain Esprit debt obligations (including its $230,000,000
principal amount 11 1/2% Senior Notes due 2007 ("Esprit US Notes due 2007"),
$150,000,000 principal amount 10 7/8% Senior Notes due 2008 ("Esprit US Notes
due 2008" and, together with the US Notes due 2007, the "Esprit US Notes"), DM
125,000,000 principal amount 11 1/2% Senior Notes due 2007 ("Esprit DM Notes due
2007") and DM 150,000,000 principal amount 11% Senior Notes due 2008 ("Esprit DM
Notes due 2008" and, together with the Esprit DM Notes due 2007, the "Esprit DM
Notes"; the Esprit US Notes and the Esprit DM Notes, are hereinafter referred to
as the "Esprit Notes") or certain judgment defaults or bankruptcy or insolvency
events thereunder did not trigger a default or event of default under the
Company's 9.875% Senior Notes due 2005 ("GTS 9.875% Notes"), the Company sought
consents from the holders of the GTS 9.875% Notes to amend the indenture for the
GTS 9.875% Notes to provide that an event of default under the Esprit Notes or
other Esprit debt obligations would not trigger a default or event of default
under the GTS 9.875% Notes. In November 2000, the Company paid an aggregate
consent fee in the amount of $10.5 million, obtained the requisite consents and
such amendments to the indenture for the GTS 9.875% Notes were effected.

     In order to be able to continue to meet its trade obligations consistent
with past practices while it addressed its options with regard to its
outstanding indebtedness under the Esprit Notes and its long-term debt owed to
GTS, on December 15, 2000 Esprit announced that it had elected not to pay
scheduled cash interest payments totaling approximately $12.0 million due on
December 15, 2000 on the Esprit US Notes due 2008 and Esprit DM Notes due 2008.
Upon the expiration of the applicable grace period, this payment default matured
into an event of default under the related indentures for the Esprit US Notes
due 2008 and the Esprit DM Notes due 2008. If the indebtedness represented by
the Esprit US Notes due 2008 and Esprit DM Notes due 2008 were accelerated, this
could, in turn, trigger an event of default under the Esprit US Notes due 2007
and Esprit DM Notes due 2007. The Company and Esprit, with the assistance of its
financial advisors, Houlihan Lokey Howard & Zukin, entered into negotiations
with an unofficial committee (the "Committee") comprised of certain holders of
the Esprit Notes with a view toward developing a consensual restructuring plan
for Esprit that would maximize the value of Esprit for all interested parties.

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

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Terms, defined below, and is qualified in its entirety by reference to those
documents, which are exhibits to this report.

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

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

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

     Under the Summary of Terms, GTS will also advance interim funding of up to
E20 million to Esprit and the other companies comprising the GTS Business
Services division as of March 31, 2001 or the members of the Newco Group, as
applicable, in addition to any amounts of indebtedness incurred under the
Working Capital Facility, under a facility (the "Ebone Facility" and, together
with the Working Capital Facility, the "GTS Facilities") to be made available to
pay the costs of transmission services or network capacity to be provided by
Ebone on its data transmission network during the period April 1, 2001 through
December 31, 2001. The Ebone Facility shall be a senior secured facility. To the
extent that, other than for reasons of an increase in the number of circuits and
capacity requested and utilized over that ordered prior to March 27, 2001, the
cumulative costs of such transmission services and network capacity provided
during the period April 1, 2001 through December 31, 2001 exceed E20 million,
funds available under the Ebone Facility shall increase dollar for dollar to
cover such increased costs.

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

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

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

     On March 28, 2001, Esprit commenced a consent solicitation (the "Consent
Solicitation") seeking approval from holders of the Esprit Notes to modify
certain provisions in the indentures (the "Esprit Indentures") relating to each
series of the Esprit Notes (the "Proposed Amendments") in order to permit the
Company to (1) enter into the GTS Facilities and (2) undertake the Asset
Transfers. In addition, the consent of holders of the Esprit Notes was sought to
terminate Esprit's obligation under the Esprit Indentures to file periodic
reports with the Securities and Exchange Commission. Esprit obtained the
requisite consents to the Proposed Amendments on April 10, 2001, and on that
date Esprit and the trustee for each series of Esprit Notes entered into a
Second Supplemental Indenture related to each such series of Esprit Notes, which
adopted the Proposed Amendments.

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

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

     Notwithstanding the percentage of the aggregate principal amount of the
Esprit Notes represented by holders of the Esprit Notes that have signed the
Lock-Up Agreement, there can be no assurance that the Scheme will be approved by
the requisite votes of holders of the Esprit Notes or sanctioned by the Court or
that the consummation of the Esprit Restructuring will occur in the timeframe
contemplated by Lock-up Agreement, or at all. If the Scheme is not approved and
the Esprit Restructuring is not consummated, such failure could have a material
adverse effect on the Restructuring and the Company. In addition, in the event
the Company and Esprit are unsuccessful in obtaining approval of the Scheme or
completing the Esprit Restructuring, Esprit may be required to cease operations,
could seek protection under applicable bankruptcy laws, initiate administration
proceedings or be put into receivership and be compelled to liquidate, and the
Company may be required to defend against the claims of Esprit creditors.

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<PAGE>   9

  AMENDED BANK FACILITY

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

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

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

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

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

          (3) allow the Company to retain E35 million to fund the Working
     Capital Facility under the Esprit Restructuring and undertake the asset
     transfers associated with the Esprit Restructuring;

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

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

          (6) require the Company to apply (a) E50 million of the sale proceeds
     of the shares in Golden Telecom in prepayment of loans outstanding under
     the Amended Bank Facility (to be payable in two equal installments by May
     31, 2001 if the Closing occurs prior to that date, or payable in a single
     payment at the Closing if the Closing occurs on or after May 31, 2001); and
     (b) the proceeds of any sale of the Central European division to prepayment
     of the Amended Bank Facility and the cancellation of commitments provided
     that (i) if such proceeds received on or before September 30, 2001 (x)
     exceed E25 million, the amount of such excess shall not be applied to the
     cancellation of commitments and (y) do not exceed E25 million, the
     commitments will be reduced by all such proceeds received up to E50
     million;

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<PAGE>   10

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

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

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

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

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

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

  OTHER POSSIBLE DELEVERAGING INITIATIVES

     The Company is also considering undertaking other actions in order to
reduce the amount of indebtedness on its balance sheet. Among the measures that
the Company may undertake are purchases, in private negotiated transactions, of
its outstanding convertible securities, including its 5 3/4% Convertible
Subordinated Debentures due 2010 and the Depositary Shares representing shares
of its 7 1/4% Cumulative Convertible Preferred Stock. Such purchases may take
the form of exchanges of newly issued shares of common stock of the Company for
convertible securities surrendered by the holder. Any such transactions will be
made in compliance with applicable securities laws, the provisions of the
instruments governing such convertible securities, the indenture governing the
Company's 9 7/8% Senior Notes, and the Amended Bank Facility.

     If the Company is not successful in (1) increasing its available cash
resources through asset sales, including pursuant to the Golden Purchase
Agreement, or other means in the second quarter of 2001 and the balance of the
year, (2) completing the Esprit Restructuring and (3) satisfying the financial
covenant and other conditions to borrowing under the Amended Bank Facility, the
Company may be compelled to examine and pursue other alternatives, including
instituting cash conservation measures, which may include a
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<PAGE>   11

substantial curtailment of capital and other expenditures, a sale of assets (in
addition to those assets the Company is trying to sell as part of the
Restructuring), a sale of the Company, halting certain operations of the
Company, or seeking the protection of applicable bankruptcy or insolvency laws
for units of the Company or the Company as a whole. Any person considering an
investment in any of the Company's securities or the securities of its
subsidiaries is urged to consider these risks. All of the statements set forth
in this report are qualified by reference to these considerations, as well as
the matters addressed under "-- Certain Considerations Generally Applicable to
Our Company."

BUSINESS OVERVIEW AND STRATEGY

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

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

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

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

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

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

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

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

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

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

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<PAGE>   12

secure, high quality services to our customers, we seek to establish ourselves
as their strategic communications partner.

  EXPLOIT THE REACH AND CAPACITY OF OUR FIBER OPTIC NETWORK

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

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

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

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

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

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<PAGE>   13

       network, we will be able to host and distribute their applications,
       support their business activities and provide peering arrangements.

  CAPITALIZE ON THE "EBONE" BRAND NAME

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

OUR EUROPEAN OPERATIONS

  OVERVIEW

     AS DISCUSSED UNDER "-- IMPLEMENTATION OF THE NOVEMBER 2000 RESTRUCTURING
AND OTHER RECENT DEVELOPMENTS," THE COMPANY IS IN THE COURSE OF RE-FOCUSING ITS
OPERATIONS ON PROVIDING DATA AND INTERNET-RELATED SERVICES AND SELLING OR
OTHERWISE DISPOSING OF ITS BUSINESS SERVICES UNIT, CENTRAL EUROPEAN OPERATIONS
AND ITS INTEREST IN GOLDEN TELECOM. ACCORDINGLY, WHILE WE MAY CURRENTLY OFFER
VOICE AND ENHANCED VOICE TELEPHONY SERVICES AND INTERNATIONAL SWITCHING AND
TRANSIT SERVICES TO THE "WHOLESALE" MARKET, IT IS THE COMPANY'S INTENTION TO
DISCONTINUE OFFERING THESE SERVICES WHEN THE RESTRUCTURING HAS BEEN COMPLETED.
THE FOLLOWING DESCRIPTION OF THE COMPANY'S BUSINESS SHOULD BE READ IN THAT
LIGHT.

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

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

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

     Customers of our broadband services include:

     - European incumbent telecommunications operators

     - Alternative carriers

     - Voice resellers

     - International carriers

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<PAGE>   14

     - Internet service providers

     - Medium and large trans-European multinational enterprises

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

  BROADBAND SERVICES

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

     Our network services have the following competitive advantages:

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

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

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

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

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

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

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

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

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<PAGE>   15

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

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

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

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

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

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

  BUSINESS SERVICES TO BE DIVESTED OR DISCONTINUED

     THE OPERATIONS OFFERING THE FOLLOWING SERVICES WILL BE DIVESTED OR
DISCONTINUED BY THE COMPANY AS PART OF THE RESTRUCTURING.

     Voice Services

     We currently offer national and international direct and indirect access
services for voice communications as well as enhanced voice services.

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

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

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<PAGE>   16

     Enhanced Voice Services.  On a more limited basis, the Company has also
other voice services, including pre- and post-paid calling cards, national and
international toll-free service, conferencing services, and pre-paid mobile
phone services.

     Wholesale Services.  We offer competitively priced international switching
and transit services, primarily to the "wholesale" international gateway and
carrier-to-carrier portion of the international calling market, such as public
telecommunications companies, new operators, global alliances and regional
telephone companies, global alliances; regional telephone companies, mobile
carriers, Internet service providers and second carriers or resellers. Our
wholesale services include the provision of international call termination in
three main areas:

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

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

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

Although we have contracts with our wholesale customers, these contracts
generally do not include minimum usage levels and our wholesale customers
generally maintain relationships with a number of telecommunications providers.

  SALES AND MARKETING

     Network Services

     The term of a typical customer agreement for our broadband services
currently ranges from six months to ten years. Our customer agrees to purchase,
and we agree to provide, transmission services. In general our customer agrees
to pay certain nonrecurring charges up-front and recurring charges on an annual
basis, payable in twelve monthly installments. If a customer terminates a
service order prior to the end of the contract term, the customer is generally
required to pay us a cancellation charge equal to three months of service for
each of the twelve months remaining in the contract term. We typically guarantee
transmission services to a specified service level. If such levels are not met
or we fail to deliver service by the committed delivery date, the customer is
eligible for a credit against charges otherwise payable in respect of the
relevant link. Our low cost basis is due to, among other things, our network's
use of advanced fiber optic cable and electronic equipment permitting high
capacity transmission over longer distances between regeneration/amplifier
facilities than legacy networks.

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

     Marketing activities consist of building the service portfolio for the
segments in which we operate and providing leads and other sales-related
activity to the sales force in each of our countries. The sales organization in
each country is focused exclusively on customers and customer-related activity,
with all other administrative and market activities run centrally. We have sales
offices in Austria, Belgium, the Czech Republic, Denmark, France, Germany,
Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Slovakia,
Spain, Sweden, Switzerland and the United Kingdom.

OUR NETWORK INFRASTRUCTURE

  OVERVIEW

     Our network infrastructure consists of our pan-European fiber optic
network, our City Enterprise Networks, in the dedicated fiber pair we have
purchased on the FLAG Atlantic-1 transatlantic fiber optic cable, our data-and
Web-hosting centers and our operations system and support functions. In Europe,
our network has 65 carrier points of presence in 47 cities, and 56 IP nodes in
40 cities. The fiber optic network

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<PAGE>   17

spans approximately 21,000 kilometers and 17 countries. In addition, nine
intra-city fiber networks are currently operational.

  NETWORK DESIGN

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

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

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

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

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

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

     Network Management.  We control our pan-European fiber optic network
through our main network operations center, located in Brussels. The network
operations center can pinpoint potential service problems and can deal with
service rerouting, if required, much more effectively than in networks
controlled by multiple operators in different countries. Our advanced
operational support systems also allow us to manage the large

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number of network components and local repair organizations required in an
extensive international network of this size, as well as for advanced customer
care in managing customer operational activities. Our backup paths and
management components enable us to recover from individual failures at the
optical, synchronous digital hierarchy and Internet protocol layers. Our
resilient approach provides for a high level of network performance and
reliability. As a result, we are able to enter into strong performance
commitments with our customers, and services on most routes of our network have
performed at or above 99.9% availability.

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

  Network Capacity

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

  Network Agreements

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

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

  City Enterprise Networks

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

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

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<PAGE>   19

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

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

  The Transatlantic Expansion of our Fiber Optic Network

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

  Data- and Web-Hosting Centers

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

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

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

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

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

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

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<PAGE>   20

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

  Operations, Systems and Support

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

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

COMPETITION

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

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

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

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<PAGE>   21

OUR OPERATIONS IN CENTRAL EUROPE

     AS INDICATED UNDER "-- IMPLEMENTATION OF THE NOVEMBER 2000 RESTRUCTURING
AND OTHER RECENT DEVELOPMENTS," WE ARE SEEKING TO DIVEST OUR CENTRAL EUROPEAN
OPERATIONS., THE COMPANY EXPECTS TO RETAIN ITS TRANSBORDER FIBER OPTIC NETWORK
IN THIS REGION.

     We are a leading alternative provider of data, Internet access and voice
services in the Czech Republic, Hungary, Poland, Romania and Slovakia. Our core
business in the region is derived from providing IP transit, managed bandwidth,
data communications and corporate voice-based services to customers based in the
region. We provide these services on a diverse set of infrastructure assets
including City Enterprise Networks, which we operate in Prague and Budapest,
VSATs deployed in the Czech Republic, Hungary and Romania, a national microwave
network in Hungary, and leased and owned dark fiber, which we expect will
connect our City Enterprise Networks to our pan-European fiber optic network by
the third quarter of 2001.

     As part of our divestiture process, the Company expects to retain its
transborder fiber optic network within this region; however, the national and
city networks and in-country customers would remain with the Central European
business. Further, we contemplate that the Central European business will
continue to provide broadband services to its customers, upon its divestiture,
through the means of a proposed distributor agreement between the Company and
the Central European business.

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

     THE FOLLOWING DISCUSSION OF GOLDEN TELECOM'S OPERATIONS SHOULD BE READ IN
LIGHT OF THE RESTRUCTURING AND THE AGREEMENT THE COMPANY HAS CONCLUDED TO SELL
UP TO ITS ENTIRE EQUITY INTEREST IN GOLDEN TELECOM. SEE "-- IMPLEMENTATION OF
THE NOVEMBER 2000 RESTRUCTURING AND OTHER RECENT DEVELOPMENTS -- AGREEMENT TO
SELL THE CERTAIN OF COMPANY'S SHARES IN GOLDEN TELECOM."

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

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

HISTORICAL OVERVIEW

     We were founded in 1983 as a not-for-profit company under the name San
Francisco/Moscow Teleport, Inc. We incorporated as a for-profit corporation in
1986, and reincorporated in Delaware in 1993 and changed our name to Global
TeleSystems, Inc. in February 1995. Our principal business office is located at
4121 Wilson Boulevard, 7th floor, Arlington, Virginia 22203, United States, and
our telephone number is (703) 236-3100 and (703) 258-3401 after April 15, 2001.

     From our inception until 1998, we focused on (1) providing
telecommunications services in emerging markets, particularly in Russia and
Central Europe and (2) establishing and developing Global TeleSystems Europe
B.V. ("GTS Europe B.V."), formerly known as Hermes Europe Railtel B.V., our
subsidiary which

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<PAGE>   22

deployed the first high speed fiber optic network across Western Europe and
provides a range of bandwidth and IP services to traditional and emerging
communications companies.

     After our initial public offering in February 1998, we adapted our strategy
to address the effects of the economic crisis in emerging markets, particularly
Russia, the emergence of the Internet Protocol as a widely accepted transport
protocol and the deregulation of the provision of telecommunications services to
end-users in Western Europe. We sought to build on the success of our
pan-European fiber optic network by developing a plan to provide
telecommunications services directly to businesses and other end-users.
Accordingly, in late 1998 and in 1999, we acquired four companies that provided
such services to businesses and other high usage customers in Western Europe:
GTS (Europe) Ltd., NetSource, Omnicom and InTouch. In addition, in order to
position ourselves as a Tier-1 Internet service provider in Europe and target
the higher growth European Internet market, we acquired Ebone in 1998.

     On September 30, 1999, we contributed all of our Russian and CIS operations
to a newly formed subsidiary, Golden Telecom, Inc., which effected an initial
public offering of its common stock on October 5, 1999. We currently own
approximately 61.5% of the common stock of Golden Telecom.

     On February 18, 2000, GTS completed its acquisition of Netcom Internet
Limited ("Netcom"). Netcom was an Internet service provider in the United
Kingdom, which provides dedicated and dial-up Internet access, Web-hosting,
server co-location, Internet protocol virtual private networks and other
services.

     In November 2000, the Company's management determined to implement the
Restructuring, which will result in the disposition or discontinuance of the
business services operations of the former Esprit, NetSource, Omnicom and
InTouch. See "-- Implementation of the November 2000 Restructuring and Other
Recent Developments."

LICENSES AND REGULATORY ISSUES

OVERVIEW OF EU TELECOMMUNICATIONS LAW AND POLICY

     UPON COMPLETION OF THE RESTRUCTURING AND THE ESPRIT RESTRUCTURING, THE
PORTIONS OF THE REGULATORY DISCUSSION BELOW, WHICH PERTAIN TO REGULATION OF
VOICE OR ENHANCED VOICE AND TELEPHONY SERVICES AND GOLDEN TELECOM, WILL NO
LONGER BE APPLICABLE TO THE COMPANY'S OPERATIONS. SEE "-- IMPLEMENTATION OF THE
NOVEMBER 2000 RESTRUCTURING AND OTHER RECENT DEVELOPMENTS."

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

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

     In 1996, the EU adopted the Full Competition Directive, which requires EU
member states to permit the provision of telecommunications services, other than
reserved services, over (1) networks established by the provider of the
services, (2) network infrastructure provided by third parties or (3) by means
of sharing of networks from July 1996. Since then, there has been an increasing
supply of such capacity offered at attractive prices from such alternative
suppliers. The Full Competition Directive also established January 1, 1998 as
the date by which all EU member states must remove all remaining restrictions on
the provision of telecommunications services, including voice telephony. A
number of EU member states were granted a delay in implementing the Full
Competition Directive.

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<PAGE>   23

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

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

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

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

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

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

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

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

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

     As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services and deploy our network. Local laws and regulations and the
interpretation of such laws and regulations differ significantly among the
jurisdictions in which we operate. For a discussion of the regulatory risks we
face, see "-- Certain Considerations Generally Applicable to Our
Company -- Risks associated with regulatory matters."

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<PAGE>   24

NETWORK AND SERVICE LICENSES

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

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

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

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

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

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

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

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

     France.  The French telecommunications market was fully liberalized in
January 1998. We have licenses to build and operate our network, including City
Enterprises Networks, and provide managed bandwidth and related services in
France. We also have licenses that permit us to provide public telephony
services in France. In addition, we have been granted one of seven available one
digit carrier selection code by the French regulatory authority. In exchange for
the grant of the one digit code, certain network deployment obligations have
been imposed on us. We are now in the process of building out a national network
in France. The licenses are valid for a 15 year period from the date of issue.
See Item 3 -- "Legal Proceedings."

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

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

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<PAGE>   25

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

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

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

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

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

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

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

     United Kingdom.  Since the elimination in 1991 of the UK telecommunications
duopoly consisting of British Telecommunications and Mercury, it has been the
stated goal of the UK regulatory authority to create a competitive marketplace
from which detailed regulation could eventually be withdrawn. The United Kingdom
telecommunications market is liberalized beyond the requirements of the Full
Competition Directive, and most restrictions on competition have been removed in
practice as well as in law. We have been granted licenses to build and operate
our network, including City Enterprise Networks, and provide our services
throughout the United Kingdom.

     United States.  The Federal Communications Commission ("FCC") granted us a
license, as amended, pursuant to Section 214 of the Communications Act of 1934
authorizing us to provide limited global facilities-based and global resale
services, (subject to the terms and conditions imposed by the law and
authorization). The Section 214 authorization does not allow us to offer U.S.
services between the United States and Hungary, Poland, the Czech Republic,
Romania, Monaco, Russia, Ukraine, Kazakhstan, Uzbekistan, Azerbaijan, China and
India. We subsequently filed an application with the FCC for a Section 214
authorization to provide international facilities-based and resale service
between the United States and the latter countries. The FCC issued a public
notice stating that the portion of the application relating to service between
the United States and Russia was removed from stream line processing, and that
the remainder of the application was granted.
                                        24
<PAGE>   26

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

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

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

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

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

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

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

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

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

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

                                        25
<PAGE>   27

  Internet Protocol Transport

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

  Data- and Web-Hosting

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

GOLDEN TELECOM

     THE FOLLOWING DISCUSSION OF REGULATION OF GOLDEN TELECOM'S OPERATIONS
SHOULD BE READ IN LIGHT OF THE RESTRUCTURING AND THE AGREEMENT THE COMPANY HAS
CONCLUDED TO SELL UP TO ITS ENTIRE EQUITY INTEREST IN GOLDEN TELECOM. SEE
"-- IMPLEMENTATION OF THE NOVEMBER 2000 RESTRUCTURING AND OTHER RECENT
DEVELOPMENTS -- AGREEMENT TO SELL THE CERTAIN OF COMPANY'S SHARES IN GOLDEN
TELECOM."

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

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

     The Communications Ministry issues licenses to provide telecommunications
services on the basis of a decision by its subordinated body, the Licensing
Commission. The Communications Ministry has generally issued no new licensing
regulations since the enactment of the Communications Law, and in practice the
Communications Ministry continues to issue licenses based on general regulations
applicable to any licensing activity in Russia, except to the extent such
regulations have been modified by licensing regulations with respect to cellular
services. According to the general licensing regulations, licenses for rendering
telecommunications services may be issued and renewed for periods which range
from 3 to 10 years and several different licenses may be issued to one person.
Under the subsequently adopted cellular licensing regulations, licenses for
rendering cellular services may be issued only on the basis of a competitive
tender for longer periods ranging from five to 15 years. Once the licenses are
received, the licensee is required to register its right to hold and operate
under the license with Gossvyaznadzor, the national authority responsible for
monitoring compliance with regulatory and technical norms. Renewals may be
obtained upon application to the Communications Ministry and verification by
appropriate government authorities that the licensee has conducted its
activities in accordance with the licenses. Officials of the Communications
Ministry have broad discretion with respect to both the issuance and renewal
procedures. The Communications Law and general licensing regulations provide
that a license may not be transferred or assigned to another holder. Cellular
service licenses obtained through competitive tender are freely assignable.
                                        26
<PAGE>   28

     In August 1995, the Russian government created Svyazinvest, a holding
company, to hold the federal government's interests in the majority of Russian
local telecommunications operators. In addition, entities such as Svyazinvest at
the federal level, as well as other entities in Moscow and St. Petersburg and
other administrative regions within Russia, exercise significant control over
their respective local telephone networks and may therefore affect the licensing
process.

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

  Employees

     On December 31, 2000, we had approximately 2,930 employees, excluding
approximately 944 persons employed by Golden Telecom. At that date,
approximately 1,300 employees were part of the Business Services division and
approximately 530 persons were employed by the Central Europe division.

CERTAIN CONSIDERATIONS GENERALLY APPLICABLE TO OUR COMPANY

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

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

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

                                        27
<PAGE>   29

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

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

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

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

     Our Common Stock may be delisted

     During 2000, the market price for our common stock declined by more than
90%. Although we have taken measures, such as the Restructuring, which are
intended to enhance the market price of the common stock, there can be no
assurance that the market price will recover to its former levels. We have
received a notice dated January 19, 2001 from The New York Stock Exchange
("NYSE") that our common stock failed to maintain the required closing price of
$1.00 over a period of 30 consecutive trading days. As a result, the NYSE
notified the Company that (i) we must bring the average closing share price back
above $1.00 for the 30-trading day period ending on the later of our next annual
meeting date or six months following receipt of the notification from the NYSE
and (ii) if at the expiration of such period, a $1.00 average closing price has
not been obtained, the NYSE may commence suspension and/or delisting procedures.
If necessary, we may take a number of steps to help ensure that the closing
stock price remains above $1.00 during the relevant time period. However, there
can be no assurance that these steps will be successful. In that event, the
Company could seek to have its common shares listed in the Nasdaq Small-Cap
Issues market or on the Over-the-Counter Bulletin Board market. In that event,
trading in shares of our common stock could decrease substantially or could
cease altogether, and the market price of common stock would decline further. In
addition, if the price of the Company's common stock were to decline to
approximately $0.49 for a period of thirty consecutive trading days, the Company
would be in jeopardy of not complying with an additional NYSE listing standard,
which requires the Company to maintain a market capitalization of at least $100
million.

     We may be unable to meet our substantial debt obligations

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

                                        28
<PAGE>   30

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

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

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

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

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

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

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

     If we fail to make the required payments or to comply with our debt
covenants, we will default on our debt. A default would permit our debtholders
to accelerate the maturity of the debt, which in turn could cause defaults under
our other debt. See "-- Implementation of the November 2000 Restructuring and
Other Recent Developments'

     Covenants in our debt agreements restrict our operations

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

     - Incurrence of additional debt;

     - Payment of dividends or make certain other restricted payments;

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

     - Disposition of our assets;

     - Entrance into transactions with affiliates; or

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

     We may continue to have substantial net losses indefinitely which may make
     it difficult to fund our operations

     We have historically sustained substantial operating and net losses. As a
result of the Restructuring, we are planning to reduce substantially our
operating expenses and the amount of our outstanding debt obligations and
re-focus on our broadband operations, which we believe have stronger prospects
for profitability. If we do not become profitable in the future, the value of
our common stock may continue to fall and we could have difficulty obtaining
funds to continue our operations. We expect to continue incurring significant
operating losses during the next several years while we expand our operations,
infrastructure, service offerings and customer base in our target markets. In
particular, we expect to have negative operating cash flow for the 2001 fiscal
year.

                                        29
<PAGE>   31

     Substantial additional capital is required to expand our network

     We will require significant amounts of capital to implement our business
plan. We anticipate that we will incur between $225 million to $275 million in
cash capital expenditures in 2001 to expand the reach and capacity of our
network, construct additional intracity fiber networks, deploy additional data-
and Web-hosting centers in our target metropolitan markets, and to fund our
remaining payments associated with the dedicated fiber pair that we have
purchased on the FLAG Atlantic-1 transatlantic fiber link. The cash capital
expenditure amounts disclosed above excludes the cash capital expenditure
requirements for our Golden Telecom, Central European and Business Services
businesses that we are in the process of divesting. However, the actual amount
and timing of our future capital requirements may differ from our estimates.
Thus, financing may be needed to expand the reach and capacity of our network,
to construct additional intracity fiber networks, deploy additional data- and
Web-hosting centers, to purchase equipment to upgrade the capacity of the
dedicated fiber pair we have purchased on the FLAG Atlantic-1 transatlantic
fiber link and for general working capital purposes. We cannot assure you that
such additional financing will be available on terms acceptable to us or at all.
If we fail to obtain this financing, we might have to delay or abandon our plans
for expanding the reach and capacity of our network, constructing additional
intracity fiber networks, deploying additional data- and Web-hosting centers,
and purchasing equipment to upgrade the capacity of the dedicated fiber pair
that we have purchased on the FLAG Atlantic-1 transatlantic fiber link, and we
may be compelled to sell certain of these assets. Delaying or abandoning these
plans or selling such assets could have a material adverse effect on our
business and financial condition.

     Competitors with greater resources may adversely affect our revenues

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

     Competition for customers of our broadband and Internet services

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

                                        30
<PAGE>   32

downturn in the market may cause certain competitors to downsize, merge or
consolidate with other companies or cease to operate, we continue to expect to
encounter strong and vigorous competition.

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

     During the fourth quarter of 2000, we recorded a bad debt reserve of
approximately $24.7 million for customer bad debts, see Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
created this reserve as a result of our experience of several defaults by
start-up or emerging telecommunications providers, which were our customers, and
the general tightening of the credit markets. Although we believe this reserve
is adequate, we expect adverse market and economic conditions to persist for the
foreseeable future. As a result, we may experience late collections and may be
compelled to create additional reserves for bad debt.

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

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

     We may experience a potential lack of customer demand

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

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

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

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

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

     - Efficiently manage the enhancement of our network and operations;

     - Access markets and attract a sufficient number of customers;

     - Negotiate favorable contracts with suppliers;
                                        31
<PAGE>   33

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

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

     - Effectively manage our billing and information systems.

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

     - Regulatory changes;

     - Changes in technology;

     - Increased competition;

     - Strikes;

     - Weather; and

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

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

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

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

     - Implementation of the Restructuring, including the sale of additional
       non-strategic assets;

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

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

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

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

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

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

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

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

                                        32
<PAGE>   34

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

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

     The technology of our network could become obsolete and harm our
     competitiveness

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

     System failures or interruptions in our network may cause loss of customers

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

     - Fire;

     - Earthquakes;

     - Severe storms;

     - Power loss;

     - Natural disasters;

     - Damage from human error and tampering;

     - Software defects;

     - Capacity limitations;

     - Breaches of security;

     - Physical break-ins;

     - Intentional acts of vandalism;

     - Telecommunications failures; and

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

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

                                        33
<PAGE>   35

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

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

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

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

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

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

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

     We may encounter delays, operational problems and increased costs if we are
     unable to acquire key equipment from our major suppliers

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

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     We will lose tax benefits if we are unable to use our net operating loss
     carryforwards

     As of December 31, 2000, we had net operating loss carry forwards for U.S.
federal tax purposes of approximately $288.6 million expiring in 2004 through
2020. We cannot assure you that U.S. tax authorities will allow us to apply
these loss carryforwards, in part or full, to reduce taxes on our future income.
Because of the change in ownership provisions of the Tax Reform Act of 1986, our
ability to use the tax benefits from our net operating loss carryforwards may be
subject to an annual limit.

     Our infrastructure may not keep pace with our rapid growth

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

     Failure to carry sufficient traffic on our leased lines could cause us to
     incur losses on the leased portion of our network

     The revenues generated by transporting traffic in our leased fiber routes
may vary with traffic volumes and prices. Accordingly, if we do not carry enough
traffic volume over the particular route or are unable to charge an appropriate
price for such traffic, we could fail to generate revenue sufficient to cover
our lease costs, and would therefore incur operating losses on the particular
route or routes. For a more comprehensive discussion of our network agreements,
see "-- Our Network Infrastructure -- Network Agreements."

  Risks associated with regulatory matters

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

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

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

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

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

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<PAGE>   37

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

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

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

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

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

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

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

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

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

  Substantial resales of our common stock may depress our stock price

     We cannot predict what effect future sales of our common stock or the
availability of our common stock for sale would have on the market price for our
common stock. Sales of large numbers of shares of our

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<PAGE>   38

common stock in the public market pursuant to effective registration statements
under the Securities Act, or the perception that sales could occur, may have an
adverse effect on the market price for our common stock. We have filed, and the
SEC has declared effective, five registration statements covering the resale of
our common stock. Approximately 61 million shares are subject to resale under
these registration statements. Additionally, three registration statements on
Form S-8 cover the resale of shares of common stock issued to employees,
officers and directors under our employee benefit plans.

  Our management, legal and financial controls may have been inadequate to
  ensure that we complied with applicable laws

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

     - Establishing internal management, legal and financial controls;

     - Collecting financial data;

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

     - Instituting business practices that meet Western standards.

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

CERTAIN CONSIDERATIONS RELATED TO GOLDEN TELECOM

     Golden Telecom generates substantially all its revenues from operations in
Russia, Ukraine and other countries of the Commonwealth of Independent States.
All companies operating in the Commonwealth of Independent States, including
Golden Telecom, face significant political, economic, regulatory, legal and tax
risks, as described below. HOWEVER, THE COMPANY HAS ENTERED INTO AN AGREEMENT TO
SELL UP TO ITS ENTIRE EQUITY INTEREST IN GOLDEN TELECOM. SEE "-- IMPLEMENTATION
OF THE NOVEMBER 2000 RESTRUCTURING AND OTHER RECENT DEVELOPMENTS  --  AGREEMENT
TO SELL CERTAIN OF THE COMPANY'S SHARES IN GOLDEN TELECOM." The following
considerations should be read in that light.

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

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

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<PAGE>   39

     This political and economic instability in Russia, Ukraine and the other
countries where Golden Telecom operates could disrupt the direction and the pace
of political and economic development. Such a disruption could discourage
foreign and local investment and spending, in which case demand for Golden
Telecom's services could decrease and its results of operations could
deteriorate.

  The lack of clear jurisdictional boundaries between central, regional, and
  local authorities in Russia create a volatile operating environment

     The relatively new constitutional system adopted by Russia in 1993 does not
specifically delineate jurisdictional divisions between central, regional and
local authorities and during the past several years, regional and local
authorities have acquired a measure of autonomy. Since assuming power, President
Putin has attempted to reassert central control over Russia's numerous and
diverse regions. To the extent that regional and local authorities resist any
realignment of power, President Putin's assertion of central authority may lead
to tensions or even destabilizing conflict between federal authorities in Moscow
and powerful political and financial figures in the regions. In this
environment, businesses that operate in Russia's regions are subject to
sometimes inconsistent and conflicting demands from central, regional and local
authorities, especially in areas concerning state revenue collection. Further,
local and regional interpretation of regulations governing the
telecommunications industry may conflict with federal interpretation of the same
regulations. The lack of clearly delineated jurisdictional boundaries creates an
uncertain and volatile operating environment wherein it can be very difficult to
implement a consistent operational strategy.

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

     After August 1998, the Russian and Ukrainian economies entered into an
economic downturn that was exacerbated by political instability. Although the
political situation in Russia may have recently stabilized somewhat as
demonstrated by the December 1999 Duma elections, the resignation of former
President Yeltsin, and the election of President Putin, if the political
situations in the countries in which Golden Telecom operates, especially
Ukraine, do not stabilize and if their economies do not strengthen, Golden
Telecom expects that demand for its services will remain depressed. The failure
and subsequent stagnation of the Russian and Ukrainian economies has also
weakened the financial condition and the results of operations of many of Golden
Telecom's customers. As a result, some of these customers were unable to pay
Golden Telecom's invoices or maintain their telecommunication services, and
Golden Telecom's revenues suffered accordingly.

     Demand for Golden Telecom's services has recovered since the August 1998
Russian financial crisis and recent trends indicate that it has surpassed
pre-crisis traffic levels for some of its services, however demand for Golden
Telecom's services could again become depressed if the Russian and Ukrainian
political and economic situations deteriorate.

  The Russian monetary and currency control system could adversely affect Golden
  Telecom's ability to convert rubles to hard currency and manage cash flows

     The Russian government's default on its obligations to make payments on its
internal debt in August 1998 triggered a substantial decline in the value of the
ruble and the bankruptcy of a number of prominent Russian banks and businesses.
As a result, the value of the ruble against the US dollar fell significantly,
and this decline has negatively affected, and continues to affect, Golden
Telecom's financial performance. Golden Telecom's consolidated and
non-consolidated entities recorded an aggregate $13.1 million pre-tax charge in
the third quarter of 1998, $5.3 million in fiscal year 1999, and $2.0 million in
fiscal year 2000. These charges related primarily to foreign currency exchange
losses for ruble-denominated net monetary assets. Continued decline in the value
of the ruble would negatively affect Golden Telecom's results of operations and
could require Golden Telecom to record another significant pre-tax charge.

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<PAGE>   40

  Fluctuations in the global economy may adversely affect Russia's economy and
  Golden Telecom's business

     Russia's economy is vulnerable to market downturns, volatile currency
fluctuations and economic recessions in other parts of the world. As has
happened in the past, financial problems or an increase in the perceived risks
associated with investing in emerging economies could dampen foreign investment
in Russia and adversely effect the Russian economy. Additionally, because Russia
produces and exports large amounts commodities in the world market for hard
currency, the Russian economy is especially vulnerable to world oil prices and
other commodity prices and a steep decline in world commodity prices could
disrupt the Russian economy or cause significant state budgetary shortfalls.
These developments could severely limit Golden Telecom's access to capital and
could adversely affect the purchasing power of its customer base. A dramatic
decline in world oil prices could cause severe budgetary shortfalls leading to
increased social and political instability.

  Reorganizations of the Russian and Ukrainian telecommunications industries may
  increase competition

     Russia

     The Russian government has structured the telecommunications industry so
that one entity, Svyazinvest, controls Rostelecom, Golden Telecom's partner in
Sovintel, one of Golden Telecom's largest units, and most of Golden Telecom's
other principal wire-line joint venture partners. During the last several
quarters the Russian business press has reported that Rostelecom may be merged
with Svyazinvest. This reorganization could make it more difficult for Golden
Telecom to attract and retain customers because its business relationships with
our joint venture partners, which make up a major component of its business
strategy in Russia, may suffer.

     Ukraine

     In preparation for a large-scale privatization of the telecommunications
industry, the Ukrainian government has reorganized the state telecommunications
sector so that Ukrtelekom, the state telecommunications operator, holds all the
government's interests in the telecommunications industry. Furthermore, the
Ukrainian government has reached an agreement with the foreign partners of Utel,
its joint venture, which provides international and domestic long distance
services, to buy out their interests in the company. When the buy out is
completed, it is expected that Utel will merge with Ukrtelekom.

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

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

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

     - Our ability to negotiate reasonable interconnection rates may suffer; and

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

  Russian and Ukrainian telecommunications policies could restrict Golden
  Telecom's operations

     Russian and Ukrainian telecommunications regulations govern the procurement
and continuing validity of Golden Telecom's licenses and the terms and
conditions under which it provides services. Adverse changes to these
regulations may make it prohibitively expensive for Golden Telecom to provide
services or otherwise frustrate the implementation of our business plans causing
a material adverse effect on its results of operations.

     Russia's parliament recently adopted legislation, which, if implemented,
could restrict foreign ownership of telecommunications operators if necessary to
protect the social order and national security. In addition, the Minister of
Communications has publicly stated that he will review the efficacy of wholly
owned foreign subsidiaries operating in the telecommunications industry. Any
change to current government regulations or

                                        39
<PAGE>   41

policies that negatively affects Golden Telecom's ownership structure or its
licenses or ability to obtain licenses in the future would restrict its
operations in Russia.

     Ukrainian regulatory authorities have established mandatory tariff
guidelines for fixed operator services. The national carrier, Ukrtelekom and its
joint venture, Utel, charge settlement fees in excess of the mandatory
guidelines. In addition, the mandatory guidelines set tariffs in local currency
units and the guidelines do not adjust to reflect the creeping devaluation of
the local currency. Consequently, Golden Telecom's pricing structure in Golden
Telecom BTS may, from time to time, exceed the limits established in the
mandatory guidelines. Any enforcement action undertaken in regard to the pricing
guidelines by Ukrainian authority could result in fines or in the suspension or
revocation of our Ukrainian licenses.

     Until August 2000, Ukrainian legislation prohibited the establishment and
operation of telecommunications ventures in which foreign investors own more
than 49%. Golden Telecom does not believe that this prohibition extended to
indirect investment by a foreign entity through a wholly owned Ukrainian
subsidiary. Golden Telecom's investments in Golden Telecom (Ukraine) are made
both directly through a foreign company and indirectly through a wholly owned
Ukrainian subsidiary. This direct and indirect investment in Golden Telecom
(Ukraine) totals 69%. Golden Telecom (Ukraine), in turn, recently acquired 99%
of Sovam Teleport Ukraine. If Ukrainian authorities determine that the
prohibition against foreign participation extended to indirect holdings, Golden
Telecom would have been in violation of this legislation. Similarly, if
Ukrainian authorities reenact the prohibitive legislation against foreign
ownership of telecommunications ventures, Golden Telecom could be found to be in
violation of the prohibition. The consequences of any historical or future
violation are unpredictable and may include fines, license suspension or
revocation, or an order to divest a portion of its holdings.

  Golden Telecom's operating licenses may not authorize it to provide all of the
  services that it offers

     The licensing and regulatory regime in Russia and the markets where Golden
Telecom operates frequently do not keep pace with the technological advances in
the telecommunications industry. Thus there exists a great deal of ambiguity in
regard to the interpretation of licenses and the application of rules and
regulations in regard to new services enabled by technological developments in
telecommunications infrastructure and software. Although Golden Telecom's
operating companies possess a wide range of licenses issued by the Russian
Ministry of Communications, it is possible that the technical means by which
Golden Telecom delivers some of its service offerings, or the service offerings
themselves, may be subject to licensing requirements or restrictions and that
Golden Telecom's existing licenses do not satisfy these requirements or that it
is in violation of these restrictions. In the event that regulatory authorities
determine that Golden Telecom is offering services without the requisite license
or that it is delivering services in violation of its existing licenses, one or
more of Golden Telecom's operating licenses could be suspended or revoked or it
could be subject to fines and penalties. The suspension or revocation of a
significant license or the levying of substantial fines could cause a
deterioration in Golden Telecom's financial results.

  Russian Anti-Trust Policies may limit Golden Telecom's ability to expand its
  businesses and to establish market rates for its service offerings

     Recently the Russian Ministry for Anti-Monopoly Policy (MAP), the state
agency responsible for establishing and enforcing the state's anti-trust
policies, adopted a policy position whereby each licensed telecommunications
operator, including Golden Telecom's operating companies, may be classified as a
"monopolist." In the event that the MAP policy is enacted and enforced, Golden
Telecom's operating companies may be subject to increased state regulation,
including the regulation of its pricing structures. Since Golden Telecom's
product offerings are frequently priced at a premium in comparison with the
state-owned incumbent offerings, it is possible that Golden Telecom could be
required to reduce its tariffs. Any state imposed re-pricing of our product
offerings could result in a deterioration of its financial results and decreased
operating profits. Similarly, if Golden Telecom's operating companies in Russia
are classified as monopolists, Golden Telecom's merger and acquisition
activities will be subjected to increased scrutiny and MAP may prohibit any
mergers or acquisitions proposed by the operating companies. Any such
prohibitions will frustrate

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<PAGE>   42

Golden Telecom's ability to implement its growth strategy and to combine its
operations to achieve cost and other synergies.

  Special fees and taxes levied against telecommunications operators could
  adversely affect our results of operations

     In May 1999, the Cabinet of Ministers of Ukraine passed a resolution which
would, if it had been enforced, effectively increased Golden Telecom's monthly
frequency use fees from $25,000 per month to $250,000 per month. However, this
resolution was suspended prior to implementation. Still, from time to time,
Ukrainian government officials seek to offset budgetary shortfalls by increasing
levies extracted from the cellular phone industry. For example, in 1999 the
Ukrainian parliament passed legislation introducing a 6% "pension tax" on
cellular calls. This cost is passed along to Golden Telecom's Ukrainian
customers and may affect the ability of some of our customers to subscribe to
Golden Telecom's services. The enactment of other similar industry-specific
legislation may have a material adverse effect on demand for Golden Telecom's
services and on its results of operations. Similarly, the results of its
operations could deteriorate if the government introduces any new frequency fees
substantially in excess of the amounts previously budgeted for frequency fees.

  The presence of and the fight against organized crime may adversely affect
  Golden Telecom's operations

     When customers fail to make full payment for services rendered after
several requests for payment, it is Golden Telecom's policy to terminate their
services until full payment is received. Golden Telecom believes that some of
these customers, particularly those with links to organized crime, may
physically endanger its employees or damage its properties, especially those in
remote regions of Russia where police protection may be limited. So long as
organized crime in Russia and Ukraine remains pervasive, Golden Telecom believes
that its employees may be subjected to threats of violence, its property may be
damaged, and it may be subject to threats of extortion.

     Growing social and political pressure for the government to eliminate
corruption and organized crime could precipitate extraordinary government
security measures that could increase Golden Telecom's costs, lead to more
restrictive and comprehensive government regulatory oversight of its businesses
and otherwise adversely affect its operations.

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

     The governments of Russia and Ukraine have enacted legislation to protect
foreign investment and other property against expropriation and nationalization.
In the event that Golden Telecom's property is expropriated or nationalized,
legislation provides for fair compensation. However, there can be no assurance
that such protections would be enforced. This uncertainty is due to several
factors, including:

     - the lack of state budgetary resources;

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

     - widespread corruption among government officials.

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

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

     The dispersion of regulatory powers among a number of government agencies
in Russia and Ukraine has resulted in inconsistent or contradictory regulations
and unpredictable enforcement. This situation has made it difficult for Golden
Telecom to comply with all laws and regulations that appear to apply to it and
has resulted in unpredictable regulatory enforcement. For example, pursuant to
the Russian Communications Law, Minsvyaz, the Ministry of Communications, has
authority to regulate and control the development of the
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<PAGE>   43

communications industry in Russia. However, there is additional legislation that
recognizes and defines the roles of other regulatory organs and jurisdictional
boundaries are unclear.

     The Russian Communications Law requires any entity that offers any
communications service to obtain the appropriate license in accordance with the
Communications Law and other applicable licensing regulations. A similar
licensing regime exists in Ukraine. However, neither the Communications Law nor
applicable regulations in Russia or Ukraine provide clear guidelines for the
issuance or extension of a license, and state agencies exercise broad discretion
when determining whether to approve a license application, as well as the terms
and conditions of any license. Similarly, Golden Telecom's licenses may not be
renewed on the same terms and conditions as preexisting licenses. Such broad
discretion in the issuance of licenses may result in arbitrary decision making
and may also give rise to opportunities for corruption.

     The Ukrainian regulatory agency requires that the terms of international
licenses include provisions requiring licensees to pay unspecified annual
amounts into local network development. The required amount of investment has
yet to be defined but may be substantial, and Golden Telecom cannot predict
whether failure to comply will lead to the revocation of its license or whether
the financial burden associated with compliance may be so burdensome as to cause
a deterioration in its financial results.

  Golden Telecom may be unable to enforce our rights due to confusion in the
  laws and legal structures of the countries where it operates

     The current confusion with the Russian and CIS legal structure makes it
difficult to know if Golden Telecom would be able to enforce its rights in
disputes with its joint venture partners or other parties, or if Golden Telecom
is in compliance with all applicable laws, rules and regulations. Furthermore,
the dispersion of regulatory power among a number of government agencies in
Russia and the other independent countries of the CIS has resulted in
inconsistent or contradictory regulations and unpredictable enforcement. The
Russian and other CIS governments have rapidly introduced laws and regulations
and have changed their legal structures in an effort to make their economies
more market-oriented, resulting in considerable legal confusion, especially in
areas of the law that directly affect Golden Telecom's operations. There can be
no assurance that local laws and regulations will become stable in the future.
Golden Telecom's ability to provide services in Russia and the other independent
countries of the CIS could be adversely affected by difficulties in protecting
and enforcing its rights and by future changes to local laws and regulations.

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

     Russia

     It is possible that Golden Telecom's Russian taxes may be greater than the
estimated amount that it has expensed to date and paid or accrued on its balance
sheets. Because of the need for additional sources of budgetary finance, Russian
tax authorities are aggressive in their interpretation of tax laws and their
many ambiguities, as well as in their enforcement and collection activities.
Foreign companies are often forced to negotiate their tax bills with tax
inspectors who demand higher taxes than applicable law appears to provide. Any
additional tax liability, as well as any unforeseen changes in the tax law,
could have a material adverse effect on Golden Telecom's future results of
operations or cash flows in a particular period. Under Russian accounting and
tax norms, financial statements of Russian companies are not consolidated for
tax purposes. As a result, each Russian-registered entity in Golden Telecom's
group pays its own Russian taxes and Golden Telecom cannot offset the profits or
losses in any single entity against the profits and losses in any other entity.
Golden Telecom's overall effective tax rates may increase or its financial
results may worsen as it expands its operations and if Golden Telecom is unable
to implement an effective corporate structure that minimizes the effect of these
accounting and tax norms.

     Ukraine

     Like the situation in Russia, Ukrainian tax law is unpredictable. The
constitution prohibits retroactive legislation, and the tax code requires new
tax laws to be adopted no later than six months prior to the

                                        42
<PAGE>   44

beginning of the next fiscal year. Nevertheless, sudden shifts in tax law and
policy and retroactive legislation are common. For example, Golden Telecom is
currently allowed to deduct losses in hryvna, the Ukrainian currency, on hard
currency borrowings. This allowance resulted in a significant tax benefit in
1998. Recent decisions by the tax authorities, however, make it unclear as to
whether this tax benefit will continue to be available. If this tax benefit is
removed, Golden Telecom will be subject to significantly higher tax liability in
the event of the continued devaluation of the hryvna.

  The implementation of Russia's new Tax Code may increase our effective tax
  burden and adversely affect our results of operations

     Russia introduced the first part of its new Tax Code in 1999. The second
part of the Tax Code entered into effect as of January 1, 2001. Under the new
code, the corporate profits tax rate applicable to the corporate entities
through which Golden Telecom conducts the majority of its operations will be
increased from 30% of gross profit to 35% of gross profit, calculated in
accordance with Russian accounting standards. It is expected that this increase
in the tax rate will be offset, at least partially, by a reduction in various
revenue-based taxes and by a reduction in the level of tax collected for various
social funds. There can be no assurance that the new Tax Code will not result in
a greater tax burden for Golden Telecom's Russian operations or that its tax
planning to date will not be frustrated by the new code, either of which could
cause a material adverse effect in Golden Telecom's operating results and cash
flows.

     Tax authorities are beginning to implement the new code but during the
transition period and until appropriate regulations consistent with the new code
are promulgated, there is likely to a period of confusion and ambiguity as tax
inspectors and taxpayers become acquainted with the new code and the regulations
that will guide its implementation and interpretation. Aggressive tax collectors
may exploit any ambiguities in an attempt to collect additional tax revenue. In
addition, as Russian tax legislation becomes increasingly sophisticated and as
issues connected with capital flight remain unresolved, state bodies may
introduce new legislation designed to minimize tax-avoidance schemes, such as
transfer pricing, that have been abused in the past by Russian-registered
companies. Additionally, Russian legislators may attempt to collect revenue
generated from outside of Russia, but with a strong nexus to Russian nationals
or Russian-registered entities, by introducing into the Tax Code concepts such
as "controlled foreign company." As a result of these measures, Golden Telecom's
tax burden could increase and its financial results may suffer.

  Golden Telecom may be at a competitive disadvantage because of restrictions in
  the Foreign Corrupt Practices Act

     It is widely reported that Russia, Ukraine, and the other markets where
Golden Telecom operates are plagued with widespread corruption and criminal
activity. It is alleged that high levels of corruption exist among governmental
officials and among quasi-commercial enterprises in which the state has a
controlling ownership interest. Commercial bribery is likewise believed to be
widespread.

     The anti-bribery restrictions of the US Foreign Corrupt Practices Act make
it illegal for Golden Telecom to give anything of value to foreign officials in
order to obtain or retain any business or other advantage. Some of Golden
Telecom's current and potential competitors are not subject to these
anti-bribery restrictions. As a result, Golden Telecom may be subject to
competitive disadvantages to the extent that its competitors are able to secure
business, licenses or other preferential treatment by making payments to corrupt
government officials or commercial purchasing agents. Golden Telecom believes
that bribery is commonplace in Russia and the other countries of the
Commonwealth of Independent States where it operates, and there can be no
assurance that Golden Telecom will be able to compete effectively with companies
that are free from such limitations.

  Golden Telecom is in a highly competitive industry and its competitors may be
  more successful in attracting and retaining customers

     The market for Golden Telecom's products and services is highly competitive
and it expects that competition, especially in underdeveloped markets, will
continue to intensify. As Golden Telecom expands the scope of its offerings, it
will compete directly with a greater number of competitors providing business
services

                                        43
<PAGE>   45

in the same markets. Negative competitive developments could have a material
adverse effect on Golden Telecom's business.

  Golden Telecom relies on a small number of major customers for a substantial
  portion of its revenues

     Revenues from Golden Telecom's five largest customers represented
approximately 32% of its revenue for the year ended December 31, 2000 and
approximately 37% of its consolidated revenues for the year ended December 31,
1999. Accordingly, the loss of business from any of its key customers, or a
reduction in tariffs charged to these customers could have a material adverse
effect on its financial condition and results of operations.

     Vimpelcom, a Moscow cellular provider and Golden Telecom's largest
customer, has its prices regularly reviewed in the light of market conditions,
which generally leads to a reduction in the fees paid. Revenues from Vimpelcom
and its affiliates represented approximately 16% of Golden Telecom's
consolidated revenues for the year ended December 31, 2000 and approximately 21%
of its consolidated revenues for the year ended December 31, 1999. Golden
Telecom agreed to reductions in Vimpelcom's fees through 1999 and 2000 and may
agree to further reductions hereafter. Further negotiations may lead to a
significant additional reduction in payments by Vimpelcom and may have a
material adverse effect on Golden Telecom's consolidated revenues.

  Falling prices for Golden Telecom's services may lead to a decline in revenues

     Prices for international and domestic long distance calls, as well as
Internet access and wireless services, have fallen substantially over the last
few years in most of Golden Telecom's current and potential markets. Golden
Telecom expects that the prices for its services will continue to decrease for
the foreseeable future as competitive pressures increase. These reductions are
attributable, in part, to increased competition and the creeping devaluation of
the ruble. Unlike Golden Telecom, most local Russian carriers do not link their
prices to the dollar/ruble exchange rate, so as the ruble devalues, their prices
become relatively cheaper than our prices. In order to compete with these local
operators, Golden Telecom expects that it will continue to lower its tariffs,
which may result in declining margins.

  Golden Telecom must manage its growth, including the integration of recently
  acquired companies, successfully in order to achieve its desired results

     Golden Telecom has experienced significant growth in personnel in the short
and medium term as the result of acquisitions and it expects such growth to
continue. As the number of its employees grows, Golden Telecom will become
increasingly difficult and more costly to manage our personnel. As part of
Golden Telecom's business strategy, it has completed several acquisitions,
including its recent acquisitions of Glasnet, Nevalink, Fintek, KIS, Referat.ru,
Absolute Games, InfoArt, and the Agama family of assets, and it expects to enter
into additional business combinations and acquisitions. Acquisition transactions
are accompanied by a number of risks, including:

     - the difficulty of assimilating the operations and personnel of the
       acquired companies;

     - the potential disruption of ongoing business and distraction of
       management;

     - the difficulty of incorporating acquired technology or content and rights
       into Golden Telecom' products and media properties and unanticipated
       expenses related to such integration;

     - the potential negative impact on reported earnings;

     - the impairment of relationships with employees and customers as a result
       of any integration of new management personnel; and

     - the contingent liabilities associated with acquired businesses,
       especially in the markets where Golden Telecom operates.

                                        44
<PAGE>   46

     Golden Telecom may not be successful in addressing these risks or any other
problems encountered in connection with its completed and future acquisitions
and its operating results may suffer as a result of any failure to integrate
these businesses with existing operations.

  Golden Telecom competes with established competitors who may have greater
  resources than it does

     Golden Telecom's competitors include incumbent Russian and Ukrainian
operators and other large international telecommunications providers doing
business in the Commonwealth of Independent States. Its competitors may have
substantially greater resources, closer ties to governmental authorities and
longer operating histories. These advantages may give them a competitive edge
over alternative providers like Golden Telecom. This competition may result in a
loss of customers, falling prices and a decline in revenues.

     Golden Telecom competes with large established national carriers, some of
which are powerful companies with political connections, as well as joint
ventures of large international operators doing business in Russia and Ukraine.
Such ventures include Global One and Combelga in Russia and Ukrtelecom and Utel
in Ukraine. Other competitors are alliances among telecommunications companies,
companies that own equipment and networks, companies that purchase and resell
the services of other carriers, Internet service providers and other providers
of bundled services. Golden Telecom may also face increasing competition from
wireless telephone companies and satellite companies. Many of these competitors,
including the Russian incumbent operators, have established customer bases and
extensive brand name recognition and possess greater financial, management and
other resources. Golden Telecom's results of operation would suffer if it is
unable to keep up with the increasing levels of competition in the countries
where it operates.

  Government interaction with our partners could have adverse spillover effects
  on us

     The interactions between government authorities and Golden Telecom's past
or current partners may create problems. For example, Golden Telecom is aware
that Russian authorities were reviewing the activities of its former partners in
GTS-Vox, the holding company which owned Golden Telecom's interest in TCM, prior
to TCM's merger into our wholly owned subsidiary, TeleRoss. Certain of Golden
Telecom's employees were requested by Russian governmental authorities to
provide information as part of those inquiries. The authorities' inquiries have
raised issues about the formation of TCM and the sale of our partners' interest
in GTS-Vox to Golden Telecom, including issues concerning Russian antimonopoly
and securities filings and the commercial relationship between TCM and the local
telephone network in Moscow. GTS has also received inquiries apparently
regarding these matters from U.S. authorities in connection with a U.S. grand
jury investigation.

     Golden Telecom's involvement in the authorities' review of its former
partners' activities could result in a diversion of management's time and
resources or the deterioration in Golden Telecom's relationship with its
partners. The review could lead to the imposition of administrative fines or
other penalties and forfeitures of assets, including the loss of Golden
Telecom's ownership interest in the assets that constituted TCM prior to its
merger into TeleRoss. If Golden Telecom were to lose its ownership interest in
the assets that constituted TCM, it would have a material adverse impact on its
operations.

  Failure to lease sufficient and reliable transmission capacity at reasonable
  costs could cause Golden Telecom to incur losses

     Historically, Golden Telecom has leased a substantial portion of its
network transmission capacity under agreements which generally have twelve- to
thirty-six-month fixed terms. In addition to this capacity, Golden Telecom
recently leased significant additional international capacity which it intends
to utilize for data transmission under long-term lease agreements which may be
extended up to fifteen years. If Golden Telecom's lease arrangements deteriorate
or terminate and it is unable to enter into new arrangements or if the entities
from whom Golden Telecom leases such capacity are unable to perform their
obligations under such arrangements, Golden Telecom's cost structure, service
quality and network coverage could be adversely affected.

                                        45
<PAGE>   47

     Golden Telecom currently relies on Rostelecom, the exclusive supplier of
international switched voice channels in Russia, to lease transmission capacity
to it, and Golden Telecom relies on local operators for last-mile access to
end-users. These companies may be subject to political and economic pressures
not to lease capacity to foreign operators or competitors. Any changes in
regulation or policies that restrict Golden Telecom from leasing adequate
capacity could have an adverse effect on its business. Local telecommunications
operators may, for business reasons or otherwise, resist giving Golden Telecom
access to the last mile.

ITEM 2. PROPERTIES

     We lease office space to serve as sales office and/or administrative
facilities, including our approximately 35,000 square-foot corporate
headquarters in Arlington, Virginia with a ten-year lease expiring October 2009.
As part of our Restructuring, we have subleased approximately one-half of this
space. We maintain our operational headquarters in London in an approximately
52,000 square-foot facility under a twenty-one year lease expiring December
2020.

     As part of the Restructuring, we have undertaken efforts to assign or
sublet a lease, which expires in May 2010, by one of the Company's subsidiaries
of a 54,000 square foot facility in Chantilly Virginia. The facility was
intended to house a Web-hosting and network operations center. Further, in
connection with this Restructuring, we have plans to shut down several sales
offices and other facilities to reduce our operating costs.

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

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

     GTS Europe B.V. has its principal administrative offices and its Network
Operations Center in two adjacent buildings in Hoeilaart, Belgium, just outside
Brussels. The leases on both the buildings expire on June 30, 2005. GTS Europe
B.V. has also entered into leases for two additional buildings in the same
complex as its principal offices. GTS Europe B.V. commenced its occupancy of
these buildings in January 2000. These leases run through January 2009 but may
be terminated after six years with six months notice plus six months rental
penalty.

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

ITEM 3. LEGAL PROCEEDINGS

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

     On March 26, 1999, we opposed the annual license fee for 1998 imposed by
the French regulator as, among other things, contrary to Article 11 of EC
Directive 97/13 which requires license fees to cover only the administrative
cost of managing the license. On September 23, 1999, the French regulator
informed us that they rejected our position. On November 24, 1999, we filed a
complaint before the French administrative tribunal opposing the license fee. On
February 25, 2000, we filed a similar complaint, on the same terms, before the
French administrative tribunal opposing the license fee for 1999. Under French
law, we would not be required to pay these license fee and the French regulator
does not have the right to terminate our license until such time as a ruling by
the French administrative tribunal is issued. If our claim is rejected in a
final

                                        46
<PAGE>   48

non-appealable judgment, we will be required to pay our license fee in France.
We do not believe that the outcome of this litigation will have a material
adverse effect upon our financial condition.

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

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

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None.

                                    PART II

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

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

<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
2000:
  Quarter ending March 31, 2000.............................  $34.00   $20.50
  Quarter ending June 30, 2000..............................   22.25     9.94
  Quarter ending September 30, 2000.........................   12.50     3.31
  Quarter ending December 31, 2000..........................    4.44     0.38
1999:
  Quarter ending March 31, 1999.............................  $33.31   $24.43
  Quarter ending June 30, 1999..............................   45.75    27.17
  Quarter ending September 30, 1999.........................   38.93    19.38
  Quarter ending December 31, 1999..........................   36.13    19.81
</TABLE>

     As of December 31, 2000, there were approximately 345 holders of record of
our common stock.

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

     During the year ended December 31, 2000 we issued securities which were not
registered under the Securities Act of 1933, as amended (the "Securities Act")
as follows:

                                        47
<PAGE>   49

     During the first and second quarters of 2000, the Company issued a total of
4,135,920 shares of its common stock as consideration for the acquisition of
Netcom Internet Limited. The excess of the purchase price paid over the fair
value of assets acquired has been calculated at approximately $105.3 million.
The 4,135,920 shares of the Company's common stock were issued pursuant to
exemptions from registration available under Section 4(2) of, and Regulation S
under, the Securities Act.

     On July 26, 2000, the Company exchanged 3,166,528 of its common shares for
3,283 of GTS Europe B.V.'s common shares, pursuant to an exchange agreement that
the Company had entered into, on October 15, 1999, with the minority interest
holders of GTS Europe B.V., who were grantees of GTS Europe B.V.'s stock
options. The July 26, 2000 exchange of GTS common shares was based on the fair
market value of GTS Europe B.V. as of the date of the exchange, and the
transaction resulted in excess purchase price over the fair value of assets
acquired of approximately $37.2 million, which was recorded in July 2000. The
3,166,528 shares of the Company's common stock were issued pursuant to
exemptions from registration available under Section 4(2) of, and Regulation S
under, the Securities Act. As a result of this transaction, as of December 2000,
the Company owns 99.8% of the outstanding shares of GTS Europe B.V.

     On May 16, 2000 the Company's stockholders approved an increase in the
Company's authorized common stock from 270 million to 540 million shares. On
July 21, 1999, the Company effected a two-for-one split of its common stock
through the distribution of a stock dividend. All shares and per share amounts
in this Report have been restated to reflect the stock split.

                                        48
<PAGE>   50

ITEM 6. SELECTED FINANCIAL DATA

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

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

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                               --------------------------------------------------
                                                 2000        1999       1998      1997      1996
                                               ---------   --------   --------   -------   ------
                                                      (IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                                            <C>         <C>        <C>        <C>       <C>
STATEMENT OF OPERATIONS DATA:
  Revenues...................................  $ 1,023.5   $  852.2   $  372.4   $ 121.4   $ 62.5
  Operating loss.............................   (1,442.0)    (433.7)    (143.7)    (91.4)   (55.4)
  Loss before extraordinary loss.............   (1,615.3)    (616.7)    (243.1)   (134.8)   (76.2)
  Extraordinary loss.........................         --         --      (12.7)       --       --
  Net loss...................................   (1,615.3)    (616.7)    (255.8)   (134.8)   (76.2)
  Preferred Dividends........................      (36.3)     (25.7)        --        --       --
  Net loss applicable to common
     shareholders............................   (1,651.6)    (642.4)    (255.8)   (134.8)   (76.2)
  Loss per common share:
  Loss per common share before extraordinary
     loss....................................      (8.34)     (3.76)     (1.70)    (1.37)   (1.01)
  Extraordinary loss per share...............         --         --      (0.09)       --       --
  Net loss per common share..................      (8.34)     (3.76)     (1.79)    (1.37)   (1.01)
  Deficiencies of earnings available to cover
     fixed charges(1)........................   (1,682.7)    (648.6)    (240.2)   (132.3)   (74.8)
OTHER DATA:
  EBITDA(2)..................................  $  (115.8)  $  (75.3)  $  (61.6)  $ (70.3)  $(45.6)
  Net cash used in operating activities......     (243.1)    (330.8)    (120.9)    (52.3)   (42.8)
  Net cash used in investing activities......     (593.6)    (917.0)    (455.9)   (117.6)   (86.4)
  Net cash provided by financing
     activities..............................       81.0    1,352.3    1,032.4     468.4    179.0
BALANCE SHEET DATA (AT END OF PERIOD):
  Cash and cash equivalents..................  $   363.8   $1,082.9   $  998.5   $ 358.4   $ 67.9
  Property and equipment, net................    1,424.5    1,004.5      643.0     260.0     47.0
  Total assets...............................    2,833.8    4,001.8    2,614.6     876.6    275.1
  Total debt and capital leases..............    2,595.2    2,552.2    1,792.3     645.7     89.3
  Redeemable preferred stock.................      511.4      502.3         --        --       --
  Shareholders' (deficit) equity.............   (1,292.6)     128.3      349.9      71.6    128.3
</TABLE>

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

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

                                        49
<PAGE>   51

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

     The following discussion and analysis relates to the Company's financial
condition and results of operations for the three years ended December 31, 2000.
This information should be read in conjunction with Item 6 -- "Selected
Financial Data," Item 8 -- "Consolidated Financial Statements and Supplementary
Information for the Company" and the other information contained in this report.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

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

     In addition, any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or
performance (often, but not always, through the use of words or phrases such as
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "intends," "plans," "projection" and "outlook") are not historical
facts and may be forward-looking and, accordingly, such statements involve
estimates, assumptions and uncertainties which could cause actual results to
differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the factors discussed throughout this Report. Among
the key factors that have a direct bearing on the Company's results of
operations are the potential risk of delay in implementing the Company's
Restructuring and business plan; the political, economic and legal aspects of
the markets in which the Company operates; competition; and the Company's need
for additional substantial financing. These and other factors are discussed
under Item 1 -- "Business -- Implementation of the November 2000 Restructuring
and Other Recent Developments" and "-- Certain Considerations Generally
Applicable to Our Company," in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Report.

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

NOVEMBER 2000 RESTRUCTURING

     In November 2000, the Company announced the Restructuring of its operations
to focus on those areas of its business that management believes have stronger
prospects for long-term success and profitability, and to divest, liquidate or
otherwise address those operations that management believes are non-strategic or
which are unsustainable as currently constituted and are a drain on the
Company's limited financial and other resources. The decision to undertake the
Restructuring was prompted in large measure by the significant downturn in the
financial and stock markets, which commenced in March 2000. As a consequence of
that downturn, the availability of equity and debt financing, which was
essential and was previously plentiful for below-investment grade emerging and
more-established alternative telecommunications providers, like the Company, has
substantially decreased or has become available only with onerous terms and
conditions. At the

                                        50
<PAGE>   52

same time, the pace of competition in the Company's markets has intensified. The
Company cannot predict when these conditions will improve. Consequently, the
Company determined that a substantial restructuring was required to achieve
self-sufficiency with regard to its financial resources and to implement its
business plan. Although the Company believes it has made significant progress
during the first and second quarters of 2001 to complete the Restructuring and
to enhance its liquidity position, the future viability of the Company will
depend upon the Company's ability to complete those aspects of the
Restructuring, which will fund its operations through the first quarter of 2002,
and to access additional capital to fund its operations after the first quarter
of 2002, as discussed in greater detail under Item
1 -- "Business -- Implementation of the November 200 Restructuring and Other
Recent Developments."

     In connection with the Restructuring, the Company will focus on its core
competency of providing broadband services to traditional carriers, Internet
service providers, application service providers, other Web-centric entities and
data intensive pan-European corporations. The objective of the Restructuring is
to position the Company as a data and Internet services-only provider, which the
Company expects will have positive operating results, although there can be no
assurance in this regard. As part of the Restructuring, the Company reorganized
into four "stand alone" business units  --  GTS Broadband Services; GTS Business
Services; GTS Central Europe; and Golden Telecom. Among other things, the
objective of separating itself into these four business units was to enable the
Company to sell its investment interest in its Business Services and Central
Europe. In addition, the Company indicated it could sell all or part of its 62%
interest in Golden Telecom, a subsidiary with operations in Russia and other
countries in the former Soviet Union, which was split-off from the Company in an
initial public offering, which occurred in October 1999.

     As a result of the Restructuring initiative, the Company recorded a $988.5
million charge within its statements of operations in the fourth quarter 2000.
Of the $988.5 million, $942.5 million represents non-cash items due to the
write-off of goodwill and intangibles and fixed assets, due to impairment of the
respective assets. The remaining $46.0 million is comprised of transaction
related costs (professional advisors), contract termination penalties and
severance for personnel. In determining the write down amounts for the goodwill
and intangibles, the Company utilized third party fair value appraisals and
discounted cash flow analysis. Further, in determining the write-down amount for
its fixed assets, the Company utilized discounted cash flows analysis and
considered fair values that could be achieved in the market for the sale of its
assets; however, due to the significant downturn in the financial markets for
telecommunication providers the re-sale market for used telecommunication
equipment has also become less favorable to the Company.

     During the first and second quarters of 2001, the Company made significant
progress in achieving steps necessary to complete the Restructuring and to
enhance its liquidity position. On April 2, 2001, the Company announced that it
had entered into an agreement to sell up to its entire equity interest in Golden
Telecom. The Company expects to realize at least $125 million in proceeds from
this sale. See Item 1 -- "Business -- Implementation of the November 2000
Restructuring and Other Recent Developments -- Agreement to Sell Certain of the
Company's Shares in Golden Telecom." While the Company has had certain
discussions with third parties concerning the sale of the Central European
businesses, these discussions have not resulted at this time in any definitive
agreements to purchase any of these assets and there can be no assurance that
the Company will conclude any such agreements.

     Furthermore, on March 28, 2001, the Company announced a consensual
agreement with an unofficial committee of the senior noteholders of Global
TeleSystems (Europe) Limited, formerly known as Esprit Telecom Group plc ("GTS
(Europe) Ltd or "Esprit"), under which the obligation to repay approximately
$500 million of senior debt owed to the noteholders will be exchanged for a 90
percent ownership interest in a new business unit comprised of Esprit and other
GTS subsidiaries that comprise GTS's "Business Services" business unit, subject
to approval of a scheme of arrangement by the U.K. courts. GTS will indirectly
own the remaining 10% of this new company and has agreed, upon certain
conditions, to provide up to E35 million in senior secured financing for working
capital and up to E20 million in senior secured debt financing (subject to
increase in certain circumstances) (which will be repaid with preferred stock in
the new company upon consummation of the restructuring of Esprit) to be used by
this new company to purchase backbone transmission services from the Company. On
March 28, 2001, Esprit commenced a consent solicitation to obtain approvals from
its noteholders to allow the Company's senior secured financing to proceed.
Esprit
                                        51
<PAGE>   53

obtained the required consents on April 10, 2001, and on that date it entered
into supplemental indentures relating to its senior debt, which will allow such
senior secured financing to proceed. The parties expect to file the scheme of
arrangement with the appropriate reviewing authorities during the second quarter
of 2001. See Item 1 -- "Business -- Implementation of the November 2000
Restructuring and Other Recent Developments -- Restructuring of the Company's
Global TeleSystems (Europe) Limited (Esprit) Subsidiary."

     On July 14, 2000, Global TeleSystems Europe Holdings, B.V., an indirect
subsidiary of the Company, entered into a $550 million loan agreement with Bank
of America International Limited, Deutsche Bank AG London and Dresdner AG London
Branch. As a result of the Restructuring, the parties determined that changes to
the agreement should be made and agreed to negotiate an amended long-term credit
facility. In April 2001, the parties entered into an interim amended facility
while a definitive longer-term credit facility is negotiated. The amended
facility provides a E300 million revolving credit facility through March 2002,
at which time the facility converts into a one-year term loan. See Item
1 -- "Business -- Implementation of the November 2000 Restructuring and Other
Recent Developments -- Amended Bank Facility."

BUSINESS STRATEGY

     As a result of the Restructuring, the Company will focus on enhancing and
building on its position as the premier provider of broadband network solutions
and services in Europe. The unit will expand its services to address the data
and Internet needs of the pan-European corporate market, and will continue to
provide carriers, ISPs, ASPs and Web-centric customers with managed bandwidth
and data products. Expanded services include IP virtual private networks,
dedicated hosting, high-capacity direct Internet access as well as a host of new
high-end data applications, such as streaming media services.

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

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

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

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

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

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

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

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

     - Capitalize on the "Ebone" brand name, which we adopted in January 2001 as
       the brand for our broadband unit.

GTS (EUROPE) LTD. -- BUSINESS COMBINATION

     The following discussion of the Company's results of operations and
liquidity and capital resource requirements reflect the restatement of the
Company's financial results for 1998 and prior periods as a result of the
business combination with Global TeleSystems (Europe) Limited ("GTS (Europe)
Ltd.") which was accounted for as a pooling of interests.

                                        52
<PAGE>   54

RESULTS OF OPERATIONS

  Organizational Structure Change

     THE FINANCIAL RESULTS FOR THE YEARS ENDED THAT IS REFLECTED BELOW IS NOT
INDICATIVE OF THE FINANCIAL RESULTS OF THE COMPANY AS A RESULT OF THE
RESTRUCTURING, INCLUDING THE CONTEMPLATED SALE OR DIVESTITURE OF ITS INTEREST IN
ITS BUSINESS SERVICES AND CENTRAL EUROPE BUSINESSES AND GOLDEN TELECOM.

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

<TABLE>
<CAPTION>
                                                            FOR THE YEAR ENDED DECEMBER 31,
                                                            --------------------------------
                                                              2000        1999        1998
                                                            --------     -------     -------
<S>                                                         <C>          <C>         <C>
Revenues..................................................    100.0%      100.0%      100.0%
  Access and network services.............................     63.0        61.5        63.9
  Selling, general and administrative.....................     48.8        47.7        53.5
  Depreciation and amortization...........................     30.0        25.0        21.1
  Business disposition, merger and restructuring related
    charges...............................................     99.1        16.7          --
                                                             ------       -----       -----
  Loss from operations....................................   (140.9)      (50.9)      (38.5)
  Other expense:
  Interest, net...........................................    (16.2)      (15.8)      (19.1)
  Other expense...........................................     (0.1)       (3.6)       (5.5)
                                                             ------       -----       -----
  Net loss before income taxes and extraordinary loss.....   (157.2)      (70.3)      (63.1)
  Income taxes............................................      0.6         2.1         2.1
                                                             ------       -----       -----
  Net loss before extraordinary loss......................   (157.8)      (72.4)      (65.2)
  Extraordinary loss -- debt refinancing..................       --          --        (3.4)
                                                             ------       -----       -----
  Net loss................................................   (157.8)%     (72.4)%     (68.6)%
                                                             ======       =====       =====
  Preferred dividend......................................      3.5         3.0          --
                                                             ------       -----       -----
  Net loss applicable to common shareholders..............   (161.3)%     (75.4)%     (68.6)%
                                                             ======       =====       =====
</TABLE>

  Year Ended December 31, 2000 Compared To The Year Ended December 31, 1999

     The Company reported a net loss of $1,615.3 million for the year ended
December 31, 2000, compared to a net loss of $616.7 million in the same period
of the prior year.

     Revenue.  Consolidated revenue increased to $1,023.5 million for the year
ended December 31, 2000 as compared to $852.2 million for the year ended
December 31, 1999. Significant components of revenue for the year ended December
31, 2000 were Business Services ($524.0 million), Ebone ($378.6 million),
Central Europe ($59.6 million) and Golden Telecom ($113.1 million). Revenue for
the year ended December 31, 1999 was primarily comprised of Business Services
($428.8 million), Ebone ($304.4 million), Central Europe ($29.9 million) and
Golden Telecom ($97.9 million). The growth in Business Services revenue was due
to an increase in customers, an increase in voice traffic on the Company's
network and acquisitions that were completed during 1999. The growth in Ebone
revenue was due to an increase in customers and acquisitions that were completed
during 2000, offset by price reductions in excess of 50% during 2000. Central
Europe revenue increased significantly during 2000 due to the build out of
business in the region. The Company expects that its revenues will decline as a
result of the restructuring measures initiated in 2000, primarily related to the
sale of Business Services, Golden Telecom and the potential sale of Central
Europe.

     Access and Network Services.  Access and network costs consist of costs
associated with providing telecommunications services through the Company's
network and the costs of leased capacity. During 2000 these costs increased to
$644.5 million or 63.0% of revenues as compared to $523.7 million or 61.5% of
revenues for 1999. The increase in access and network services costs as a
percentage of revenues in 2000 is attributable to increased settlement and
interconnect costs paid to third parties and direct network operating and
maintenance costs. In addition, the Company expects that these access and
network services costs will

                                        53
<PAGE>   55

slowly decline as a result of the restructuring measures initiated in 2000, as
the Company disposes of Business Services, a lower margin voice business unit.

     Selling, General and Administrative.  Selling, general and administrative
expenses for 2000 increased to $499.0 million or 48.8% of revenues as compared
to $406.9 million or 47.7% of revenues for 1999. The increase in selling,
general and administrative expenses in 2000 is attributable to the following:
additional expenses related to acquired entities; an increase in the Company's
sales and marketing efforts; additional building rent expense related to the
increased office space due to growth in the Company's infrastructure; increased
administrative costs required for the Company's increased customer base; the
development of the Company's new brand identity and increased charges to bad
debt expense as a result of the failure of several customers as well as
increased risk in the telecom sector. The Company expects that selling, general
and administrative expenses will decrease in future periods as a result of the
restructuring measures initiated in 2000.

     Depreciation and Amortization.  Depreciation and amortization increased to
$307.4 million or 30.0% of revenues for the year ended December 31, 2000 as
compared to $212.8 million or 25.0% of revenues for the year ended December 31,
1999. The substantial increase in depreciation and amortization costs is
attributable to the depreciation related to the expansion of the Company's
network infrastructure that has been undertaken over the past several years.
Additionally, the Company has experienced an increase in amortization expense
associated with goodwill that has resulted from its acquisition activities. The
Company expects that depreciation and amortization will decrease in future
periods as a result of the restructuring measures initiated in 2000 and the
resulting write-down of long-lived assets and goodwill.

     Business Disposition, Merger and Restructuring Related Charges.  In 2000,
the Company recorded $1,014.6 million in charges to earnings attributable to
business disposition and restructuring related costs. Of the $1,014.6 million,
$988.5 million and $26.1 million were recorded in the fourth and third quarter
respectively. The $988.5 million fourth quarter 2000 charge was attributable to
the Board of Directors approval, in November 2000, of management's plan to
restructure the Company so that its primary focus is to provide broadband
services to traditional carriers, Internet service providers ("ISPs"),
application service providers ("ASPs"), other Web-centric entities and data
intensive pan-European corporations. The components of the $988.5 million charge
include $955.1 million associated with our business disposition initiatives and
$33.4 million for the restructuring of our Ebone business.

     Of the $955.1 million charge for our business disposition initiatives,
$922.2 million represents non-cash items related to the write-off of impaired
goodwill and intangibles of $697.5 million and fixed assets of $224.7 million.
The remaining $32.9 million represents cash items for transaction related costs
(professional advisors) and severance for personnel.

     Of the $33.4 million for the restructuring of our Ebone business, $20.3
million represents non-cash items related to the write-off of impaired fixed
assets with the remaining $13.1 million representing cash items that are
principally for contract terminations for excess local access transmission
capacity and facilities.

     The $26.1 million charge was attributable to the Board of Directors
approval in August 2000 of management's plan to exit from its residential and
pre-paid card businesses, and streamline its operations by, among other things,
consolidating its headquarters functions, reducing or redeploying headcount,
centralizing finance and billing operations and consolidating sales offices. The
components of the charge include approximately $14.7 million for severance
related costs associated with termination of personnel, cancellation of facility
leases and anticipated office closure costs in Western Europe and approximately
$11.4 million for severance costs under the terms of separation with the
Company's former Chairman and Chief Executive Officer and severance and
termination costs in connection with consolidation of the its headquarters
functions, including its Northern Virginia web-hosting center.

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

     The $63.7 million first quarter charge was attributable to the
transactional costs associated with the acquisition and integration of GTS
(Europe) Ltd. The $19.8 million third quarter charge was a result of the
                                        54
<PAGE>   56

Company's September 1999 decision to abandon certain cellular ventures in Russia
and to cease to provide any further financial assistance to these ventures other
than the assumption of certain debt obligations. The $59.0 million fourth
quarter charge reflects a charge of $40.1 million for the integration and
rationalization of the Company's switched-voice assets as well as $18.9 million
for certain employee reorganization and severance costs. These charges were
principally a result of the acquisitions and organizational consolidations that
the Company effected in 1999.

     Interest Expense.  Interest expense increased to approximately $236.3
million in 2000 from $208.9 million in 1999. This significant increase in
interest expense is attributable to the interest associated with the issuance in
November 1999 of E500 million aggregate principle amount of senior notes,
partially offset by an increase in capitalized interest resulting from the
construction of the Company's network. The Company had outstanding debt
obligations of $2.6 billion at December 31, 2000 and 1999.

     Interest Income.  Interest income for 2000 decreased to $70.9 million from
$74.3 million in 1999. The decrease in interest income is attributable to the
decline of interest earned on short-term investments as a result of a reduction
in the short-term investment balances during the year.

     Foreign Currency Loss.  The Company recognized foreign currency losses of
$31.7 million in 2000 as compared to $8.9 million in 1999. This increase is
primarily due to the impact of foreign currency fluctuations on the Company's
unhedged debt obligations.

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

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

     Revenue.  Consolidated revenue increased to $852.2 million for the year
ended December 31, 1999 as compared to $372.4 million for the year ended
December 31, 1998. Significant components of revenue for the year ended December
31, 1999 were Business Services ($428.8 million), Ebone ($304.4 million),
Central Europe ($29.9 million) and Golden Telecom ($97.9 million). Revenue for
the year ended December 31, 1998 was primarily comprised of Business Services
($182.5 million), Ebone ($85.2 million), Central Europe ($18.9 million) and
Golden Telecom ($86.1 million). The growth in revenue in Business Services,
Ebone and Central Europe was primarily attributable to the increase in the
Company's customer base, the expansion of the Company's network and the
resulting increased traffic in all of its operations and acquisitions completed
during the year. Additional contributors to the revenue growth in 1999 are as
follows: within Golden Telecom, the Company followed the consolidation method of
accounting for certain business ventures, whereas in the first half of 1998,
these business ventures were accounted for following the equity method of
accounting.

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

     Selling, General and Administrative.  Selling, general and administrative
expenses for 1999 increased to $406.9 million or 47.7% of revenues as compared
to $199.2 million or 53.5% of revenues for 1998. The decrease in selling,
general and administrative expenses as a percentage of revenue is attributable
to the growth in the Company's revenue base and its efforts to integrate the
Company's business operations and eliminate redundant costs. The increase in
selling, general and administrative expenses in 1999 is attributable to the
following: additional expenses related to acquired entities; increases in
payroll, related costs from the recruitment and hiring of additional staff
associated with business growth; an increase in the Company's sales

                                        55
<PAGE>   57

and marketing efforts; additional building rent expense related to the increased
office space due to growth in the Company's infrastructure; increased
administrative costs required for the Company's increased customer base and the
development of the Company's new brand identity. The Company expects to
establish sales offices in additional European cities, which involves incurring
substantial start-up costs. However, the Company expects to improve its
effectiveness and leverage these expenses as a percentage of revenue.

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

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

     The $63.7 million first quarter charge was attributable to the
transactional costs associated with the acquisition and integration of GTS
(Europe) Ltd. The $19.8 million third quarter charge was a result of the
Company's September 1999 decision to abandon certain cellular ventures in Russia
and to cease to provide any further financial assistance to these ventures other
than the assumption of certain debt obligations. The $59.0 million fourth
quarter charge reflects a charge of $40.1 million for the integration and
rationalization of the Company's switched-voice assets as well as $18.9 million
for certain employee reorganization and severance costs. These charges were
principally a result of the acquisitions and organizational consolidations that
the Company effected in 1999.

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

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

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

     Foreign Currency Loss.  The Company recognized foreign currency losses of
$8.9 million in 1999 as compared to $23.2 million in 1998. The losses in 1999
are primarily attributable to the impact of foreign currency fluctuations on the
Company's unhedged debt obligations. The losses in 1998 were attributable to the
devaluation of the Russian ruble and losses on several forward exchange
contracts and the weakening of the U.S. dollar versus European currencies in the
third and fourth quarters of 1998.

LIQUIDITY AND CAPITAL RESOURCES

     The telecommunications industry is capital intensive. In order for the
Company to successfully compete, the Company will require substantial capital to
continue to develop its telecommunications networks, implement its business
strategy and meet the funding requirements of its operations, including losses
from operations, as well as to provide capital for its business development
initiatives. We anticipate that we will incur between $225 million to $275
million in cash capital expenditures in 2001 to implement our business plan,
including the transatlantic capacity participation discussed below. The cash
capital expenditure amounts
                                        56
<PAGE>   58

disclosed above excludes the cash capital expenditure requirements for our
Golden Telecom, Central European and Business Services businesses that we are in
the process of divesting. The Company anticipates that the 2001 cash capital
expenditures for the Golden Telecom, Central European and Business Services
businesses will in aggregate approximate $75 million.

     During the fourth quarter 2000, in connection with the Restructuring and in
view of the substantial deterioration of the capital markets, the Company
initiated measures to bolster its liquidity position. On October 31, 2000, the
Company announced that it has reached an agreement to sell its 50% equity
interest in FLAG Atlantic Limited to FLAG Telecom while retaining ownership over
certain infrastructure, including the dedicated fiber pair on the FLAG
Atlantic-1 transatlantic link, previously purchased from the joint venture. FLAG
Atlantic Limited was a 50/50 joint venture established by the Company and FLAG
Telecom to build FLAG Atlantic-1, a major subsea fiber network connecting the US
and Europe. Further, in October 2000, prior to the closing of the Company's sale
of its equity interest in FLAG Atlantic Limited, the Company made its required
$100 million equity contribution into the joint venture.

     Under the terms of the sale agreement, the Company received $130 million in
cash from FLAG Telecom in the fourth quarter with the balance of the purchase
price, $5 million, to be received upon the resolution of certain regulatory
matters. The Company currently anticipates that it will receive the remaining $5
million of consideration in the second quarter of 2001.

     On April 2, 2001, the Company announced that it had entered into an
agreement to sell up to its entire equity interest in Golden Telecom. The
Company expects to realize at least $125 million in proceeds from this sale. See
Item 1  --  "Business -- Implementation of the November 2000 Restructuring and
Other Recent Developments -- Agreement to Sell Certain of the Company's Shares
in Golden Telecom."

     On April 5, 2001, the Company announced that a subsidiary had reached an
agreement to amend the bank facility entered into July 2000 while a longer-term
credit facility is negotiated. The Amended Bank Facility provides up to E300
million in available funds through March 2002, at which time the Amended Bank
Facility converts into a one-year term loan. Effectiveness of the amended bank
facility is subject to the satisfaction of certain conditions precedent which
the subsidiary is in the process of completing. As of March 31, 2001, the
borrower had drawndown E200 million of these funds. The borrower will have
access to available funding under the Amended Bank Facility limited to the
lesser of (i) a range of funding, based on the borrower's business plan, from
E180 million to E300 million from April 2001 through January 2002 (until the
termination of the Amended Bank Facility), and (ii) an amount determined by a
monthly calculated rolling three-month annualized cash flow multiple. See Item
1 -- "Business -- Implementation of the November 2000 Restructuring and Other
Recent Developments -- Amended Bank Facility" and Item 8 -- "Consolidated
Financial Statements and Supplementary Information for the Company" Footnote 2
thereto, "Management Plans and Subsequent Events."

     In addition, in connection with the Esprit Restructuring, the Company
expects that the Esprit Notes will be exchanged for a ninety percent ownership
interest in a new business unit comprised of Esprit and other GTS subsidiaries
that comprise GTS's "Business Services" business unit, subject to approval of a
scheme of arrangement by the U.K. courts. The Company's obligation to fund
Esprit and this new business unit will be limited to borrowings under two senior
secured loan facilities. See Item 1 -- "Business -- Implementation of the
November 2000 Restructuring and Other Recent Developments -- Restructuring of
the Company's Global TeleSystems (Europe) Limited (Esprit) Subsidiary."

     The Company is also considering undertaking other actions in order to
reduce the amount of indebtedness on its balance sheet. Among the measures that
the Company may undertake are purchases, in private negotiated transactions, of
its outstanding convertible securities, including its 5 3/4% Convertible
Subordinated Debentures due 2010 and the Depositary Shares representing shares
of its 7 1/4% Cumulative Convertible Preferred Stock. Such purchases may take
the form of exchanges of newly issued shares of common stock of the Company for
convertible securities surrendered by the holder. Any such transactions will be
made in compliance with applicable securities laws, the provisions of the
instruments governing such convertible securities, the indenture governing the
Company's 9 7/8% Senior Notes, and the Amended Bank Facility.

                                        57
<PAGE>   59

     Based on the Company's current existing cash balances, projected internally
generated funds, the Company's recent agreement under the Esprit Restructuring
to divest its voice focused Business Services business, the contemplated sale of
up to all of its shares in Golden Telecom and available borrowings under the
Amended Bank Facility, the Company believes that it will be able to address its
funding requirements into first quarter 2002. To address its longer term funding
needs, the Company is in the process of potentially divesting of its Central
European business operations and is seeking to refinance its indebtedness under
the Amended Bank Facility (through a long term facility or otherwise), exploring
opportunities to reduce its outstanding debt obligations and seeking additional
funding, including through the issuance of new equity or debt securities. There
can be no assurance that these objectives will be met. Further, as the Company's
business strategy evolves, the Company will continuously evaluate its optimal
capital structure to ensure that it meets the Company's overall corporate
strategy.

     The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates. In particular, the accuracy
of the estimates is subject to changes and fluctuations in revenues, operating
costs and development expenses, which can be affected by the Company's ability
to (1) consummate the Restructuring, including the Esprit Restructuring, (2)
meet the financial covenants and other conditions to borrowing under the Amended
Bank Facility, (3) effectively and efficiently manage the expansion of the Ebone
network and operations and the build-out of its City Enterprise Network
infrastructure in the targeted metropolitan markets, (4) implement its strategy
to become a leading provider of data and IP to corporate businesses, (5) limit,
to the extent possible, price erosion for broadband services, (6) access
markets, attract sufficient numbers of customers and provide and develop
services for which customers will subscribe, (7) effectively and efficiently
manage the recently announced sale of up to the Company's entire equity interest
in Golden Telecom, (8) effectively and efficiently manage the planned sale of
our Central Europe business and (9) negotiate favorable contracts with
suppliers, including large volume discounts on purchases of capital equipment.
The Company's revenues and costs are also dependent upon factors that are not
within its control such as political, economic and regulatory changes, changes
in technology, increased competition and various factors such as strikes,
weather, and performance by third parties in connection with its operations. Due
to the uncertainty of these factors, actual revenues and costs may vary from
expected amounts, possibly to a material degree, and such variations are likely
to affect the Company's future capital requirements. In addition, if the Company
expands its operations at an accelerated rate, its funding needs will increase,
possibly to a significant degree, and the Company will expend its capital
resources sooner than currently expected. As a result of the foregoing, or if
the Company's capital resources otherwise prove to be insufficient, the Company
will need to raise additional capital to execute its current business plan and
to fund expected operating losses. The Company continues to evaluate its capital
program in light of business needs, expansion plans and market conditions for
acquiring certain assets.

CHANGES IN FINANCIAL CONDITION

     The Company had cash and investments of $363.8 million and $1.1 billion as
of December 31, 2000 and 1999, respectively. The Company had restricted cash
(current and non-current) of $86.1 million and $312.1 million as of December 31,
2000 and 1999, respectively. The restricted cash at December 31, 2001, primarily
related to cash held in escrow for contractual obligations associated with the
construction of our network. The restricted cash at December 31, 1999, primarily
related to cash held in escrow for contractual obligations associated with the
construction of our network, including amounts to be paid to Flag Atlantic
Limited for our transatlantic capacity, and amounts held in escrow for debt
interest payments.

     In 2000, 1999 and 1998, the Company used cash of $297.4 million, $330.8
million and $120.9 million, respectively, for its operating activities. The
significant increase in cash spending for the Company's operations is
attributable to the growth of its business operations that has resulted in
higher operating cash costs and accounts receivable carrying balances. In
addition, at December 31, 2000, the Company had $46.0 million of accrued
expenses associated with unpaid liabilities that have resulted from our
Restructuring. The Company also used cash of $593.6 million, $917.0 million and
$455.9 million for its investing activities in 2000, 1999 and 1998,
respectively. Of the $593.6 million of 2000 investing activities, $773.4 million
of cash was spent on building the Company's telecommunications networks with the
remaining investing activities attributable to

                                        58
<PAGE>   60

the realization of restricted cash. In 1999 investing activities included $339.4
million spent on business acquisitions and $386.0 million spent on building the
Company's telecommunications networks. In 1998 investing activities included
$257.4 million spent on business acquisitions and $231.0 million spent on
building the Company's telecommunications network. The Company cannot assure you
that its operations will achieve or sustain profitability or positive cash flow
in the future. If the Company cannot achieve and sustain operating profitability
or positive cash flow from operations, the Company may not be able to meet its
debt service obligations or working capital requirements.

FOREIGN CURRENCY CONSIDERATIONS

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

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

IMPACT OF THE EURO CURRENCY ON OPERATIONS

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

     Through certain of the Company's subsidiaries the Company has significant
operations within the EU, including many of the countries that adopted the Euro.
The Company has evaluated and is in the process of addressing the system issues
raised by the adoption of the Euro, including: preparing business systems for
trading in Euros and converting the accounting systems of companies in the
common currency area from their national currency to Euros; the benefit of the
elimination of exchange rate risk in cross border transactions within the common
currency area; the potential impact of increases in pricing transparency on
price
                                        59
<PAGE>   61

differentials between member states; and training and human resources issues.
The Company continues to evaluate the impact the Euro will have on its
continuing business operations and no assurances can be given that the Euro will
not have material adverse affect on its business, financial condition and
results of operations. However, the Company does not expect the Euro to have a
material effect on its competitive position as a result of price transparency
within the European Union as the Company has always operated as a pan-European
business with transparent pricing in ECU for the majority of its customers.
Moreover, the Company is in the process of updating its information systems to
accommodate the adoption of the Euro and does not expect to incur material costs
in the updating of such systems. In addition, the Company cannot accurately
predict the impact the Euro will have on currency exchange rates or on its
currency exchange risk.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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

     The Company attempts to mitigate its foreign exchange exposures by
maintaining assets in the exposed currency wherever possible. The Company has
found it impractical to hedge all foreign currency exposure and as a result will
continue to experience foreign currency gains and losses. The introduction of
the Euro as a common currency for members of the European Union occurred on
January 1, 1999.

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

<TABLE>
<CAPTION>
                                                                                            FAIR VALUE
                                2001    2002   2003   2004   2005   THEREAFTER    TOTAL      12/31/00
                               ------   ----   ----   ----   ----   ----------   --------   ----------
                                                            (IN MILLIONS)
<S>                            <C>      <C>    <C>    <C>    <C>    <C>          <C>        <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  Fixed rate.................  $518.4   $9.7   $2.1   $2.2   $1.4    $1,589.6    $2,123.4     $508.4
  Avg. interest rate.........    11.2%   9.3%  11.6%  12.7%  13.9%        9.3%         --         --
  Variable rate..............  $  0.8     --     --     --     --    $   94.2    $   95.0     $ 95.0
  Avg. interest rate.........     9.8%    --     --     --     --         6.1%         --         --
</TABLE>

     The following tables provide information about the Company's financial
instruments by functional currency and where applicable, presents such
information in US dollar equivalents. The tables summarize information on
foreign currency denominated debt obligations that are sensitive to foreign
currency exchange rates.

                    OPERATIONS WITH EURO FUNCTIONAL CURRENCY

<TABLE>
<CAPTION>
                                                                                            FAIR VALUE
                            2001     2002     2003     2004    2005   THEREAFTER   TOTAL     12/31/00
                           ------   ------   ------   ------   ----   ----------   ------   ----------
                                                          (IN MILLIONS)
<S>                        <C>      <C>      <C>      <C>      <C>    <C>          <C>      <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  US Dollars
     Fixed rate..........      --       --       --       --    --      $465.0     $465.0     $186.0
     Avg. interest
       rate..............      --       --       --       --    --        11.0%        --         --
</TABLE>

                                        60
<PAGE>   62

               OPERATIONS WITH BRITISH POUND FUNCTIONAL CURRENCY

<TABLE>
<CAPTION>
                                                                                            FAIR VALUE
                            2001     2002     2003     2004    2005   THEREAFTER   TOTAL     12/31/00
                           ------   ------   ------   ------   ----   ----------   ------   ----------
                                                          (IN MILLIONS)
<S>                        <C>      <C>      <C>      <C>      <C>    <C>          <C>      <C>
LONG-TERM DEBT, INCLUDING
  CURRENT PORTION:
  US Dollars
     Fixed rate..........  $380.0       --       --       --    --          --     $380.0     $  9.6
     Avg. interest
       rate..............    11.3%      --       --       --    --          --         --         --
  German Mark
     Fixed rate..........  $132.5       --       --       --    --          --     $132.5     $  3.3
     Avg. interest
       rate..............    11.2%      --       --       --    --          --         --         --
</TABLE>

                                        61
<PAGE>   63

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

                            GLOBAL TELESYSTEMS, INC.

                          CONSOLIDATED BALANCE SHEETS
                        (IN MILLIONS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        1999
                                                              ---------   ---------
<S>                                                           <C>         <C>
CURRENT ASSETS
  Cash and cash equivalents, including restricted and other
     cash investments.......................................  $   449.9   $ 1,341.4
  Trade accounts receivable, net of allowance for doubtful
     accounts of $71.2 million and $44.1 million,
     respectively...........................................      257.8       239.0
  Prepaid expenses and other current assets.................      167.2       106.5
                                                              ---------   ---------
          TOTAL CURRENT ASSETS..............................      874.9     1,686.9
  Property and equipment, net...............................    1,424.5     1,004.5
  Goodwill and intangible assets, net.......................      476.7     1,172.9
  Other non-current assets..................................       57.7       137.5
                                                              ---------   ---------
          TOTAL ASSETS......................................  $ 2,833.8   $ 4,001.8
                                                              =========   =========

                  LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

CURRENT LIABILITIES
  Accounts payable..........................................  $   409.4   $   198.6
  Accrued expenses..........................................      219.6       295.3
  Debt and capital lease obligations maturing within one
     year...................................................      552.3       122.2
  Deferred revenue and other current liabilities............      105.5        86.6
                                                              ---------   ---------
          TOTAL CURRENT LIABILITIES.........................    1,286.8       702.7
  Long-term debt and capital leases, less current portion...    2,042.9     2,430.0
  Deferred revenue and other non-current liabilities........      175.2       123.9
                                                              ---------   ---------
          TOTAL LIABILITIES.................................    3,504.9     3,256.6
COMMITMENTS AND CONTINGENCIES
  Minority interest.........................................      110.1       114.6
  Redeemable preferred stock, $0.0001 par value (10,000,000
     shares authorized; 100,000 shares issued and
     outstanding)...........................................      511.4       502.3
SHAREHOLDERS' (DEFICIT) EQUITY
  Common stock, $0.10 par value (540,000,000 shares
     authorized; 203,869,538 and 184,472,884 shares issued
     and outstanding, respectively).........................       20.4        18.4
  Additional paid-in capital................................    1,462.8     1,280.8
  Notes receivable due from shareholder.....................         --       (10.4)
  Accumulated deficit.......................................   (2,775.8)   (1,160.5)
                                                              ---------   ---------
          TOTAL SHAREHOLDERS' (DEFICIT) EQUITY..............   (1,292.6)      128.3
                                                              ---------   ---------
          TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT)
            EQUITY..........................................  $ 2,833.8   $ 4,001.8
                                                              =========   =========
</TABLE>

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

                                        62
<PAGE>   64

                            GLOBAL TELESYSTEMS, INC.

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

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000        1999      1998
                                                              ---------   --------   -------
<S>                                                           <C>         <C>        <C>
Revenues....................................................  $ 1,023.5   $  852.2   $ 372.4
Operating Expenses:
  Access and network services...............................      644.5      523.7     238.1
  Selling, general and administrative.......................      499.0      406.9     199.2
  Depreciation and amortization.............................      307.4      212.8      78.8
  Business disposition, merger and restructuring related
     charges................................................    1,014.6      142.5        --
                                                              ---------   --------   -------
          Total operating expenses..........................    2,465.5    1,285.9     516.1
                                                              ---------   --------   -------
Loss from operations........................................   (1,442.0)    (433.7)   (143.7)
Other Income/(Expense):
  Interest, net.............................................     (165.4)    (134.6)    (71.0)
  Foreign currency losses...................................      (31.7)      (8.9)    (23.2)
  Other income/(expenses)...................................       30.4      (21.6)      2.6
                                                              ---------   --------   -------
                                                                 (166.7)    (165.1)    (91.6)
                                                              ---------   --------   -------
Net loss before income taxes and extraordinary loss.........   (1,608.7)    (598.8)   (235.3)
Income taxes................................................       (6.6)     (17.9)     (7.8)
                                                              ---------   --------   -------
Net loss before extraordinary loss..........................   (1,615.3)    (616.7)   (243.1)
Extraordinary loss -- debt refinancing......................         --         --     (12.7)
                                                              ---------   --------   -------
Net loss....................................................   (1,615.3)    (616.7)   (255.8)
                                                              ---------   --------   -------
Preferred dividends.........................................      (36.3)     (25.7)       --
                                                              ---------   --------   -------
Net loss applicable to common shareholders..................  $(1,651.6)  $ (642.4)  $(255.8)
                                                              =========   ========   =======
Loss per common share:
  Net loss per share before extraordinary loss..............  $   (8.34)  $  (3.76)  $ (1.70)
  Net loss per share -- extraordinary loss..................         --         --     (0.09)
                                                              ---------   --------   -------
  Net loss per share........................................  $   (8.34)  $  (3.76)  $ (1.79)
                                                              =========   ========   =======
Weighted average common shares outstanding..................      198.0      170.8     142.6
                                                              =========   ========   =======
</TABLE>

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

                                        63
<PAGE>   65

                            GLOBAL TELESYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000        1999      1998
                                                              ---------   --------   -------
<S>                                                           <C>         <C>        <C>
Operating Activities
  Net loss..................................................  $(1,615.3)  $ (616.7)  $(255.8)
Adjustments to Reconcile Net Loss to Net Cash Used in
  Operating Activities:
  Depreciation and amortization.............................      303.0      210.8      79.4
  Equity in (earnings) losses of ventures, net of dividends
     received...............................................       (0.1)      16.7       1.3
  Adjustment on foreign exchange instruments................      (55.0)     (38.7)     28.7
  Business disposition, merger and restructuring related
     charges................................................      942.5       83.6        --
  Other adjustments.........................................       31.2       (6.9)      2.1
  Changes in assets and liabilities:
     Accounts receivable....................................     (121.2)    (138.5)   (128.3)
     Accounts payable and accrued expenses..................      159.5      101.6     115.6
     Unearned revenue.......................................       48.8      112.7      68.7
     Other changes in assets and liabilities................        9.2      (55.4)    (32.6)
                                                              ---------   --------   -------
       Net Cash Used in Operating Activities................     (297.4)    (330.8)   (120.9)
Investing Activities:
  Purchases of property and equipment.......................     (773.4)    (386.0)   (231.0)
  Restricted cash...........................................      221.5     (173.2)     32.0
  Acquisitions, net of cash acquired........................         --     (339.4)   (257.4)
  Other investing activities................................      (41.7)     (18.4)      0.5
                                                              ---------   --------   -------
       Net Cash Used in Investing Activities................     (593.6)    (917.0)   (455.9)
Financing Activities:
  Proceeds from debt, net of debt issuance costs............      192.1      818.3     787.9
  Net proceeds from issuance of securities..................        7.7      631.0     370.0
  Repayments of debt and capital leases.....................     (181.1)     (97.0)   (116.1)
  Proceeds from termination of foreign exchange
     instruments............................................       62.3         --        --
  Other financing activities................................         --         --      (9.4)
                                                              ---------   --------   -------
       Net Cash Provided by Financing Activities............       81.0    1,352.3   1,032.4
Effect of exchange rate changes on cash and cash
  equivalents...............................................       36.6      (20.1)      2.7
                                                              ---------   --------   -------
Net (decrease) increase in cash and cash equivalents........     (773.4)      84.4     458.3
Cash and cash equivalents at beginning of year..............    1,082.9      998.5     540.2
                                                              ---------   --------   -------
Cash and cash equivalents at end of year....................  $   309.5   $1,082.9   $ 998.5
                                                              =========   ========   =======
Supplemental Disclosure of Cash Flow Information:
  Issuance of common shares or notes for interest in
     business ventures......................................  $   136.8   $  336.6   $  19.5
                                                              =========   ========   =======
  Capitalization of leases..................................  $   186.5   $  126.4   $ 149.4
                                                              =========   ========   =======
  Conversion of debt into common shares.....................  $    79.0   $   38.5   $  40.6
                                                              =========   ========   =======
</TABLE>

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

                                        64
<PAGE>   66

                            GLOBAL TELESYSTEMS, INC.

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
                                 (IN MILLIONS)

<TABLE>
<CAPTION>
                                                                                                         TOTAL
                                         COMMON STOCK     ADDITIONAL      NOTES                      SHAREHOLDERS'
                                        ---------------    PAID-IN     RECEIVABLE,    ACCUMULATED      (DEFICIT)
                                        SHARES   AMOUNT    CAPITAL     COMMON STOCK     DEFICIT          EQUITY
                                        ------   ------   ----------   ------------   -----------   ----------------
<S>                                     <C>      <C>      <C>          <C>            <C>           <C>
Balance at December 31, 1997..........  106.6     10.6        349.0           --          (288.0)           71.6
  Proceeds from the sale of common
    stock, net of expenses of
    $22,805...........................   31.1      3.1        350.8           --              --           353.9
  Exercise of stock options and other
    equity transactions...............    5.8      0.6         15.6           --              --            16.2
  Conversion of notes payable.........    4.1      0.4         40.4           --              --            40.8
  Exercise of common stock warrants...    5.1      0.5         (0.5)          --              --              --
  Issuance of common stock in
    connection with business
    combinations......................    8.7      0.9        115.2           --              --           116.1
  Comprehensive income................     --       --          7.1           --              --             7.1
  Net loss............................     --       --           --           --          (255.8)         (255.8)
                                                                                                       ---------
        Total comprehensive loss......                                                                    (248.7)
                                        -----    -----     --------       ------       ---------       ---------
Balance at December 31, 1998..........  161.4     16.1        877.6                       (543.8)          349.9
  Exercise of stock options and other
    equity transactions...............    5.0      0.5         38.8           --              --            39.3
  Conversion of notes payable.........    3.8      0.4         38.1           --              --            38.5
  Issuance of common stock in
    connection with business
    combinations and employment
    arrangements......................   13.6      1.3        344.9        (10.4)             --           335.8
  Issuance of common stock in
    connection with preferred
    dividends.........................    0.7      0.1         23.3           --              --            23.4
  Comprehensive loss..................     --       --        (41.9)          --              --           (41.9)
  Net loss............................     --       --           --           --          (616.7)         (616.7)
                                                                                                       ---------
        Total comprehensive loss......                                                                    (658.6)
                                        -----    -----     --------       ------       ---------       ---------
Balance at December 31, 1999..........  184.5    $18.4     $1,280.8       $(10.4)      $(1,160.5)      $   128.3
                                        =====    =====     ========       ======       =========       =========
  Exercise of stock options and other
    equity transactions...............    2.0      0.3         17.1         10.4              --            27.8
  Conversion of notes payable.........    7.9      0.8         78.2           --              --            79.0
  Issuance of common stock in
    connection with business
    combinations and employment
    arrangements......................    7.3      0.7        136.1           --              --           136.8
  Issuance of common stock in
    connection with preferred
    dividends.........................    2.2      0.2         27.0           --              --            27.2
  Comprehensive loss..................     --       --        (76.4)          --              --           (76.4)
  Net loss............................     --       --           --           --        (1,615.3)       (1,615.3)
                                                                                                       ---------
        Total comprehensive loss......                                                                  (1,691.7)
                                        -----    -----     --------       ------       ---------       ---------
Balance at December 31, 2000..........  203.9    $20.4     $1,462.8       $   --       $(2,775.8)      $(1,292.6)
                                        =====    =====     ========       ======       =========       =========
</TABLE>

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

                                        65
<PAGE>   67

                            GLOBAL TELESYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS OPERATIONS

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

SIGNIFICANT 1999 BUSINESS COMBINATION

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

NOTE 2: MANAGEMENT PLANS & SUBSEQUENT EVENTS

MANAGEMENT PLANS

  Going Concern

     The Company incurred a net loss and realized negative cash flows from
operating activities of $1.6 billion and $297.4 million, respectively, for the
year ended December 31, 2000. In addition, at December 31, 2000, the Company's
current liabilities exceed current assets by $411.9 million and the Company has
a net shareholders' deficit of $1.3 billion. Further, in December 2000, the
Company defaulted on senior debt obligations of $512.5 million, and as such, we
have reflected this outstanding debt as a current obligation within our December
31, 2000 balance sheet (see Note 7, "Debt Obligations").

     The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates continuity of operations,
realization of assets and the satisfaction of liabilities in the ordinary course
of business. The Company's continued existence and plans for future growth are
dependent upon its ability to restructure the senior debt obligations of GTS
Europe Ltd. and to obtain the capital necessary to operate, primarily through
the sale of certain business units, specifically the Business Services and
Golden Telecom businesses, and potentially the Central Europe business, and
through borrowings under the Amended Bank Facility (discussed below), to secure
additional equity and debt capital, and to continue to compete effectively
within the European market for telecommunication services. Further, during the
first and second quarters of 2001, the Company has made significant progress in
meeting several of these initiatives (see "Subsequent Events").

     Based on the Company's current existing cash balances, projected internally
generated funds, the Company's recent agreements to divest its voice focused
Business Services business, the sale of a majority of its shares in Golden
Telecom and available borrowings under the Amended Bank Facility the Company
believes that it will be able to address its funding requirements through the
first quarter of 2002. To address its longer term funding needs, the Company is
in the process of potentially divesting its Central European business operations
and is seeking to refinance its indebtedness under the Amended Bank Facility
(through a long term facility or otherwise), exploring opportunities to reduce
its outstanding debt obligations and seeking additional funding, including
through the issuance of new equity or debt securities. If the Company cannot
raise additional capital through these steps or otherwise, however, the Company
may be compelled to examine and pursue other alternatives, including instituting
cash conservation measures, which may include a substantial curtailment of
capital and other expenditures, a sale of assets (in addition to those assets
the Company is trying to sell as part of the Restructuring), a sale of the
Company, halting certain operations of

                                        66
<PAGE>   68
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Company, or seeking the protection of applicable bankruptcy laws for units
of the Company or the Company as a whole.

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

SUBSEQUENT EVENTS

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

     On April 2, 2001, the Company announced that it had entered into an
agreement to sell, to a group of buyers, 12.2 million shares of the common stock
of Golden Telecom, which the Company owned, for approximately $125 million. The
buyers have the right under certain circumstances to purchase the remainder of
the Company's equity interest in Golden Telecom, see Item 1.
"Business -- Implementation of the November 2000 Restructuring and Other Recent
Developments -- Agreement to Sell Certain of the Company's Shares in Golden
Telecom".

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

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

     Upon the completion of the debt restructuring, the Company will recognize a
substantial gain in 2001 associated with the early extinguishment of the
restructured debt obligations.

  Amended Bank Facility:

     On April 5, 2001, the Company announced that a subsidiary had reached an
agreement to amend its Bank Facility (the "Amended Bank Facility") while a
longer-term credit facility is negotiated. The Amended Bank Facility provides up
to E300 million in available funds, assuming the satisfaction of certain
conditions, through March 2002, at which time the Amended Bank Facility converts
into a one-year term loan. As of March 31, 2001, the borrower had drawndown E200
million of these funds. The borrower will have access to available funding under
the Amended Bank Facility limited to the lesser of (i) a range of funding, based
on the borrower's business plan, from E180 million to E300 million from April
2001 through January 2002 (until the termination of the Amended Bank Facility),
and (ii) an amount determined by a monthly calculated rolling three-month
annualized cash flow multiple. See Item 1 -- "Business -- Implementation of the
November 2000 Restructuring and Other Recent Developments --  Amended Bank
Facility.

                                        67
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                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3: BUSINESS DISPOSITION, MERGER AND RESTRUCTURING RELATED CHARGES

     During 2000 and 1999 the Company has undergone several business initiatives
to improve the operating performance of its business, and as a result, the
Company has recognized a charge within its Statement of Operations of $1,014.6
million and $142.5 million, respectively. Highlighted below is a summary of the
significant issues and items that comprise these charges.

2000 BUSINESS INITIATIVES

     In November 2000, the Company announced a substantial Restructuring of its
operations to focus on those areas of its business that management believes have
stronger prospects for long-term success and profitability, and to divest,
liquidate or otherwise address those operations that management believes are
non-strategic or which are unsustainable as currently constituted and are a
drain on the Company's limited financial and other resources. The decision to
undertake the Restructuring was prompted in large measure by the significant
downturn in the financial and stock markets, which commenced in March 2000. As a
consequence of that downturn, the availability of equity and debt financing,
which was essential and was previously plentiful for below-investment grade
emerging and more-established alternative telecommunications providers, like the
Company, has substantially decreased or has become available only with onerous
terms and conditions. At the same time, the pace of competition in the Company's
markets has intensified. The Company cannot predict when these conditions will
improve. Consequently, the Company determined that a substantial restructuring
was required to achieve self-sufficiency with regard to its financial resources
and to implement its business plan. Although the Company believes it has made
significant progress during the first and second quarters of 2001 to complete
the Restructuring and to enhance its liquidity position, the future viability of
the Company will depend upon the Company's ability to complete those aspects of
the Restructuring, which will fund its operations through the first quarter of
2002, and to access additional capital to fund its operations after the first
quarter of 2002, as discussed in greater detail below and in Note 2 - Management
Plans and Subsequent Events."

     In connection with the Restructuring, the Company will focus on its core
competency of providing broadband services to traditional carriers, Internet
service providers, application service providers, other Web-centric entities and
data intensive pan-European corporations. The objective of the Restructuring is
to position the Company as a data and Internet services-only provider, which the
Company expects will have positive earnings, before interest, taxes,
depreciation and amortization, although there can be no assurance in this
regard. As part of the Restructuring, the Company reorganized into four "stand
alone" business units -- GTS Broadband Services; GTS Business Services; GTS
Central Europe; and Golden Telecom. The objective of separating itself into
these four business units was to enable the Company to sell its investment
interest in its Business Services and Central Europe divisions and in Golden
Telecom. Further, during the first and second quarters of 2001, the Company made
significant progress in achieving its restructuring objective of creating a
simplified, transparent business that is centralized solely on providing
broadband optical and IP services to its customers that we refer to as our Ebone
business unit.

     As a result of the Restructuring initiative, the Company recorded a $988.5
million charge within its statements of operations in the fourth quarter 2000.
The components of the $988.5 million charge include $955.1 million associated
with our business disposition initiatives and $33.4 million for the
restructuring of our Ebone business.

     Of the $955.1 million charge for our business disposition initiatives,
$922.2 million represents non-cash items related to the write-off of impaired
goodwill and intangibles of $697.5 million with the remaining $224.7 million
principally related to the write-off of impaired fixed assets. The remaining
$32.9 million of the $955.1 million represents cash items for transaction
related costs (professional advisors) and severance for personnel.

                                        68
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                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Of the $33.4 million for the restructuring of our Ebone business, $20.3
million represents non-cash items related to the write-off of impaired fixed
assets with the remaining $13.1 million representing cash items that are
principally for contract terminations for excess local access transmission
capacity and facilities.

     In determining the write-down amounts for the goodwill and intangibles, the
Company utilized third party fair value appraisals and discounted cash flow
analysis. Further, in determining the write-down amount for its fixed assets,
the Company utilized discounted cash flows analysis and considered fair values
that could be achieved in the market for the sale of its assets; however, due to
the significant down-turn in the financial markets for telecommunication
providers the re-sale market for used telecommunication equipment has also
become less favorable to the Company.

     At December 31, 2000, $30.1 million of the $46.0 million remains as an
accrual for additional cash payments that the Company expects to pay in 2001.

  Third Quarter 2000

     The $26.1 million charge was attributable to the Board of Directors
approval, in August 2000, of management's plan to exit from its residential and
pre-paid card businesses, and streamline its operations by, among other things,
consolidating its headquarters functions, reducing or redeploying headcount,
centralizing finance and billing operations and consolidating sales offices.

     The components of the charge include $14.7 million for severance related
costs associated with termination of personnel, cancellation of facility leases
and anticipated office closure costs in Western Europe and $11.4 million for
severance costs under the terms of separation with the Company's former Chairman
and Chief Executive Officer and severance and termination costs in connection
with consolidation of its headquarters functions, including its Northern
Virginia web-hosting facility. In addition, the Company has reclassified within
its balance sheet the $10.0 million loan amount that was due from its former
Chairman and Chief Executive Officer from the equity section to a non-current
asset, as the Company expects the amount to be collected under the terms of his
separation agreement. At December 31, 2000, $15.0 million of the $26.1 million
remains as an accrual for additional cash payments that the Company expects to
pay in 2001.

1999 BUSINESS INITIATIVES

     In 1999 the Company recorded $142.5 million in charges to earnings
attributable to merger and restructuring costs. Of the $142.5 million, $59.0
million, $19.8 million and $63.7 million were recorded in the fourth quarter,
third quarter and first quarter of 1999, respectively.

  Fourth Quarter 1999

     The $59.0 million charge reflects $40.1 million for the integration and
rationalization of the Company's switched-voice assets as well as $18.9 million
for certain employee-related reorganization costs. These charges were incurred
principally as a result of the acquisitions and organizational consolidations
that the Company effected in 1999. At December 31, 2000, $0.9 million of the
$59.0 million remains as an accrual for additional cash payments that the
Company expects to pay in 2001.

  Third Quarter 1999

     The $19.8 million charge was a result of the Company's decision that the
allocation of sufficient resources to support certain cellular ventures in
Russia was not consistent with the Company's strategic plans. Accordingly, the
Company decided to abandon certain cellular ventures and decided to cease to
provide any further financial assistance to these ventures other than the
assumption of certain debt obligations. In December 2000, Golden Telecom, a
subsidiary of the Company, which holds these cellular ventures, entered into an
agreement with MCT, a third party, whereby Golden Telecom exchanged its
ownership interest in its
                                        69
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                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Russian mobile operations, including the abandoned cellular ventures, for MCT
common stock. Accordingly, as of December 31, 2000, the Company no longer has an
accrual for unpaid transactional costs associated with the abandonment.

  First Quarter 1999

     The $63.7 million charge was attributable to the transactional and other
costs associated with the acquisition and integration of Global TeleSystems
(Europe) Ltd. At December 31, 2000, the Company no longer has an accrual for
unpaid transactional costs.

  1998 Extraordinary Charge

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

NOTE 4: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

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

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

COMPARATIVE FIGURES

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

CASH AND CASH EQUIVALENTS

     The Company classifies cash on hand and deposits in banks, including
commercial paper, money market accounts, and any other investments with an
original maturity of three months or less, that the Company may hold from time
to time, as cash and cash equivalents. The Company had $86.1 million and $312.1
million of restricted cash at December 31, 2000 and 1999, respectively. The
restricted cash at December 31, 2000 is primarily related to cash held in escrow
for contractual obligations associated with the construction of our network.

                                        70
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                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Further, at December 31, 2000, the Company had $54.3 million of investments
available for sale, investments in short-term debt securities that do not meet
the definition of a cash and cash equivalent, but with maturities of less than
one year.

PROPERTY AND EQUIPMENT

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

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

GOODWILL AND INTANGIBLE ASSETS

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

     During the year ended December 31, 2000, the Company's analysis indicated
that there was an impairment of certain of its goodwill and intangible assets.
In determining the write-down amount, the Company utilized third party fair
value appraisals and discounted cash flow analysis. Further, the write-down of
goodwill and intangible assets was primarily attributable to the Company's
Business Services businesses that it is currently seeking to dispose of and has
reflected this write-down within the "Business Disposition, Merger and
Restructuring Related Charges" line item in the Company's consolidated
statements of operations (see Note 3, "Business Disposition, Merger and
Restructuring Related Charges"). No impairment expense was recognized in 1999
and 1998.

LONG-LIVED ASSETS

     In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived
assets to be held and used by the Company are reviewed to determine whether an
event or change in circumstances indicates that the carrying amount of the asset
may not be recoverable. For long-lived assets, the Company bases its evaluation
on such impairment indicators as the nature of the assets, the future economic
benefit of the assets, any historical or future profitability measurements, as
well as other external market conditions or factors that may be present. If such
impairment indicators are present or other factors exist that indicate that the
carrying amount of the asset may not be recoverable, the Company determines
whether an impairment has occurred through the use of an undiscounted cash flows
analysis of assets at the lowest level for which identifiable cash flows exist.
If impairment
                                        71
<PAGE>   73
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

has occurred, the Company recognizes a loss for the difference between the
carrying amount and the estimated value of the asset. The fair value of the
asset is measured using discounted cash flow analysis or other valuation
techniques.

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

INCOME TAXES

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

FOREIGN CURRENCY TRANSLATION

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

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

  Post 2000 Accounting and Reporting

     The Company has determined that, beginning January 1, 2001, the functional
currency of the Company is the Euro (E) as compared with the United States
dollar. Further, the Company also intends to report its financial results in the
Euro (E) reporting currency as compared with the United States dollar, within
its 2001 reports filed with the United States Securities and Exchange Commission
("SEC"). This change in accounting and reporting is reflective of management's
analysis of its functional currency indicators; that is, its anticipated cash
flows, its product portfolio pricing, geographic market, operating expenses and
to a lesser extent its financing sources and the Company's initiatives to
dispose of its Business Services, Central European and CIS business operations.
                                        72
<PAGE>   74
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REVENUE RECOGNITION

     The Company records as revenue the amount of telecommunications services
rendered, as measured primarily by the minutes of traffic processed, after
deducting an estimate of the traffic that will be neither billed nor collected.
Revenue from service contracts is accounted for when the services are provided.
Billings received in advance of service being performed are deferred and
recognized as revenue as the service is performed. In addition, the Company
defers telecommunications installation revenue and capitalizes telecommunication
connection costs. Further, the deferred revenue and capitalized costs are
recognized over the estimated life of the customer contract.

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

ADVERTISING COSTS

     Costs for advertising products and services or corporate image are expensed
as incurred. Advertising expenses for the years ended December 31, 2000, 1999
and 1998 were $31.7 million, $32.9 million and $21.7 million, respectively.

NET LOSS PER SHARE

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of the
long-term debt is determined based on quoted market prices. At December 31, 2000
and 1999, the fair value of the Company's debt is as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------
                                                       2000                    1999
                                               ---------------------   ---------------------
                                                            CARRYING                CARRYING
                                               FAIR VALUE    VALUE     FAIR VALUE    VALUE
                                               ----------   --------   ----------   --------
                                                               (IN MILLIONS)
<S>                                            <C>          <C>        <C>          <C>
Senior subordinated convertible debentures at
  interest rates Ranging from 5.75% to
  8.75%......................................    $ 23.4     $  466.9    $  864.4    $  546.0
Senior nonconvertible debentures at interest
  rates ranging from 9.875% to 11.5%.........     462.2      1,633.5     1,683.2     1,685.2
Redeemable preferred stock, dividend rate of
  7.25%......................................      14.0        511.4       556.3       502.3
</TABLE>

     In addition, since December 31, 2000, there has been significant change in
the fair market value of the financial instruments identified above, current
fair market value, as of March 30, 2001 as follows: Senior subordinated
convertible debentures of $37.4 million; Senior nonconvertible debentures of
$333.1 million and Redeemable preferred stock of $21.3 million.

     Further, the recorded amounts for all other long-term debt, including the
outstanding obligation associated with the Company's bank facility, approximates
fair value.

                                        73
<PAGE>   75
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK

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

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

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

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

STOCK-BASED COMPENSATION

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

USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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

                                        74
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                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS

     During 2000 and 1999 the Company has acquired several businesses and has
also increased its ownership interest in several of its previously existing
ventures by either buying out or acquiring part of the minority shareholders'
interest in these ventures.

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

2000 BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS

  FLAG Atlantic Limited

     On October 31, 2000, the Company announced that it has reached an agreement
to sell its 50% equity interest in FLAG Atlantic Limited to FLAG Telecom while
retaining ownership over certain infrastructure, including the dedicated fiber
pair on the FLAG Atlantic-1 transatlantic link, previously purchased from the
joint venture. FLAG Atlantic Limited was a 50/50 joint venture established by
the Company and FLAG Telecom to build FLAG Atlantic-1, a major subsea fiber
network connecting the US and Europe. Further, in October 2000, prior to the
closing of the Company's sale of its equity interest in FLAG Atlantic Limited,
the Company made its required $100 million equity contribution into the joint
venture.

     Under the terms of the sale agreement, the Company received $130 million in
cash from FLAG Telecom in the fourth quarter with the balance of the purchase
price, $5 million, to be received upon the resolution of certain regulatory
matters. The Company currently anticipates that it will receive the remaining $5
million of consideration in the second quarter of 2001. Further, the Company
recognized a gain of $31.3 million in 2000 as a result of its sale of its
investment interest in the joint venture.

  GTS Europe B.V.

     The Company increased its ownership in GTS Europe B.V. from 98.4% at
December 31, 1999 to 99.8% at December 31, 2000 by the following transactions:

     On July 26, 2000, the Company exchanged 3,166,528 of its common shares for
3,283 of Global TeleSystems Europe B.V's., formerly Hermes Europe Railtel B.V.
("GTS Europe B.V.") common shares, pursuant to an exchange agreement that the
Company had entered into, on October 15, 1999, with the minority interest
holders of GTS Europe B.V., who were grantees of GTS Europe B.V.'s stock
options. The July 26, 2000 exchange of GTS common shares was based on the fair
market value of GTS Europe B.V. as of the date of the exchange, and the
transaction resulted in excess purchase price over the fair value of assets
acquired of approximately $37.2 million, which was recorded in July 2000. In
September 2000, the remaining 318 options of GTS Europe BV were exercised. As a
result of this transaction, as of September 2000, the Company owns 99.8% of the
outstanding shares of GTS Europe BV. The Company is obligated to exchange its
Common Stock for the resulting 318 shares of GTS Europe BV stock in 2001.

  Netcom Internet Limited

     On February 18, 2000, GTS acquired Netcom Internet Limited ("Netcom") with
the issuance of 4,135,920 of our common stock. Netcom is an Internet service
provider in the United Kingdom, which provides dedicated and dial-up Internet
access, Web-hosting, server co-location, Internet protocol virtual private
networks and other services. The excess of the purchase price paid over the fair
value of assets acquired has been calculated at approximately $105.3 million and
has been reflected as goodwill, which is being amortized over 20 years.

     Further, during the fourth quarter 2000, the Company's analysis and a third
party appraisal had indicated that there was an impairment of the Netcom
goodwill. Accordingly, the Company recorded an impairment

                                        75
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                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

charge of $36.9 million in order to reflect its investment in Netcom at the fair
value in the December 31, 2000 consolidated balance sheet (see Note 3, "Business
Disposition, Merger and Restructuring Related Charges").

1999 BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS

  GTS Europe B.V.

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

     On October 15, 1999, the Company entered into an exchange agreement with
all of the minority interest holders of GTS Europe B.V.'s common shares and
grantees of GTS Europe B.V. stock options that provides for the acquisition by
the Company of their equity interest in GTS Europe B.V. The exchange will take
place in up to three separate exchanges commencing on October 18, 1999. Pursuant
to the agreement the Company will acquire the respective minority interest
holders' common shares in GTS Europe B.V. that have been held by them for a
period greater than six months. Pursuant to this agreement and effective October
15, 1999, the Company exchanged 5,985,930 of its common shares for 6,565 of GTS
Europe B.V.'s common shares. The excess of the purchase price paid over the fair
value of assets acquired has been calculated at approximately $133.0 million and
has been reflected as goodwill, which is being amortized over 20 years. Further,
minority interest holders of GTS Europe B.V. have additional beneficial
ownership rights in GTS Europe B.V.'s common shares, and common share options,
totaling 3,601 common shares. As stated above, the Company will acquire these
GTS Europe B.V. common shares in the future; however, future acquisitions will
be based on future market values of GTS Europe B.V. and the Company.

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

  Omnicom

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

     Further, during the fourth quarter 2000, the Company's analysis had
indicated that there was a full impairment of the unamortized Omnicom goodwill.
Accordingly, the Company wrote-off the net book value of the Omnicom goodwill in
order to properly reflect the value of the goodwill in the December 31, 2000
balance sheet (see Note 7, "Business Disposition, Merger and Restructuring
Related Charges").

  GTS (Europe) Ltd.

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

                                        76
<PAGE>   78
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Golden Telecom

     On October 5, 1999 Golden Telecom, a then wholly owned subsidiary of GTS,
completed an initial public offering of its common stock. Golden Telecom was
formed to hold GTS's interest in the businesses it owns and operates in Russia
and the CIS. Golden Telecom, through subsidiaries, is a facilities-based
provider of integrated telecommunications services in Moscow, Kiev, St.
Petersburg and other major population centers throughout Russia, Ukraine and
other countries of the CIS. Through the initial and a secondary public offering,
Golden Telecom raised over $50 million from public investors and approximately
$45 million from strategic investors, which was recorded as minority interest.
In addition, GTS contributed $50 million to Golden Telecom. At December 31,
2000, GTS had a 61.5% ownership interest in Golden Telecom.

     In conjunction with the 2000 and 1999 business combinations, assets
acquired, liabilities assumed and common stock issued were as follows (in
millions):

<TABLE>
<CAPTION>
                                                               2000      1999
                                                              -------   -------
<S>                                                           <C>       <C>
Fair value of assets acquired...............................  $   7.9   $  50.6
Goodwill....................................................    142.4     717.2
Fair value of liabilities assumed...........................    (13.5)    (91.8)
Common stock issued.........................................   (136.8)   (336.6)
                                                              -------   -------
Net cash paid...............................................  $    --   $ 339.4
                                                              =======   =======
</TABLE>

NOTE 6: SUPPLEMENTAL BALANCE SHEET INFORMATION

     Property and equipment consists of:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
Communications equipment....................................  $1,303.0   $  871.3
Non-network property and equipment..........................     248.3      154.4
Construction in process.....................................     516.4      196.9
                                                              --------   --------
          Total.............................................   2,067.7    1,222.6
Less: Accumulated depreciation..............................    (411.1)    (193.8)
          Accumulated impairment write off..................    (232.1)     (24.3)
                                                              --------   --------
                                                              $1,424.5   $1,004.5
                                                              ========   ========
</TABLE>

     As previously discussed in Note 2, "Summary of Significant Accounting
Policies -- Long-Lived Assets," the Company determined that an impairment
write-off of certain property and equipment that is primarily attributable to
its Business Services businesses was required in order to properly reflect the
value of the aforementioned property and equipment at its net realizable value.

                                        77
<PAGE>   79
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Goodwill and intangibles consists of:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
Goodwill....................................................  $1,227.6   $1,159.8
Intangibles.................................................     192.5      155.0
                                                              --------   --------
          Total.............................................   1,420.1    1,314.8
Less: Accumulated amortization..............................    (245.9)    (141.9)
          Accumulated impairment write off..................    (697.5)        --
                                                              --------   --------
                                                              $  476.7   $1,172.9
                                                              ========   ========
</TABLE>

     As previously discussed in Note 2, "Summary of Significant Accounting
Policies -- Goodwill and Intangible Assets," the Company determined that an
impairment write-off of goodwill and intangible assets that is primarily
attributable to its Business Services businesses was required in order to
properly reflect the value of the aforementioned goodwill and intangible assets
at their future economic value.

     Comprehensive loss consists of:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              ---------   -------
                                                                 (IN MILLIONS)
<S>                                                           <C>         <C>
Net loss....................................................  $(1,615.3)  $(616.7)
Other comprehensive loss:
  Preferred Dividends.......................................      (36.3)    (25.7)
  Foreign currency translation adjustments..................      (40.1)    (16.2)
                                                              ---------   -------
                                                                  (76.4)    (41.9)
                                                              ---------   -------
Comprehensive loss..........................................  $(1,691.7)  $(658.6)
                                                              =========   =======
</TABLE>

                                        78
<PAGE>   80
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7: DEBT OBLIGATIONS

     Company debt consists of:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                 (IN MILLIONS)
<S>                                                           <C>        <C>
DEBT OBLIGATIONS OF GTS (PARENT COMPANY)
  Senior subordinated convertible debentures, due July 1,
     2010...................................................  $  466.9   $  466.9
  Senior non-convertible debentures, due February 15,
     2005...................................................     105.0      105.0
  Senior subordinated convertible debentures, due June 30,
     2000...................................................        --       79.1
DEBT OBLIGATIONS OF GTS EUROPE B.V.
  Senior notes, due August 15, 2007.........................     265.0      265.0
  Senior notes, due December 1, 2009........................     259.0      278.6
  Senior notes, due December 1, 2006........................     212.0      228.0
  Senior notes, due January 15, 2009........................     200.0      200.0
  Senior notes, due January 15, 2006........................      80.0       86.1
  Bank facility, due July 14, 2008..........................      94.2         --
DEBT OBLIGATIONS OF GTS (EUROPE) LTD. -- (ALL CURRENT DEBT
  OBLIGATIONS)
  Senior notes, due December 15, 2007.......................     290.2      294.7
  Senior notes, due June 15, 2008...........................     222.3      227.8
Capital lease obligations...................................     376.8      283.2
Other financing agreements..................................      23.8       37.8
                                                              --------   --------
                                                               2,595.2    2,552.2
Less: debt and capital lease obligations maturing within one
  year......................................................     552.3      122.2
                                                              --------   --------
          Total long-term debt and capital lease
            obligations.....................................  $2,042.9   $2,430.0
                                                              ========   ========
</TABLE>

DEBT OBLIGATIONS OF GTS (PARENT COMPANY)

     In July 1998, the Company issued aggregate principal amount of $466.9
million of 5.75% convertible senior subordinated debentures (the "Convertible
Debentures due 2010") that mature July 1, 2010. The Convertible Debentures due
2010 are redeemable on or after July 1, 2001 at our option, at redemption prices
ranging from 104.025% to 100.0% of the principal amount, plus accrued and unpaid
interest. The Convertible Debentures due 2010 are convertible into approximately
17.0 million common shares at any time prior to maturity or redemption at a
conversion price of $27.525 per common share. Interest is payable semiannually
in January and July. The Convertible Debentures due 2010 are subordinated to all
existing and future senior indebtedness of the Company, except for the
Convertible Bonds due 2000, as defined below, with which they rank pari passu in
right of payment.

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

     On November 30, 2000, the Company successfully completed its efforts to
obtain consents from holders of its 9.875% Senior Notes due 2005 to certain
amendments of the indenture governing the 9.875% Senior Notes due 2005. The
amendments sought in the consent solicitation removed as events of default under
the

                                        79
<PAGE>   81
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

indenture defaults under any indebtedness of, judgments against, and bankruptcy,
insolvency and related filings and other events of, GTS (Europe) Ltd. or any of
its direct or indirect subsidiaries. The Company made a payment in the fourth
quarter 2000 equal to 10% of the principal amount of the 9.875% Senior Notes to
each holder, or an aggregate of $10.5 million, in order to secure their consent
to the amendments sought.

     In July 1997, the Company issued $144.8 million aggregate principal amount
of convertible senior subordinated bonds (the "Convertible Bonds due 2000") that
matured on June 30, 2000. On December 20, 1999, GTS called for redemption on
March 20, 2000, all of the outstanding Convertible Bonds due 2000. The
redemption price of such bonds was $1,016 per $1,000 principal amount of such
bonds, including accrued interest to the redemption date. All of the Convertible
Bonds due 2000, not previously converted prior to 2000, were converted into
Common Stock in the first quarter of 2000.

DEBT OBLIGATIONS OF GTS EUROPE B.V.

     On July 14, 2000, a subsidiary of the Company executed an eight year, $550
million, multi-currency bank credit facility ("the Bank Facility"). The Bank
Facility will be applied to the purchase of additional network assets; to
construct the Company's proposed hosting centers and city enterprise networks;
to pursue business development opportunities in the telecommunications field;
and for general corporate purposes in the telecommunications business.
Borrowings under the Bank Facility bear interest at LIBOR (for non-Euro
dominated borrowings) or EURIBOR (for Euro dominated borrowings) plus additional
basis points based on current financial performance. The Company also pays
commitment fees on the unused portion of the Bank Facility. In addition, the
Bank Facility agreement requires compliance with certain financial covenants,
including interest coverage. The outstanding borrowings under the Bank Facility
was E100 million as of December 31, 2000. We have reflected the borrowing under
the Bank Facility as a long-term debt obligation within our consolidated balance
sheet, since any amounts outstanding at a given time will, in effect,
continually be re-financed by subsequent borrowings until its maturity.

     On April 5, 2001, the Company announced that a subsidiary had reached an
agreement to amend its Bank Facility while a longer-term credit facility is
negotiated. The Amended Bank Facility provides up to E300 million in available
funds, assuming the satisfaction of certain conditions, through March 2002, at
which time the Amended Bank Facility converts into a one-year term loan. As of
March 31, 2001, the borrower had drawndown E200 million of these funds (see Note
2, "Management Plans and Subsequent Events").

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

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

                                        80
<PAGE>   82
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

     The debt obligations of GTS Europe B.V. described above represent senior
obligations of GTS Europe B.V. Because the holders of the GTS Europe B.V. senior
obligations described above have direct recourse to the assets of GTS Europe
B.V., these debt obligations are structurally senior to the debt obligations of
GTS described above.

DEBT OBLIGATIONS OF GTS (EUROPE) LTD. -- (ALL CURRENT DEBT OBLIGATIONS)

     On December 15, 2000, GTS (Europe) Ltd. announced that it had elected not
to pay scheduled cash interest payments totaling approximately $12.0 million on
its 10.875% and 11% Senior Notes due 2008, described below. Under the terms of
the indenture governing these notes, GTS (Europe) Ltd. had 30 days to cure the
non-payment and failed to do so during the cure period, and as a result, we have
classified the notes as a short-term debt obligation within our December 31,
2000 consolidated balance sheet. Further, during the first quarter 2001, the
Company made significant progress in addressing this default (see Note 2,
"Management Plans and Subsequent Events"). If the Esprit Restructuring,
described in Note 2, "Management Plans and Subsequent Events," is consummated,
the outstanding Senior Notes due 2008 and Senior Notes due 2007, described
below, will be exchanged for equity in a new company.

     In June 1998, GTS (Europe) Ltd. issued $150.0 million and DM150.0 million
aggregate principal amount of Senior Notes due June 15, 2008 (the "Senior Notes
due 2008"). The Senior Notes due 2008 pay interest semi-annually in June and
December at a rate of 10.875% and 11.00% respectively. GTS may redeem the Senior
Notes due 2008, in whole or in part, any time on or after June 15, 2003, at a
price ranging from 105.438% to 100.0% of the principal amount, plus accrued and
unpaid interest. GTS may redeem, at our option, up to 35% of the principal
amount of each series of the 11.5% Senior Notes due 2007, defined below, and
Senior Notes due 2008 prior to December 15, 2000 and June 15, 2001,
respectively, at prices equal to 111.50% of the principal amount of the 11.5%
Senior Notes due 2007, and 110.875% of the principal amount of the Senior Notes
due 2008, plus other amounts, with the net cash proceeds of public equity
offerings of GTS (Europe) Ltd. or strategic equity investments of at least $50
million, provided that following such redemption at least 65% of the principal
amount of the notes remain outstanding.

                                        81
<PAGE>   83
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

     The debt obligations of GTS (Europe) Ltd. described above represent senior
obligations of GTS (Europe) Ltd. Because the holders of the GTS (Europe) Ltd
senior obligations described above have direct recourse to the assets of GTS
(Europe) Ltd., these debt obligations are structurally senior to the debt
obligations of GTS described above.

     Certain of the Company's consolidated ventures maintain credit facilities
for their local operations. Borrowings under such credit facilities bear
interest at the prevailing negotiated market rates.

     Aggregate maturities of long-term debt, as of December 31, 2000, are as
follows: 2001 -- $519.2 million, 2002 -- $9.7 million, 2003 -- $2.1 million,
2004 -- $2.2 million, 2005 -- $1.4 million and $1,683.8 million thereafter.

     The Company paid interest of $251.8 million, $186.9 million and $124.2
million in 2000, 1999, and 1998, respectively.

NOTE 8: FOREIGN CURRENCY TRANSACTIONS

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

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

NOTE 9: SHAREHOLDERS' EQUITY

COMMON STOCK

     On May 16, 2000, the Company's stockholders approved an increase in the
Company's authorized common stock from 270 million to 540 million shares.

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

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

     In February 1998, the Company completed an initial public offering of 25.6
million shares of common stock at $10.00 per common share (the "Stock
Offering"). The Stock Offering resulted in the Company's

                                        82
<PAGE>   84
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock being listed in the United States on the Nasdaq National Market.
Net proceeds from the Stock Offering were $235.2 million. In October 1999, GTS
began trading on the New York Stock Exchange.

     In February 1999 and June 1998, pursuant to previously issued and redeemed
debt obligations, warrants to purchase 116,260 and 6,666,666 common shares,
respectively, were exercised using a cash-less exercise. In addition, warrants
to purchase 8,772,626 shares of the Company's common stock, at an exercise price
of $4.67 per share, expire in the first and second quarters of 2002.

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

     The Company has reserved 94,485,391 shares of common stock for issuance
upon conversion of the exercise of outstanding stock options, warrants,
convertible bonds and similar dilutive rights.

PREFERRED STOCK

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

     On November 13, 2000 and on February 28, 2001, the Company announced that
the Board of Directors had determined that it was in the best interests of the
Company and all its shareholders to discontinue the payment of dividends on the
Preferred Stock. As of December 31, 2000, the cumulative unpaid dividends on the
Preferred Stock were $9.1 million. The Company's payment of dividends on the
Preferred Stock represents a non-cash item to the Company since the Company has
previously paid common stock dividends on the Preferred Stock. A market agent
has sold the dividended shares of common stock on behalf of a depositary to
provide the applicable cash payment to the Preferred Stock holders. The holders
of the Preferred Stock have no voting rights, except that upon the accumulation
of six full unpaid quarterly dividends (whether or not consecutive) the number
of members of the Company's Board of Directors will be immediately and
automatically increased by two and the holders of a majority of the outstanding
shares of Preferred Stock, voting together as a class, will be entitled to elect
two members to the Board of Directors of the Company.

NOTE 10: STOCK OPTION PLANS

     The Company applies the provisions of APB No. 25 in accounting for its
stock option incentive plans. The effect of applying SFAS No. 123 on the net
loss as reported is not representative of the effects on reported net loss for
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years. Had compensation expense been
determined in accordance with the methodology of SFAS No. 123, the Company's net
loss for the years ended December 31, 2000, 1999 and 1998 would have increased
by approximately $126 million, $46 million and $14 million, respectively.

     The Company maintains the 1992 Stock Option Plan, the 2000 Stock Option
Plan, the Non-Employee Directors Stock Option Plan and the GTS Equity
Compensation Plan (the "Option Plans"). As of December 31, 2000, the maximum
number of shares of common stock available for grant under the Option Plans was
68.0 million. Except for the Company's performance based options granted under
the 1992 stock option plan, options granted under the Option Plans issued prior
to June of 1999, generally vest over a three to
                                        83
<PAGE>   85
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

four-year period from the date of grant and expire ten years from the date of
grant. In 1996 and 1998, the Company had granted options with vesting terms that
provide for vesting within five and six years after the date of grant,
respectively, unless certain performance goals are met, in which case vesting
could occur over a shorter period of time. Effective June 1999, options granted
under the Option Plans generally vest over a three year term with one-third
vesting after one year and one thirty-sixth vesting each month thereafter.
Further, effective in mid 2000, options granted under the Option Plans generally
vest within 18 months after the date of grant. Upon a change of control, as
defined in the Option Plans, all options would immediately vest.

     The fair value of options granted under the GTS plans during 2000, 1999 and
1998 is estimated to be between $0.18 and $18.01, $1.20 and $38.05 and $8.26 and
$16.86 per common share, respectively, on the date of grant using the Black
Scholes option pricing model with the following assumptions: dividend yield of
0% and expected life of three to five years for all periods presented, risk free
interest rates of between 5.10% and 6.81% for 2000, between 4.57% and 6.32% for
1999 and between 4.19% and 5.64% for 1998, volatility of 100.0 for 2000 and .75
for 1999 and 1998 grants.

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

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                           ---------------------------------------------------------------------
                                   2000                    1999                    1998
                           ---------------------   ---------------------   ---------------------
                                        WEIGHTED                WEIGHTED                WEIGHTED
                                        AVERAGE                 AVERAGE                 AVERAGE
                                        EXERCISE                EXERCISE                EXERCISE
                             SHARES      PRICE       SHARES      PRICE       SHARES      PRICE
                           ----------   --------   ----------   --------   ----------   --------
<S>                        <C>          <C>        <C>          <C>        <C>          <C>
Outstanding at beginning
  of year................  24,070,415    $19.55    18,520,280    $ 8.93    15,449,514    $ 4.10
Options granted..........  44,457,671      4.02    12,820,630     28.32     9,235,842     13.44
Options exercised........   1,397,646      5.00     4,594,246      5.21     5,223,982      3.01
Options canceled or
  expired................  13,029,580     19.07     2,676,249     15.29       941,094      8.14
                           ----------              ----------              ----------
Outstanding at end of
  year...................  54,100,860      7.27    24,070,415     19.55    18,520,280      8.94
                           ==========              ==========              ==========
Options exercisable at
  year end...............   8,488,201    $13.92     4,461,025    $ 7.26     5,433,264    $14.35
</TABLE>

     The following table summarizes information about stock options outstanding:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                          ----------------------------------------   ----------------------
                                           WEIGHTED
                                            AVERAGE       WEIGHTED                 WEIGHTED
                                           REMAINING      AVERAGE                  AVERAGE
RANGE OF EXERCISE PRICE     NUMBER        CONTRACTUAL     EXERCISE     NUMBER      EXERCISE
AT DECEMBER 31, 2000:     OUTSTANDING   LIFE (IN YEARS)    PRICE     EXERCISABLE    PRICE
-----------------------   -----------   ---------------   --------   -----------   --------
<S>                       <C>           <C>               <C>        <C>           <C>
   $ 0.10 to $ 3.86       30,603,822          9.6          $ 1.01       372,376     $ 1.09
     3.86 to   7.72        2,335,640          4.6            5.42     2,091,267       5.23
     7.72 to  11.59       10,062,180          7.5            9.82     1,873,054       9.11
    11.59 to  15.49        3,581,347          6.7           12.72     1,485,480      12.90
    15.49 to  19.31          413,898          5.8           18.77       344,898      18.73
    19.31 to  23.17        1,039,166          7.2           20.98       399,667      21.31
    23.17 to  27.03          457,722          6.1           23.60       250,664      23.53
    27.03 to  30.90        4,800,297          7.1           28.42     1,198,107      27.76
    30.90 to  34.76          136,777          6.4           32.37        88,724      32.25
    34.76 to  38.62          659,761          6.5           37.86       443,964      37.95
</TABLE>

                                        84
<PAGE>   86
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition, prior to the establishment of the Option Plans, options were
granted to certain key employees to purchase 2,344,500 shares of the Company's
common stock at an exercise price of $0.265 per share. There are 167,321 and
388,256 of these options outstanding and fully exercisable at December 31, 2000
and 1999, respectively.

     In the fourth quarter of 2000, the Company issued 4,045,000 restricted
common shares to its employees, as a part of a retention program, that will
require the Company to recognize non-cash compensation costs within its
consolidated statement of operations. The Company has recognized non-cash
compensation costs associated with equity securities, restricted shares and
stock options, of $4.2 million, $3.1 million and $2.3 million during 2000, 1999
and 1998, respectively, and these amounts have been reflected as selling,
general and administrative expenses within its consolidated statement of
operations. In 2001, the Company anticipates that it will recognize a non-cash
compensation charge in the range of $15.0 million and $20.0 million.

EMPLOYEE STOCK PURCHASE PLAN

     In January 2000, the Company instituted an Employee Stock Purchase Plan
("ESPP"). The Company is authorized to issue approximately 1.5 million shares of
common stock to eligible employees. Under the terms of the ESPP, eligible
employees may authorize payroll deductions of up to 15% of their base
compensation, as defined, to purchase common stock at a price of 85% of the fair
market value of the Company's common stock on the last trading day of the month
in which the common stock is purchased. Approximately 0.1 million shares of
common stock have been issued for $0.4 million during 2000. As of December 31,
2000, approximately 1.4 million shares are available for issuance under this
plan.

NOTE 11: GTS EMPLOYEE BENEFIT PLAN

     The Company has a 401(k) retirement savings plan (the "Savings Plan")
covering all U.S. citizen employees. The Savings Plan qualifies under section
401(k) of the Internal Revenue Code and as such, participants may defer pretax
income in accordance with federal income tax limitations. The Company provides a
50% matching contribution on the first 5% contributed by the employee. The
Company may also, at its discretion, make non-matching contributions. Both
matching and non-matching contributions by the Company vest after three years of
service. The Company's expense under the Savings Plan was approximately $0.3
million for the year ended December 31, 2000 and $0.2 million for the years
ended December 31, 1999 and 1998. The Company made no discretionary
(non-matching) contributions for the years ended December 31, 2000, 1999 or
1998.

     With respect to certain GTS (Europe) Ltd. employees, the Company is
required to contribute a fixed percentage, based upon the salary earned, to the
employees' nominated pension insurance policy or other pension arrangements.
During the years ended December 31, 2000, 1999 and 1998, the Company incurred
expense of $5.5 million, $3.0 million and $1.9 million, respectively related to
these pension arrangements.

     GTS Europe B.V. established a pension plan in 1995 that covers all GTS
Europe B.V. employees upon twenty-five years of age and at least one year of
service. GTS Europe B.V. has entered into an insurance arrangement (an
investment contract) whereby an insurance provider has undertaken a legal
obligation to provide specific benefits to participants in return for a fixed
premium. As such, GTS Europe B.V. does not bear significant financial risk for
its pension plan. GTS Europe B.V.'s expense under the pension plan was $0.5
million, $1.8 million and $1.0 million for the years ended December 31, 2000,
1999 and 1998, respectively.

                                        85
<PAGE>   87
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12: INCOME TAXES

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

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                         -----------------------------
                                                           2000       1999      1998
                                                         ---------   -------   -------
                                                                 (IN MILLIONS)
<S>                                                      <C>         <C>       <C>
Pretax loss:
  Domestic.............................................  $  (359.5)  $(177.2)  $ (63.9)
  Foreign..............................................   (1,249.2)   (421.6)   (171.4)
                                                         ---------   -------   -------
                                                         $(1,608.7)  $(598.8)  $(235.3)
                                                         =========   =======   =======
</TABLE>

     For the years ended December 31, 2000, 1999 and 1998, the Company recorded
$6.6 million, $17.9 million and $7.8 million, respectively, in income tax
expense that related exclusively to its current provision for foreign taxes. In
addition, for the years ended December 31, 2000, 1999 and 1998, the Company paid
taxes of $9.2 million, $11.3 million and $4.0 million, respectively.

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

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     1999     1998
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Taxes at U.S. statutory rates...............................   35.0%    35.0%    35.0%
Foreign income taxes........................................    0.4      3.0      3.3
Foreign operating losses generating no tax benefit..........  (27.2)   (24.6)   (25.5)
Domestic operating losses generating no tax benefit.........   (7.8)   (10.4)    (9.5)
                                                              -----    -----    -----
                                                                0.4%     3.0%     3.3%
                                                              =====    =====    =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              ----------------
                                                               2000      1999
                                                              -------   ------
                                                               (IN MILLIONS)
<S>                                                           <C>       <C>
Deferred Tax Assets:
  Net operating loss carry-forwards.........................  $ 101.0   $ 64.3
  Other deferred tax assets.................................     12.5     11.0
                                                              -------   ------
Net deferred tax asset......................................    113.5     75.3
  Less: valuation allowance.................................   (113.5)   (75.3)
                                                              -------   ------
          Total.............................................  $    --   $   --
                                                              -------   ------
</TABLE>

     As of December 31, 2000, the Company had net operating loss carry-forwards
("NOL's") for U.S. federal income tax purposes of approximately $288.6 million
expiring in fiscal years 2004 through 2020. Because of the "change in ownership"
provisions of the Tax Reform Act of 1986, the utilization of the Company's net
operating loss carry-forwards may be subject to an annual limitation.

     As of October 1, 1999, the U.S. companies of Golden Telecom are no longer
included in the consolidated U.S. tax return of the Company as the Company owns
less than 80% of Golden Telecom companies. Upon the

                                        86
<PAGE>   88
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

initial public offering of Golden Telecom shares, Golden Telecom was allocated
$23.6 million previous NOL's.

NOTE 13: COMMITMENTS AND CONTINGENCIES

LEASES

     The Company has entered into various lease agreements, primarily fiber
optic cable. The obligations extend through 2023. Most of the leases contain
renewal options of one to twelve years. Assets under capital leases are included
in the consolidated balance sheets as follows:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2000     1999
                                                              ------   ------
                                                               (IN MILLIONS)
<S>                                                           <C>      <C>
Telecommunications equipment and other assets...............  $543.4   $395.8
  Less: accumulated depreciation............................    82.5     47.1
                                                              ------   ------
                                                              $460.9   $348.7
                                                              ======   ======
</TABLE>

     Rental expense for operating leases aggregated $26.8 million, $23.4 million
and $9.9 million for the years ended December 31, 2000, 1999 and 1998,
respectively.

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

<TABLE>
<CAPTION>
                                                              CAPITAL   OPERATING
                                                              LEASES     LEASES
                                                              -------   ---------
                                                                 (IN MILLIONS)
<S>                                                           <C>       <C>
December 31, 2001...........................................  $ 65.6     $ 25.2
  2002......................................................    59.6       24.7
  2003......................................................    58.8       20.2
  2004......................................................    57.6       16.7
  2005......................................................    56.7       13.4
Thereafter..................................................   384.9       61.3
                                                              ------     ------
          Total minimum lease payments......................   683.2     $161.5
                                                                         ======
Less amount representing interest...........................   306.4
                                                              ------
Present value of net minimum lease payments.................   376.8
Less current portion of capital lease obligations...........    33.1
                                                              ------
Long-term portion of capital lease obligations..............  $343.7
                                                              ======
</TABLE>

OTHER COMMITMENTS AND CONTINGENCIES

     As of December 31, 2000, the Company's has future purchase commitments
amounting to $120.5 million that is principally related to the build out of the
Ebone network. Included within the $120.5 million, is the Company's remaining
$40 million commitment relating to our dark fiber capacity purchase from FLAG
Atlantic, the Company's former joint venture with FLAG Telecom. The $40 million
commitment is reflected as restricted cash within our consolidated balance sheet
since the amount is held in a bank escrow account.

     In the ordinary course of business, the Company has issued financial
guarantees on debt and equities for the benefit of certain of its consolidated
ventures. The total amount guaranteed at December 31, 2000 was approximately
$38.2 million.

                                        87
<PAGE>   89
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

TAX MATTERS

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

OTHER MATTERS

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

NOTE 14: RELATED PARTY TRANSACTIONS

     In connection with his resignation effective September 18, 2000 (the
"Effective Date") as Chief Executive Officer and as Chairman and a member of the
Board of Directors, H. Brian Thompson and the Company entered into a general
release and severance agreement (the "Severance Agreement"). In settlement of
any obligations under his employment agreement, the Company agreed to pay Mr.
Thompson $3,448,178 as called for under the terms of his employment agreement.
Of this amount, $862,044 was paid in accordance with the Company's normal
payroll between the Effective Date and year-end 2000. The Company will pay the
balance in 18 installments of $143,674 in accordance with the Company's normal
payroll after December 31, 2000. The Company also agreed to provide Mr. Thompson
with any employee benefits and perquisites in which he was participating or
receiving on the Effective Date until the earlier of two years from the
Effective Date or his receipt of comparable benefits from a successor employer,
as provided in his Employment Agreement. In addition, the Company agreed to
accelerate vesting of options to acquire Common Stock originally granted to him
in May 2000 to acquire (i) 100,000 of Common Stock at an exercise price of $9.63
per share and (ii) 600,000 shares of Common Stock at an exercise price of $10.50
per share.

     In April 1999, at the time of his employment by the Company, the Company
loaned Mr. Thompson $10 million to purchase 368,028 shares of Common Stock. The
terms of this loan were amended in connection with the Severance Agreement. The
amended loan is due on April 6, 2005, bears interest at the federal mid-term
rate and is secured with the Company's shares purchased with the proceeds of the
loan and is reflected as a non-current asset within our consolidated balance
sheet. Further, in connection with the Severance Agreement, Mr. Thompson has
agreed to provide consulting services (the "Consulting Agreement") to the
Company and the term of Consulting Agreement is consistent with the maturity of
the term loan described above and the amounts that the Company is obligated to
pay Mr. Thompson pursuant to the Consulting Agreement is equal to the amount of
interest that Mr Thompson will owe to the Company on an annual basis associated
with the outstanding loan.

     During 2000, Gerald W. Thames, a director of the Company, exercised
non-qualified options to purchase shares of the Common Stock. Mr. Thames
borrowed funds from a brokerage firm in order to pay the exercise price and the
tax liabilities resulting from such exercise. The shares of our common stock
resulting from such exercise served as collateral for his margin loan.
Subsequently, the market price of the Common Stock declined and, consequently,
the brokerage firm required Mr. Thames to reduce the size of the loan or
increase the collateral securing it. Upon review, the Company's Board deemed it
in the best interest of the Company to loan Mr. Thames $2.5 million in April
2000 to repay the margin loan. The loan is due December 31, 2005, bears an
interest rate of 8% per annum and is reflected as a non-current asset within our
balance sheet.
                                        88
<PAGE>   90
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15: INVESTMENTS IN AND ADVANCES TO VENTURES

     The Company has various investments in ventures that are accounted for by
the equity method. The Company's ownership percentages in its equity method
investments range from 23% to 75%. The Company has no investments in ventures
that are accounted for by the cost method.

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

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              -------------
                                                              2000    1999
                                                              -----   -----
                                                              (IN MILLIONS)
<S>                                                           <C>     <C>
Equity in net assets acquired...............................  $11.5   $14.7
Excess of investment cost over equity in net assets acquired
  net of amortization of $3,476.............................     --     3.5
Accumulated earnings recognized.............................   28.0     8.8
Dividends...................................................   (2.5)   (1.5)
Cash advances and other.....................................   10.7    35.1
                                                              -----   -----
          Total investments in and advances to ventures.....  $47.7   $60.6
                                                              =====   =====
</TABLE>

     In applying the equity method of accounting, the Company's policy is to
amortize the excess of investment cost over equity in net assets acquired based
upon an assignment of the excess to the fair value of the venture's identifiable
tangible and intangible assets, with any unassigned amounts designated as
goodwill. The Company then amortizes the allocated costs in accordance with its
policies defined in Note 4, "Summary of Significant Accounting Policies."

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

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

INVESTMENT RECOVERABILITY

     The Company periodically evaluates the recoverability of its equity
investments, in accordance with APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock," and if circumstances arise where a loss in value
is considered to be other than temporary, the Company will record a write-down
of excess investment cost. The Company's recoverability analysis is based on the
projected undiscounted cash flows of the operating ventures, which is the lowest
level of cash flow information available. The Company recorded no such
write-offs during the years ended December 31, 2000, 1999 and 1998.

  FLAG Atlantic Limited

     As mentioned in Note 4, on October 31, 2000, the Company announced that it
has reached an agreement whereby it planned to sell its 50% equity interest in
FLAG Atlantic Limited to FLAG Telecom while retaining ownership over certain
infrastructure, including the dedicated fiber pair on the FLAG Atlantic-1
transatlantic link, previously purchased from the joint venture. FLAG Atlantic
Limited was a 50/50 joint venture established by the Company and FLAG Telecom to
build FLAG Atlantic-1, a major subsea fiber network connecting the US and
Europe. Further, in October 2000, prior to the closing of the Company's sale

                                        89
<PAGE>   91
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of its equity interest in FLAG Atlantic Limited, the Company made its required
$100 million equity contribution into the joint venture.

     Under the terms of the sale agreement, the Company received $130 million in
cash from FLAG Telecom in the fourth quarter with the balance of the purchase
price, $5 million, to be received upon the resolution of certain regulatory
matters. The Company currently anticipates that it will receive the remaining $5
million of consideration in the second quarter of 2001. Further, the Company
recognized a gain of $31.3 million in 2000 as a result of its sale of its
investment interest in the joint venture.

     The following tables present condensed financial information of the
Company's ventures that are accounted for by the equity method of accounting as
of December 31, 2000, 1999 and 1998 (in millions):

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
EQUITY METHOD ENTITIES                                        2000     1999     1998
----------------------                                       ------   ------   ------
<S>                                                          <C>      <C>      <C>
Revenue....................................................  $117.3   $115.4   $201.1
Gross margin...............................................    60.2     55.1     82.0
Net income (loss)..........................................     4.6     (6.6)    (0.7)
Current assets.............................................    46.0    184.5     58.0
Total assets...............................................   217.2    357.2    178.4
Current liabilities........................................    97.1     43.8     78.0
Total liabilities..........................................   116.3    294.0    114.2
</TABLE>

NOTE 16: SEGMENT INFORMATION AND CERTAIN GEOGRAPHICAL DATA

     The Company's segments are business units that offer telecommunication
products and service offerings, that include, the provision of broadband,
internet, data and voice services to its customers, which are currently being
managed separately. Transactions among segments are reported at the approximate
fair value and the accounting policies of the segments are the same as those
discussed in Note 4, "Summary of Significant Accounting Policies".

     The business segments that we are presenting below reflect the Company's
November 2000 announcement to restructure itself so that its primary focus is to
provide broadband services to traditional carriers, Internet service providers
("ISPs"), application service providers ("ASPs"), other Web-centric entities and
data intensive pan-European corporations. Accordingly, we now have four
reportable segments (Business Services, Ebone, Golden Telecom and Central
Europe) and a Corporate segment that will be absorbed into Ebone upon the
completion of the Company's restructuring and sale of businesses activities.

                                        90
<PAGE>   92
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Information about the Company's segments is as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                        -------------------------------
                                                          2000        1999       1998
                                                        ---------   --------   --------
                                                                 (IN MILLIONS)
<S>                                                     <C>         <C>        <C>
Revenue:
  Business Services...................................  $   524.0   $  428.8   $  182.5
  Ebone...............................................      378.6      304.4       85.2
  Central Europe......................................       59.6       29.9       18.9
  Golden Telecom......................................      113.1       97.9       86.1
  Corporate/Eliminations..............................      (51.8)      (8.8)      (0.3)
                                                        ---------   --------   --------
Total Revenue.........................................    1,023.5      852.2      372.4
(Loss) income from operations:
  Business Services...................................   (1,073.4)    (369.7)     (73.4)
  Ebone...............................................      (19.0)      90.5      (14.8)
  Central Europe......................................        0.3       (2.6)      (2.3)
  Golden Telecom......................................      (15.1)     (31.6)     (19.5)
  Corporate...........................................     (334.8)    (120.3)     (33.7)
                                                        ---------   --------   --------
Total loss from operations............................   (1,442.0)    (433.7)    (143.7)
Unallocated other expense:
  Interest expense, net...............................     (165.4)    (134.6)     (71.0)
  Other expense, net..................................       (1.3)     (30.5)     (20.6)
                                                        ---------   --------   --------
     Loss before income taxes.........................   (1,608.7)    (598.8)    (235.3)
Assets:
  Business Services...................................    1,970.1    1,084.3      711.1
  Ebone...............................................    2,703.3    1,902.5      741.7
  Central Europe......................................      153.9       79.8       44.8
  Golden Telecom......................................      348.5      366.6      235.8
  Corporate/Eliminations..............................   (2,342.0)     568.6      881.2
                                                        ---------   --------   --------
Total assets..........................................    2,833.8    4,001.8    2,614.6
Capital expenditures:
  Business Services...................................       87.7       77.9       60.1
  Ebone...............................................      472.7      249.8      131.9
  Central Europe......................................       36.1       20.1       16.9
  Golden Telecom......................................       37.1       22.1       18.7
  Corporate...........................................      139.8       16.1        3.4
                                                        ---------   --------   --------
Total capital expenditures............................      773.4      386.0      231.0
</TABLE>

EURO (E) QUARTERLY FINANCIAL DATA (UNAUDITED)

     Due to the significance of the Company's activities that are transacted in
the Euro (E) foreign currency, the Company believes that it is appropriate to
provide supplemental Euro reporting currency financial results for its business
segments.

     Further, as previously discussed within Note 4, "Summary of Significant
Accounting Policies -- Foreign Currency Translation" the Company has determined
that the Euro (E) foreign currency is a more appropriate reporting currency for
its 2001 SEC reported consolidated financial statements and disclosures.

                                        91
<PAGE>   93
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Accordingly, the following (Unaudited) table reflects the Company's
financial results, for the periods presented, with the Euro as the reporting
currency as compared to the US Dollar:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                       -------------------------------
                                                         2000        1999       1998
                                                       ---------   --------   --------
                                                                (IN MILLIONS)
<S>                                                    <C>         <C>        <C>
Revenue:
  Business Services..................................  E   567.9   E  404.8   E  163.9
  Ebone..............................................      410.3      287.3       76.5
  Central Europe.....................................       65.5       28.2       17.0
  Golden Telecom.....................................      122.5       92.4       77.3
  Corporate/Eliminations.............................      (56.2)      (8.3)      (0.3)
                                                       ---------   --------   --------
Total Revenue........................................    1,110.0      804.4      334.4
(Loss) income from operations:
  Business Services..................................   (1,182.2)    (348.5)     (65.9)
  Ebone..............................................      (25.1)      85.3      (13.3)
  Central Europe.....................................        0.4       (2.4)      (2.1)
  Golden Telecom.....................................      (16.0)     (29.7)     (17.5)
  Corporate..........................................     (370.7)    (113.6)     (30.3)
                                                       ---------   --------   --------
Total loss from operations...........................   (1,593.6)    (408.9)    (129.1)
Unallocated other expense:
  Interest expense, net..............................     (179.8)    (126.8)     (63.8)
  Other expense, net.................................        1.5      (28.3)     (18.5)
                                                       ---------   --------   --------
     Loss before income taxes........................   (1,771.9)    (564.0)    (211.4)
Assets:
  Business Services..................................    2,091.2    1,098.7      606.8
  Ebone..............................................    2,869.5    1,927.7      632.9
  Central Europe.....................................      163.4       80.8       38.2
  Golden Telecom.....................................      369.9      371.5      201.3
  Corporate/Eliminations.............................   (2,485.9)     575.9      752.0
                                                       ---------   --------   --------
Total assets.........................................    3,008.1    4,054.6    2,231.2
Capital expenditures:
  Business Services..................................       95.5       78.9       51.3
  Ebone..............................................      514.6      253.1      112.5
  Central Europe.....................................       39.3       20.4       14.5
  Golden Telecom.....................................       40.4       22.4       17.7
  Corporate..........................................      152.2       16.3        1.2
                                                       ---------   --------   --------
Total capital expenditures...........................      842.0      391.1      197.2
</TABLE>

                                        92
<PAGE>   94
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED)

     Summarized quarterly financial data is as follows:

<TABLE>
<CAPTION>
                                     FIRST    SECOND     THIRD     FOURTH
                                    QUARTER   QUARTER   QUARTER    QUARTER    TOTAL YEAR
                                    -------   -------   -------   ---------   ----------
                                          (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                 <C>       <C>       <C>       <C>         <C>
2000
  Revenues........................  $ 251.7   $ 259.3   $ 259.8   $   252.7   $ 1,023.5
  Gross profit....................     97.1      98.5      95.6        87.8       379.0
  Net loss........................   (144.8)   (143.4)   (183.3)   (1,143.8)   (1,615.3)
                                    =======   =======   =======   =========   =========
Preferred dividend................     (9.1)     (9.0)     (9.1)       (9.1)      (36.3)
  Net loss applicable to common
     shareholders.................   (153.9)   (152.4)   (192.4)   (1,152.9)   (1,651.6)
                                    =======   =======   =======   =========   =========
Loss per common share:
  Net loss per share..............    (0.82)    (0.77)    (0.95)      (5.66)      (8.34)(a)
                                    =======   =======   =======   =========   =========
1999
  Revenues........................  $ 170.9   $ 200.3   $ 227.9   $   253.1   $   852.2
  Gross profit....................     68.4      87.0      87.7        85.4       328.5
  Net loss........................   (162.2)   (102.3)   (112.8)     (239.4)     (616.7)
                                    =======   =======   =======   =========   =========
Preferred dividend................       --      (7.6)     (9.1)       (9.0)      (25.7)
  Net loss applicable to common
     shareholders.................   (162.2)   (109.9)   (121.9)     (248.4)     (642.4)
                                    =======   =======   =======   =========   =========
Loss per common share:
  Net loss per share..............    (1.00)    (0.66)    (0.70)      (1.38)      (3.76)(a)
                                    =======   =======   =======   =========   =========
</TABLE>

EURO (E) QUARTERLY FINANCIAL DATA

     Due to the significance of the Company's activities that are transacted in
the Euro (E) foreign currency, the Company believes that it is appropriate to
provide supplemental Euro reporting currency financial results.

     Further, as previously discussed within Note 4, "Summary of Significant
Accounting Policies -- Foreign Currency Translation" the Company has determined
that the Euro (E) foreign currency is a more appropriate reporting currency for
its 2001 SEC reported consolidated financial statements and disclosures.

                                        93
<PAGE>   95
                            GLOBAL TELESYSTEMS, INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Accordingly, the following table reflects the Company's financial results,
for the periods presented, with the Euro as the reporting currency as compared
to the US Dollar:

<TABLE>
<CAPTION>
                                   FIRST    SECOND     THIRD     FOURTH
                                  QUARTER   QUARTER   QUARTER    QUARTER    TOTAL YEAR
                                  -------   -------   -------   ---------   ----------
                                        (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                               <C>       <C>       <C>       <C>         <C>
2000
  Revenues......................  E 255.0   E 277.3   E 286.9   E   290.8   E 1,110.0
  Gross profit..................     98.4     105.3     106.0       100.7       410.4
  Net loss......................   (146.7)   (153.4)   (213.2)   (1,265.6)   (1,778.9)
                                  =======   =======   =======   =========   =========
Preferred dividend..............     (9.2)     (9.7)    (10.0)      (10.5)      (39.4)
  Net loss applicable to common
     shareholders...............   (155.9)   (163.1)   (223.2)   (1,276.1)   (1,818.3)
                                  =======   =======   =======   =========   =========
Loss per common share:
  Net loss per share............    (0.83)    (0.82)    (1.11)      (6.26)      (9.18)(a)
                                  =======   =======   =======   =========   =========
1999
  Revenues......................  E 153.8   E 189.5   E 217.2   E   243.9   E   804.4
  Gross profit..................     61.5      82.3      83.6        82.4       309.8
  Net loss......................   (146.0)    (96.9)   (107.6)     (230.4)     (580.9)
                                  =======   =======   =======   =========   =========
Preferred dividend..............       --      (7.1)     (8.6)       (8.7)      (24.4)
  Net loss applicable to common
     shareholders...............   (146.0)   (104.0)   (116.2)     (239.1)     (605.3)
                                  =======   =======   =======   =========   =========
Loss per common share:
  Net loss per share............    (0.90)    (0.62)    (0.67)      (1.33)      (3.52)(a)
                                  =======   =======   =======   =========   =========
</TABLE>

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

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

                                        94
<PAGE>   96

                 REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS GLOBAL TELESYSTEMS, INC.

     We have audited the accompanying consolidated balance sheets of Global
TeleSystems, Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, cash flows, and shareholders' equity for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the 1998 financial
statements of Global TeleSystems (Europe) Ltd., wholly-owned a subsidiary, which
statements reflect total revenues of constituting 47.5% of the related
consolidated totals. Those financial statements and schedule were audited by
other auditors whose report has been furnished to us, and our opinion insofar as
it relates to data included for Global TeleSystems (Europe) Ltd., is based
solely on the report of the other auditors.

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

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

                                                       ERNST & YOUNG

London, England
April 5, 2001

                                        95
<PAGE>   97

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 regarding Directors and Executive Officers appears in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
relating to the Company's Annual Meeting of Stockholders on June 14, 2001 and is
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

     Information regarding this item appears in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A relating to the Company's
Annual Meeting of Stockholders on June 14, 2001 and is incorporated by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information regarding this item appears in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A relating to the Company's
Annual Meeting of Stockholders on June 14, 2001 and is incorporated by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information regarding this item appears in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A relating to the Company's
Annual Meeting of Stockholders on June 14, 2001 and is incorporated by
reference.

                                    PART IV

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

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

          1  Financial Statements

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

        - Report of Ernst & Young, Independent Auditors

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

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

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

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

        - Notes to Consolidated Financial Statements

          2  Consolidated Financial Statement Schedules

          We have furnished Schedule II -- Valuation and Qualifying Accounts on
     Page 91.

                                        96
<PAGE>   98

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

     b) Reports on Form 8-K

<TABLE>
<CAPTION>
DATE OF REPORT                                         SUBJECT OF REPORT
--------------                                         -----------------
<S>                                        <C>
November 13, 2000                          Announcement of Third Quarter 2000
                                           financial results.
November 13, 2000                          Announcement of Consent Solicitation of
                                           the Company's 97 7/8% Senior Notes due
                                           2005.
                                           The Company reached an agreement whereby
                                           it will sell its 50% stake in the FLAG
                                           Atlantic Limited joint venture to FLAG
                                           Telecom while retaining ownership over
                                           certain infrastructure, including a
                                           trans-Atlantic fiber pair.
</TABLE>

     c) Exhibits

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
          3.1**          -- Certificate of Incorporation of SFMT, Inc.
          3.2**          -- Certificate of Correction to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on October 8, 1993
          3.3**          -- Certificate of Ownership and Merger Merging San
                            Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
                            with the Delaware Secretary of State on November 3, 1993
          3.4**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on January 12, 1995
          3.5**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on February 22, 1995
          3.6**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc., filed with the
                            Delaware Secretary of State on October 16, 1996
          3.7**          -- By-laws of SFMT, Inc.
          3.8**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc., filed with the
                            Delaware Secretary of State on December 1, 1997
          3.9**          -- Form of Amended and Restated By-laws of Global
                            TeleSystems, Inc. supersedes By-laws of SFMT, Inc. filed
                            as Exhibit 3.7)
          3.10***        -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on January 29, 1998.
          3.11***        -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on February 9, 1998.
          3.12***        -- Certificate of Designation, of the Series A Preferred
                            Stock of the Company.
          3.13****       -- Certificate of Designation of the 7 1/4% Cumulative
                            Convertible Preferred Stock of Global TeleSystems, Inc.
          3.14+          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on June 18, 1999.
</TABLE>

                                        97
<PAGE>   99

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
          3.15*          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on May 16, 2000.
          4.1**          -- Form of Specimen Stock Certificate for Common Stock of
                            the Registrant
          4.2**          -- Indenture dated as of July 14, 1997 between the Company
                            and The Bank of New York (including the form of Senior
                            Subordinated Convertible Bond due 2000 as an exhibit
                            thereto)
          4.3**          -- Registration Rights Agreement, dated as of July 14, 1997,
                            between Global TeleSystems, Inc. and UBS Securities LLC.
          4.4**          -- Indenture dated as of August 19, 1997 between Hermes
                            Europe Railtel B.V. and The Bank of New York (including
                            the form of 11 1/2% Senior Note due 2007 as an exhibit
                            thereto)
          4.5**          -- Registration Rights Agreement dated as of August 19, 1997
                            between Hermes Europe Railtel B.V. and Donaldson, Lufkin
                            & Jenrette Securities Corporation, UBS Securities LLC,
                            and Lehman Brothers, Inc
          4.6**          -- Form of Rights Agreement between Global TeleSystems, Inc.
                            and The Bank of New York as Rights Agent.
          4.7**          -- Indenture dated as of February 10, 1998 between Global
                            TeleSystems, Inc. and The Bank of New York (including the
                            form of 9 7/8% Senior Notes due 2005 as an exhibit
                            thereto).
         10.1**          -- Senior Note Purchase Agreement, dated as of January 19,
                            1996, among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.1(a)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            June 6, 1996
         10.1(b)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            June 6, 1996
         10.1(c)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            July 23, 1996
         10.1(d)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            September 16, 1996
         10.1(e)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            July 11, 1997
         10.1(f)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            July 29, 1997
         10.1(g)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.2**          -- Registration Rights Letter Agreement, dated as of January
                            19, 1996, among Global TeleSystems, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
</TABLE>

                                        98
<PAGE>   100

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         10.3**          -- Warrant Agreement, dated as of January 19, 1996, among
                            Global TeleSystems, Inc., The Open Society Institute and
                            Chatterjee Fund Management, L.P.
         10.4**          -- Joint Venture Letter Agreement, dated January 19, 1996,
                            among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.5            -- Intentionally Omitted
         10.6**          -- Registration Rights Letter Agreement, dated June 6, 1996,
                            among the Company, The Open Society Institute, Winston
                            Partners II LDC and Winston Partners II LLC
         10.7**          -- Warrant Agreement, dated as of June 6, 1996, between
                            Global TeleSystems, Inc., The Open Society Institute,
                            Winston Partners II LDC and Winston Partners II LLC
         10.8**          -- Senior Note Purchase Agreement, dated as of February 2,
                            1996, between Global TeleSystems, Inc. and Emerging
                            Markets Growth Fund, Inc.
         10.8(a)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated June 6, 1996
                            (see Exhibit No. 10.1(b))
         10.8(b)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated June 6, 1996
         10.8(c)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated July 25, 1996
         10.8(d)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated September 10,
                            1996
         10.8(e)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated September 16,
                            1996
         10.8(f)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated December 30,
                            1996
         10.8(g)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated May 13, 1997
         10.8(h)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated June 20, 1997
         10.8(i)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated July 11, 1997
         10.8(j)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated July 21, 1997
</TABLE>

                                        99
<PAGE>   101

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         10.8(k)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated August 14, 1997
         10.8(l)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated September 29,
                            1997
         10.9**          -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems, Inc. and Emerging
                            Markets Growth Fund, Inc.
         10.10**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems, Inc. and Emerging Markets Growth
                            Fund, Inc.
         10.11*          -- Second Amended and Restated 2000 Stock Option Plan of
                            Global TeleSystems, Inc.
         10.12**         -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems, Inc. and Capital
                            International Emerging Markets Funds
         10.13**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems, Inc. and Capital International
                            Emerging Markets Funds
         10.14**         -- Restated and Amended Global TeleSystems, Inc.
                            Non-Employee Directors' Stock Option Plan
         10.15**         -- GTS-Hermes, Inc. 1994 Stock Option Plan
         10.16**         -- Restricted Stock Grant letter, dated as of January 1,
                            1995
         10.17*          -- Employment Agreement dated November 1, 2000 between the
                            Company and Robert J. Amman
         10.18*          -- Employment Agreement dated November 1, 2000 between the
                            Company and Robert A. Schriesheim
         10.19*          -- Employment Agreement dated November 1, 2000 between the
                            Company and Grier C. Raclin
         10.20           -- [reserved]
         10.21           -- [reserved]
         10.22**         -- SFMT, Inc. Equity Compensation Plan
         10.23**         -- Form of Non-Statutory Stock Option Agreement
         10.24**         -- Third Amended and Restated 1992 Stock Option Plan of
                            Global TeleSystems Inc. dated September 25, 1997
         10.25**         -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                            Option Grant
         10.26**         -- Agreement on the Creation and Functions of the Joint
                            Venture of EDN Sovintel, dated June 18, 1990
         10.27**         -- Stock Purchase Agreement among Global TeleSystems, Inc,
                            Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
                            Limited, and MTU-Inform, dated September 6, 1995
         10.28**         -- Certificate of Registration of Revised and Amended
                            Foundation Document in the State Registration of
                            Commercial Organizations, dated May 30, 1996
         10.29**         -- Agreement on the Creation and Functions of the Joint
                            Venture Sovam Teleport, dated May 26, 1992
         10.30**         -- Amended and Restated Joint Venture Agreement between GTS
                            Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
                            Erik Jennes, dated July 6, 1995
</TABLE>

                                       100
<PAGE>   102

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         10.31**         -- Amended and Restated Shareholders' Agreement between HIT
                            Rail B.V., GTS-Hermes, Inc., Nationale Maatschappu Der
                            Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
                            Hermes Europe Railtel B.V., dated July, 1997
         10.31(a)**      -- Shareholders' Agreement among the Hermes Europe Railtel
                            B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
                            Swed Carrier (incorporated by reference to Exhibit 10.1
                            to the Hermes Europe Railtel B.V.'s Registration
                            Statement on Form S-4 (File No. 333-37719) filed on
                            December 11, 1997) (supersedes the Amended and Restated
                            Shareholders' Agreement filed as Exhibit 10.31 to this
                            Registration Statement)
         10.32**         -- Company Agreement between The Societe National de
                            Financement, GTS S.A.M. and The Principality of Monaco,
                            dated September 27, 1995
         10.33**         -- Joint Venture Agreement between SFMT-Hungaro Inc. and
                            Montana Holding Vagyonkezelo Kft., dated December 23,
                            1993
         10.34**         -- Joint Venture and Shareholders' Agreement among Gerard
                            Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
                            and Microsystem Telecom Rt., dated August 5, 1994
         10.35**         -- Agreement on the Establishment of Limited Liability
                            Company between SFMT-Czech, Inc. and B&H s.r.o., dated
                            July 12, 1994
         10.36**         -- Formation of the Equity Joint Venture between GTS and
                            SSTIC, dated April 12, 1995
         10.37**         -- Contract to Establish the Sino-foreign Cooperative Joint
                            Venture Beijing Tianmu Satellite Communications
                            Technology Co., Ltd, amended, by and between China
                            International Travel Service Telecom Co., Ltd. and
                            American China Investment Corporation, dated March 27,
                            1996
         10.38**         -- Joint Venture Contract between GTS TransPacific Ventures
                            Limited and Shanghai Intelligence Engineering, Inc.,
                            dated March 28, 1996
         10.39**         -- Agreement between Global TeleSystems, Inc. and Cesia
                            S.A., dated June 21, 1997
         10.40**         -- Consulting Agreement between SFMT, Inc. and Alan B.
                            Slifka, dated March 1, 1994
         10.41**         -- Consulting Agreement between Global TeleSystems, Inc. and
                            Bernard J. McFadden, dated August 15, 1996
         10.42**         -- Consulting Agreement between CESIA S.A. and Hermes Europe
                            Railtel B.V., dated June 20, 1997
         10.43***        -- Key Employee Stock Option Plan of Hermes Europe Railtel
                            B.V.
         21.1*           -- List of Subsidiaries of the Registrant
         23.1*           -- Consent of Ernst & Young
         23.2*           -- Consent of PricewaterhouseCoopers
         23.3***         -- Report of PricewaterhouseCoopers Independent Accountants
         24.1*           -- Powers of Attorney (included on signature page to this
                            report)
</TABLE>

                                       101
<PAGE>   103

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

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

      * Filed herewith.

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

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

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

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

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

      + Incorporated by reference to the correpondingly numbered exhibit to the
        Company's Annual Report on Form 10-K for the Year Ended December 31,
        1999.

     d) Schedules

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

                                       102
<PAGE>   104

                                   SIGNATURES

     Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the County of
Arlington, Commonwealth of Virginia, on this 12th day of April, 2001

                                            GLOBAL TELESYSTEMS, INC.

                                            By:     /s/ ROBERT J. AMMAN
                                              ----------------------------------
                                              Name: Robert J. Amman
                                              Title:  Chairman and Chief
                                                Executive Officer

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 12th day of April, 2001.

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

                 /s/ ROBERT J. AMMAN                        Chairman and Chief Executive Officer
-----------------------------------------------------         (Principal Executive Officer)
                   Robert J. Amman

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

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

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

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

               /s/ BERNARD J. MCFADDEN                      Director
-----------------------------------------------------
                 Bernard J. McFadden

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

                  /s/ W. JAMES PEET                         Director
-----------------------------------------------------
                    W. James Peet
</TABLE>

                                       103
<PAGE>   105

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

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

                                                            Director
-----------------------------------------------------
                    Frank V. Sica

                  /s/ ADAM SOLOMON                          Director
-----------------------------------------------------
                    Adam Solomon

                                                            Director
-----------------------------------------------------
                  Gerald W. Thames
</TABLE>

                                       104
<PAGE>   106

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
               COL. A                   COL. B               COL. C               COL. D        COL. E
               ------                 ----------    ------------------------    ----------    ----------
                                                           ADDITIONS
                                                    ------------------------
                                      BALANCE AT    CHARGED TO    CHARGED TO                  BALANCE AT
                                      BEGINNING     COSTS AND       OTHER                        END
DESCRIPTION                           OF PERIOD      EXPENSES      ACCOUNTS     DEDUCTIONS    OF PERIOD
-----------                           ----------    ----------    ----------    ----------    ----------
<S>                                   <C>           <C>           <C>           <C>           <C>
Allowance for doubtful accounts at
  12/31/00..........................    44,137        31,464                      (4,415)       71,186
Allowance for doubtful accounts at
  12/31/99..........................     9,533        37,560                      (2,956)       44,137
Allowance for doubtful accounts at
  12/31/98..........................     6,474         7,474                      (4,415)        9,533
</TABLE>

                                       105
<PAGE>   107

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
          3.1**          -- Certificate of Incorporation of SFMT, Inc.
          3.2**          -- Certificate of Correction to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on October 8, 1993
          3.3**          -- Certificate of Ownership and Merger Merging San
                            Francisco/Moscow Teleport, Inc. into SFMT, Inc., filed
                            with the Delaware Secretary of State on November 3, 1993
          3.4**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on January 12, 1995
          3.5**          -- Certificate of Amendment to the Certificate of
                            Incorporation of SFMT, Inc., filed with the Delaware
                            Secretary of State on February 22, 1995
          3.6**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc., filed with the
                            Delaware Secretary of State on October 16, 1996
          3.7**          -- By-laws of SFMT, Inc.
          3.8**          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc., filed with the
                            Delaware Secretary of State on December 1, 1997
          3.9**          -- Form of Amended and Restated By-laws of Global
                            TeleSystems, Inc. supersedes By-laws of SFMT, Inc. filed
                            as Exhibit 3.7)
          3.10***        -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on January 29, 1998.
          3.11***        -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on February 9, 1998.
          3.12***        -- Certificate of Designation, of the Series A Preferred
                            Stock of the Company.
          3.13****       -- Certificate of Designation of the 7 1/4% Cumulative
                            Convertible Preferred Stock of Global TeleSystems, Inc.
          3.14+          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on June 18, 1999.
          3.15*          -- Certificate of Amendment to the Certificate of
                            Incorporation of Global TeleSystems, Inc. filed with the
                            Delaware Secretary of State on May 16, 2000.
          4.1**          -- Form of Specimen Stock Certificate for Common Stock of
                            the Registrant
          4.2**          -- Indenture dated as of July 14, 1997 between the Company
                            and The Bank of New York (including the form of Senior
                            Subordinated Convertible Bond due 2000 as an exhibit
                            thereto)
          4.3**          -- Registration Rights Agreement, dated as of July 14, 1997,
                            between Global TeleSystems, Inc. and UBS Securities LLC.
          4.4**          -- Indenture dated as of August 19, 1997 between Hermes
                            Europe Railtel B.V. and The Bank of New York (including
                            the form of 11 1/2% Senior Note due 2007 as an exhibit
                            thereto)
          4.5**          -- Registration Rights Agreement dated as of August 19, 1997
                            between Hermes Europe Railtel B.V. and Donaldson, Lufkin
                            & Jenrette Securities Corporation, UBS Securities LLC,
                            and Lehman Brothers, Inc
          4.6**          -- Form of Rights Agreement between Global TeleSystems, Inc.
                            and The Bank of New York as Rights Agent.
</TABLE>
<PAGE>   108

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
          4.7**          -- Indenture dated as of February 10, 1998 between Global
                            TeleSystems, Inc. and The Bank of New York (including the
                            form of 9 7/8% Senior Notes due 2005 as an exhibit
                            thereto).
         10.1**          -- Senior Note Purchase Agreement, dated as of January 19,
                            1996, among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.1(a)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            June 6, 1996
         10.1(b)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            June 6, 1996
         10.1(c)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            July 23, 1996
         10.1(d)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            September 16, 1996
         10.1(e)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            July 11, 1997
         10.1(f)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P., dated
                            July 29, 1997
         10.1(g)**       -- Amendment to Senior Note Purchase Agreement dated January
                            19, 1996 among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.2**          -- Registration Rights Letter Agreement, dated as of January
                            19, 1996, among Global TeleSystems, Inc., The Open
                            Society Institute and Chatterjee Fund Management, L.P.
         10.3**          -- Warrant Agreement, dated as of January 19, 1996, among
                            Global TeleSystems, Inc., The Open Society Institute and
                            Chatterjee Fund Management, L.P.
         10.4**          -- Joint Venture Letter Agreement, dated January 19, 1996,
                            among Global TeleSystems, Inc., The Open Society
                            Institute and Chatterjee Fund Management, L.P.
         10.5            -- Intentionally Omitted
         10.6**          -- Registration Rights Letter Agreement, dated June 6, 1996,
                            among the Company, The Open Society Institute, Winston
                            Partners II LDC and Winston Partners II LLC
         10.7**          -- Warrant Agreement, dated as of June 6, 1996, between
                            Global TeleSystems, Inc., The Open Society Institute,
                            Winston Partners II LDC and Winston Partners II LLC
         10.8**          -- Senior Note Purchase Agreement, dated as of February 2,
                            1996, between Global TeleSystems, Inc. and Emerging
                            Markets Growth Fund, Inc.
         10.8(a)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated June 6, 1996
                            (see Exhibit No. 10.1(b))
         10.8(b)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated June 6, 1996
</TABLE>
<PAGE>   109

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         10.8(c)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated July 25, 1996
         10.8(d)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated September 10,
                            1996
         10.8(e)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated September 16,
                            1996
         10.8(f)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated December 30,
                            1996
         10.8(g)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated May 13, 1997
         10.8(h)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated June 20, 1997
         10.8(i)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated July 11, 1997
         10.8(j)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated July 21, 1997
         10.8(k)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated August 14, 1997
         10.8(l)**       -- Amendment to Senior Note Purchase Agreement, dated as of
                            February 2, 1996, between Global TeleSystems, Inc. and
                            Emerging Markets Growth Fund, Inc., dated September 29,
                            1997
         10.9**          -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems, Inc. and Emerging
                            Markets Growth Fund, Inc.
         10.10**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems, Inc. and Emerging Markets Growth
                            Fund, Inc.
         10.11*          -- Second Amended and Restated 2000 Stock Option Plan of
                            Global TeleSystems, Inc.
         10.12**         -- Registration Rights Letter Agreement, dated as February
                            2, 1996, between Global TeleSystems, Inc. and Capital
                            International Emerging Markets Funds
         10.13**         -- Warrant Agreement, dated as of February 2, 1996, between
                            Global TeleSystems, Inc. and Capital International
                            Emerging Markets Funds
         10.14**         -- Restated and Amended Global TeleSystems, Inc.
                            Non-Employee Directors' Stock Option Plan
         10.15**         -- GTS-Hermes, Inc. 1994 Stock Option Plan
         10.16**         -- Restricted Stock Grant letter, dated as of January 1,
                            1995
         10.17*          -- Employment Agreement dated November 1, 2000 between the
                            Company and Robert J. Amman
         10.18*          -- Employment Agreement dated November 1, 2000 between the
                            Company and Robert A. Schriesheim
         10.19*          -- Employment Agreement dated November 1, 2000 between the
                            Company and Grier C. Raclin
         10.20           -- [reserved]
</TABLE>
<PAGE>   110

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         10.21           -- [reserved]
         10.22**         -- SFMT, Inc. Equity Compensation Plan
         10.23**         -- Form of Non-Statutory Stock Option Agreement
         10.24**         -- Third Amended and Restated 1992 Stock Option Plan of
                            Global TeleSystems Inc. dated September 25, 1997
         10.25**         -- GTS-Hermes 1994 Stock Option Grant, Non-Qualified Stock
                            Option Grant
         10.26**         -- Agreement on the Creation and Functions of the Joint
                            Venture of EDN Sovintel, dated June 18, 1990
         10.27**         -- Stock Purchase Agreement among Global TeleSystems, Inc,
                            Kompaniya "Invest-Project," Swinton Limited, GTS-Vox
                            Limited, and MTU-Inform, dated September 6, 1995
         10.28**         -- Certificate of Registration of Revised and Amended
                            Foundation Document in the State Registration of
                            Commercial Organizations, dated May 30, 1996
         10.29**         -- Agreement on the Creation and Functions of the Joint
                            Venture Sovam Teleport, dated May 26, 1992
         10.30**         -- Amended and Restated Joint Venture Agreement between GTS
                            Cellular, Tricor B.V., Gerard Essing, Ivan Laska, and
                            Erik Jennes, dated July 6, 1995
         10.31**         -- Amended and Restated Shareholders' Agreement between HIT
                            Rail B.V., GTS-Hermes, Inc., Nationale Maatschappu Der
                            Belgische Spoorwegen, Teleport B.V., AB Swed Carrier, and
                            Hermes Europe Railtel B.V., dated July, 1997
         10.31(a)**      -- Shareholders' Agreement among the Hermes Europe Railtel
                            B.V., GTS-Hermes Inc., HIT Rail B.V., SNCB/NMBS and AB
                            Swed Carrier (incorporated by reference to Exhibit 10.1
                            to the Hermes Europe Railtel B.V.'s Registration
                            Statement on Form S-4 (File No. 333-37719) filed on
                            December 11, 1997) (supersedes the Amended and Restated
                            Shareholders' Agreement filed as Exhibit 10.31 to this
                            Registration Statement)
         10.32**         -- Company Agreement between The Societe National de
                            Financement, GTS S.A.M. and The Principality of Monaco,
                            dated September 27, 1995
         10.33**         -- Joint Venture Agreement between SFMT-Hungaro Inc. and
                            Montana Holding Vagyonkezelo Kft., dated December 23,
                            1993
         10.34**         -- Joint Venture and Shareholders' Agreement among Gerard
                            Aircraft Sales and Leasing Company, SFMT-Hungaro Inc.,
                            and Microsystem Telecom Rt., dated August 5, 1994
         10.35**         -- Agreement on the Establishment of Limited Liability
                            Company between SFMT-Czech, Inc. and B&H s.r.o., dated
                            July 12, 1994
         10.36**         -- Formation of the Equity Joint Venture between GTS and
                            SSTIC, dated April 12, 1995
         10.37**         -- Contract to Establish the Sino-foreign Cooperative Joint
                            Venture Beijing Tianmu Satellite Communications
                            Technology Co., Ltd, amended, by and between China
                            International Travel Service Telecom Co., Ltd. and
                            American China Investment Corporation, dated March 27,
                            1996
         10.38**         -- Joint Venture Contract between GTS TransPacific Ventures
                            Limited and Shanghai Intelligence Engineering, Inc.,
                            dated March 28, 1996
         10.39**         -- Agreement between Global TeleSystems, Inc. and Cesia
                            S.A., dated June 21, 1997
         10.40**         -- Consulting Agreement between SFMT, Inc. and Alan B.
                            Slifka, dated March 1, 1994
         10.41**         -- Consulting Agreement between Global TeleSystems, Inc. and
                            Bernard J. McFadden, dated August 15, 1996
         10.42**         -- Consulting Agreement between CESIA S.A. and Hermes Europe
                            Railtel B.V., dated June 20, 1997
         10.43***        -- Key Employee Stock Option Plan of Hermes Europe Railtel
                            B.V.
</TABLE>
<PAGE>   111

<TABLE>
<CAPTION>
      DESIGNATION                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
         21.1*           -- List of Subsidiaries of the Registrant
         23.1*           -- Consent of Ernst & Young
         23.2*           -- Consent of PricewaterhouseCoopers
         23.3***         -- Report of PricewaterhouseCoopers Independent Accountants
         24.1*           -- Powers of Attorney (included on signature page to this
                            report)
         99.1******      -- Share Purchase Agreement dated April 2, 2001 among the
                            Company, as seller, and Alfa Bank Holdings, Capital
                            Global, Cavendish Nominees Limited, First NIS Regional
                            Fund. SICAV, as purchasers.
         99.2*           -- Form of Lock-Up Agreement dated as of March 27, 2001
                            between the Company, Global TeleSystem (Europe) Limited
                            and the Bondholder Group, and Summary of Terms thereto.
         99.3*           -- Supplemental Agreement dated April 6, 2001 relating to
                            the Facilities of up to US $550,000,000 (to be reduced to
                            E300,000,000) among Global TeleSystems Europe Holdings
                            B.V., Bank of America International Limited, Deutsche
                            Bank AG London and Dresdner AG London Branch, with Form
                            of Amended and Restated Loan Agreement for E300,000,000
                            Revolving Credit Facility with a Term Out Option.
</TABLE>

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

      * Filed herewith.

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

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

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

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

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

      + Incorporated by reference to the correpondingly numbered exhibit to the
        Company's Annual Report on Form 10-K for the Year Ended December 31,
        1999.