U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                      -------------------------------------

                                  FORM 10-K/A/2
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                         COMMISSION FILE NUMBER 0-24622

                          TELSCAPE INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

           TEXAS                                         75-2433637
  (State or other jurisdiction of                     (I.R.S. employer
  incorporation or organization)                     identification no.)
                                        
    2700 POST OAK BLVD., SUITE 1000
            HOUSTON, TEXAS                                  77056
(Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (713) 968-0968

       SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

         SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                    REDEEMABLE COMMON STOCK PURCHASE WARRANT
                                (TITLE OF CLASS)


                         COMMON STOCK ($.001 PAR VALUE)
                                (TITLE OF CLASS)

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

Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   Yes  [X]   No   [ ]

The aggregate market value of common stock held by non-affiliates of the
registrant (based on the closing price as reported on the NASDAQ Small Cap
Market on March 25, 1998, was approximately $52,000,000. Shares of common stock
held by each executive officer and director and by each stockholder affiliated
with a director have been excluded from this calculation because such persons
may be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes. The number of
outstanding shares of the registrant's Common Stock as of March 25, 1998 was
4,635,155.

                     DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement relating to the Annual Meeting of Stockholders
to be held on June 2, 1998 are incorporated by reference into Part III of this
report. Current Report on Form 8-K dated January 7, 1998 is incorporated by
reference into Item 3 of this report.
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                                TABLE OF CONTENTS
                                FORM 10-K REPORT
                                DECEMBER 31, 1997

                                                                            PAGE
Part I

      Item 1.      Business.                                                   1

      Item 2.      Properties.                                                13

      Item 3.      Legal Proceedings.                                         13


      Item 4.      Submission of Matters to a Vote of Security Holders.       13


Part II

      Item 5.      Market for Registrant's Common Equity and Related
                   Stockholder Matters.                                       14


      Item 6.      Selected Financial Data.                                   15

      Item 7.      Management's Discussion and Analysis of
                   Financial Condition and Results of Operations.             18

      Item 7a.     Quantitative and Qualitative Disclosures about 
                   Market Risk.                                               22

      Item 8.      Financial Statements and Supplementary Data.               23


      Item 9.      Changes in and Disagreements with Accountants
                   on Accounting and Financial Disclosure.                    47


Part III

      Item 10.     Directors and Executive Officers of the Registrant.        47

      Item 11.     Executive Compensation.                                    50


      Item 12.     Security Ownership of Certain
                   Beneficial Owners and Management.                          50


      Item 13.     Certain Relationships and Related Transactions.            50


      Item 14.     Exhibits, Financial Statement Schedules and Reports
                   on Form 8-K.                                               51
<PAGE>
   Certain statements in this Annual Report on Form 10-K made herein that are
not historical are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "estimates",
"will", "should", "plans", or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
These statements are based on numerous assumptions about future conditions that
could prove not to be accurate. Actual events, transactions and results may
materially differ from the anticipated events, transactions or results described
in such statements. Investors are cautioned that all forward-looking statements
are not guarantees of future performance and that actual results could vary
materially from those in the forward-looking statements. Investors are also
cautioned that forward-looking statements involve risks and uncertainties
including, without limitation, risks related to the effectiveness of
management's strategies and decisions, market acceptance of and demand for the
Company's products and services by customers, continued relationships with and
pricing dependence on third party suppliers, economic conditions, results of
financing efforts and regulatory approvals and developments. This report
identifies other factors that could cause such differences. No assurance can be
given that these are all of the factors that could cause actual results to vary
materially from the forward-looking statements. Statements with respect to
acquisitions and continued trends are forward-looking and involve risks and
uncertainties. Furthermore, the Company has significant operations in Mexico,
subjecting the Company to certain political and commercial risk. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect future events or circumstances.

                                    PART I

ITEM 1. BUSINESS.
                                   GENERAL

   Telscape International, Inc. (collectively with its subsidiaries, the
"Company") is an emerging, fully-integrated telecommunications company. The
Company supplies U.S.-originated international long distance services on a
wholesale and retail basis, via switched and dedicated networks, with an
emphasis on Latin America. In addition, the Company provides a full range of
systems integration and value-added telecommunications services in Mexico to
major public and private sector customers. Through organic growth and strategic
acquisitions, management believes that the Company is positioned as a premier
telecommunications company with a focus on international long distance and
value-added services. The Company is aggressively pursuing opportunities in
Latin America to establish relationships with local partners.

                                   HISTORY

   The Company was founded in 1992 with the objective of becoming a significant
participant in the emerging Eastern European telecommunications equipment market
through its 90% interest in Digital Telecommunications Systems/ZWUT, a Polish
limited liability company. In May 1996 the Company began shifting its strategic
focus to the provision of telecommunications services in Latin America. Revenues
from Poland during 1997 represented less than 5% of the Company's revenues. In
November 1996, the Company's name was changed from Polish Telephones and
Microwave Corporation to Telscape International, Inc. to more accurately reflect
the Company's overall strategy. This shift in strategic focus was completed in
December 1997 with the sale of the Polish subsidiary.

   In May 1996, the Company acquired all of the stock of Telereunion, Inc., a
Delaware corporation ("Telereunion") and 97% owner of Vextro de Mexico S. A. de
C.V. ("Vextro"). Vextro is a systems integration company, with an emphasis on
voice solutions, based in Mexico. In September 1996, Orion Communications, Inc.,
a U.S.-based reseller of long distance services ("Orion"), was merged into
Telscape USA, Inc., a subsidiary of the Company. The management capabilities
that came with the Orion merger enabled the Company to expand its strategy to
include international long distance.

   In July 1997, the Company acquired Integracion de Redes, S.A. de C.V.
("Integracion") of Mexico City, Mexico, a data and network integrator. The
acquisition of Integracion marked the Company's entry into the fast growing data
and network market. In October 1997, the Company acquired N.S.I., S.A. de C.V.
("N.S.I.") of Mexico City, Mexico, also a data and network integrator.
Management of the Company believes that these acquisitions, coupled with Vextro,
strategically position the Company in Mexico to address the technological
convergence of data, voice and video transmission. The Company is one of the
three largest systems integrators in Mexico.

   In January 1998, the Company added to its international long distance
operations the business of MSN Communications, Inc. ("MSN"), a leading provider
of prepaid telephone calling cards targeted at Hispanic communities in the
United States. The transaction adds a well-known brand name, TELEFIESTA, and a
retail distribution platform to the Company's business mix and the Company
intends to utilize that brand name in certain Latin American countries as
regulations and licenses permit.

   In March 1998, the Company purchased a license from the government of El
Salvador to provide inbound and outbound international long distance as well as
certain other telecommunications services. As mentioned above, the Company
intends to introduce TELEFIESTA in El Salvador and leverage off TELEFIESTA'S
brand name recognition that has developed in the El Salvadoran immigrant
community in the U.S.

                    INDUSTRY BACKGROUND AND MARKET DEMAND
OVERVIEW

    The international telecommunications industry is undergoing a period of
fundamental change that has resulted, and is expected to continue to result, in
significant growth in usage of international telecommunications services.
According to the World Telecommunication Development Report 1996/97 published by
the International Telecommunications Union ("ITU") on February 20, 1997 (the
"ITU Report"), the 1998 revenue of the global telecommunications industry is
projected to exceed $1 trillion. The industry can be divided into two sectors,
equipment, which accounts for almost one-fourth of the revenue, and services,
which accounts for the remainder. The entire industry has experienced dramatic
changes during the past decade as a result of significant growth in the use of
services and enhancements to technology. The industry is expecting similar
growth in revenue and traffic volume in the foreseeable future. This represents
compound annual growth rates of 10% and 15%, respectively. The ITU estimates
that the 1996 sales exceeded $100 billion for total cross-border
telecommunications services. The ITU projects that revenues from global
telecommunications services will exceed $900 billion in the year 2000.

    The Company believes that numerous factors have driven the growth in demand
for international telecommunications products and services. Those factors
include: (i) the globalization of the world's economies and the worldwide trend
toward deregulation of the telecommunications sector, (ii) declining prices and
a wider selection of products and services driven by greater competition
resulting from deregulation, (iii) increased telephone accessibility resulting
from technological advances and greater investment in telecommunications
infrastructure, including deployment of wireless networks, (iv) increased
international business and leisure travel, and (v) growth of computerized
transmission of voice and data information. These trends have sharply increased
the use of, and reliance upon, telecommunications products and services
throughout the world. The Company expects these trends to continue for the
foreseeable future.

    The growth in the use of telecommunications services, along with the rapidly
changing international telecommunications market has created a significant
opportunity for carriers such as the Company, that can offer high quality, low
cost comprehensive telecommunications products, systems and services offerings.
The Company believes that a high percentage of the world's businesses and
residential consumers continue to be subject to high prices with poor quality
and availability of service which have been characteristic of many Postal,
Telephone and Telegraph providers ("PTT"). Demand for improved service and lower
prices has created opportunities for private industry to compete in the
international telecommunications market and has spurred a broadening of products
and services. New technologies have contributed to improved quality and
increased transmission capacity and speed. The Company therefore believes that
recent and on-going deregulation and increasing access to telecommunications
facilities in emerging markets will bring a high level of growth in the demand
for telecommunications services outside the U.S., and particularly in Latin
America.

    By eroding the traditional monopolies held by PTTs, many of which are or
were wholly or partially government owned, deregulation is providing U.S.-based
providers the opportunity to negotiate more favorable agreements with both the
traditional PTTs and emerging foreign providers. In addition, deregulation in
certain foreign countries is enabling U.S.-based providers to establish local
switching and transmission facilities in order to terminate their own traffic
and begin to carry international long distance traffic originated in those
countries. Deregulation, privatization, the expansion of the resale market and
other trends influencing the international telecommunications market are
resulting in decreased termination costs, a proliferation of routing options,
and increased competition.

    Advances in technology have created multiple ways for telecommunications
carriers to provide customer access to their networks and services. Overall,
these changes have resulted in a trend towards bypassing traditional
international long distance operating agreements as international long distance
companies seek to operate more efficiently. In markets that have not deregulated
or are in the process of implementing deregulation, international long distance
carriers have used advances in technology to develop innovative alternative
methods to meet customer demand.

    Recent legislation and an agreement among countries with a significant
portion of the world's international long distance traffic are expected to lead
to increased liberalization of the majority of the world's telecommunication
markets. Specifically, the World Trade Organization ("WTO") Agreement created a
framework under which 96 countries committed to liberalize their
telecommunications laws to permit increased competition and, in most cases,
foreign ownership in their telecommunications markets, beginning in 1998; the
U.S. Telecommunications Act of 1996 established the parameters for the
implementation of full competition in the U.S. long distance industry; and the
European Union's Services Directive abolished exclusive rights for the provision
of voice telephony services throughout the EU and the Public Switch Telephone
Networks ("PSTN") of any member country of the EU by January 1, 1998.

    The Company believes that these initiatives, as well as other proposed
legislation and agreements, will provide increased opportunities for emerging
competitive carriers such as the Company to provide telecommunications services
in targeted markets. Deregulation has encouraged competition, which in turn has
prompted carriers to offer a wider selection of services and reduce prices. The
industry's projections for substantially increased international minutes of use
and revenue by 2000 are based in part on the belief that reduced pricing as a
result of deregulation and competition will result in a substantial increase in
the demand for telecommunications services in most markets.

LATIN AMERICA

    The telecommunications market in Latin America is undergoing a period of
deregulation, privatization, increased competition and rapid growth. Global
Telecommunications Traffic Statistics & Commentary 1997/98, published by
TeleGeography in November 1997 (the "TeleGeography Report"), reported that
growth in the demand for telecommunications services across Latin America in
1995-1996 increased at a rate of 13.6%, faster than the global average and
substantially faster than the increased in demand in Europe and Africa.

    The Company seeks to focus on the opportunities created by deregulation and
market growth in the rapidly changing international telecommunications markets
in Latin America. Countries in the Latin American region generally are
experiencing a solid period of economic, business, and infrastructure growth,
reduced inflation, and economic and political stability. Substantial
opportunities exist for providers of telecommunications equipment, system
integration, value-added services, and voice and data services as Latin American
countries move toward privatization and greater liberalization of their
telecommunications markets.

    The Company believes that the small to medium sized business segment is the
target market in many countries in Latin America for value-added services such
as teleconferencing, advanced facsimile, advanced phone, frame relay and
Asynchronous Transfer Mode ("ATM") and unified messaging. Unlike larger
businesses that have the resources and traffic volume to support the internal
development of a wide range of value-added services, developing and maintaining
such services is not economical for smaller businesses. Accordingly, to meet
these needs smaller businesses may either purchase such services or outsource
their telecommunications services to third parties specializing in such
services, such as the Company. The Company believes that its experience and
expertise in providing these services will enable it to compete in this market.

    The Company believes that it is well positioned to exploit these
opportunities by providing high quality, low-cost comprehensive
telecommunications services. As a rule, Latin American countries have extremely
low telephone density, and the markets have been subject to characteristically
inefficient, poor quality service, as well as the unavailability of new and
innovative systems and services. In addition, the Latin American markets in
which the Company is offering services or in which it seeks to compete generally
are characterized by a lack of fiber optic cable capacity. Existing
satellite-based capacity offers limited capability to meet the increasing demand
for high bandwidth applications in the Company's targeted countries in the
region. There exists a critical and growing demand for the type of high-quality,
innovative systems, products, and services that the Company is currently
providing and seeks to provide in expanding into its current markets and
exploiting the opportunities in new markets throughout Latin America.

    The Company believes that the Latin American region is poised for growth in
telecommunications usage based on the political and economic changes in many
Latin American countries that have modernized their economies, increased
transparency in business and governmental practice, and sustained strong
economic growth. In addition, telecommunications growth will be spurred as a
result of the recent and ongoing privatizations by many Latin American
governments of their previously state-owned telecommunications monopolies, as
well as ongoing liberalization of the regulatory frameworks in many countries in
the region to promote competition in telecommunications services.

   MEXICO

   As a result of legislation enacted in 1995, Mexico began the process of
opening its telecommunications market to competition. The monopoly of Telmex
ended in August 1996 when new long distance competitors were allowed to offer
services over their networks. In January 1997, Telmex was required to begin
providing interconnection services to these new competitors. Full competition
has been gradually spreading across the country during 1997. Like the U.S.
market in the early 1980's when long distance deregulation occurred, the Mexican
telecommunications market is poised for rapid expansion as barriers to
competition are removed and new technologies enter the marketplace.

      National and international long distance services were opened to
competition as of January 1, 1997, subject to the issuance of individual
concessions. Pure switched international resale is not allowed in Mexico to
date. Value-added services are fully open to competition and subject to a simple
registration process.

   Mexico has a growing marketplace that is undergoing deregulation. Several
factors have affected the Mexican economy after the signing of the North
American Free Trade Agreement ("NAFTA"), such as the currency devaluation in
late 1994, but since then, the peso has significantly stabilized against the
U.S. dollar and the Mexican economy has a pent-up demand that is causing
expansion of important markets like telecommunications. Mexico has one-third the
population of the United States, and management believes that the
telecommunications market in Mexico is growing in excess of 15% annually. The
telephone density (number of telephones per capita) is one-sixth that of the
United States. The overall market for telecommunications services in Mexico is
concentrated in three cities, namely Mexico City, Guadalajara and Monterrey,
where 65% of the country's usage resides.

   OTHER LATIN AMERICAN MARKETS

    Within Latin America, each such country has a different national regulatory
scheme and is in varying stages of deregulation. The requirements for the
Company to obtain the necessary approvals to offer value-added services and the
full range of telecommunications services, including voice telephony, vary from
country to country. Specifically, the Company has recently obtained the
authority to provide inbound and outbound international long distance as well as
certain other telecommunications services in El Salvador. The Company is also
exploring such opportunities in other Latin American countries.

                                   STRATEGY

    The Company believes that management's extensive international
telecommunications expertise, combined with its established reputation and
extensive operations in Mexico, will enable the Company to successfully identify
and capitalize on opportunities to penetrate other deregulating markets
throughout Latin America. Key elements in the Company's strategy include the
following:

       EXPAND MULTINATIONAL PRESENCE. The Company seeks to expand its
      international operations by cultivating relationships with local partners
      in Latin American markets. The Company believes that its ability to
      originate and terminate traffic in multiple markets in Latin America will
      allow it to benefit from the relatively high growth of U.S.-originated
      traffic terminating in Latin America, as well as traffic originating in
      Latin America.

       PROVIDE INTEGRATED SUITE OF SERVICE OFFERINGS. The Company seeks to
      provide its retail business customers with a comprehensive suite of
      telecommunications services, including systems integration (voice, video
      and data), call centers and audio and video conference calling. The
      Company believes that this strategy increases customer retention and
      improves profits per customer. Management believes that the Company is one
      of the few companies to offer a wide array of high quality and
      competitively priced telecommunications services to retail business
      customers in Mexico. These factors have enabled the Company to establish a
      customer base of more than 1,000 large and medium-sized businesses,
      including U.S. multinationals. The Company will continue to expand and
      market its value-added services offerings to increase margins and improve
      customer loyalty.

       PURSUE ACQUISITIONS, JOINT VENTURES AND STRATEGIC ALLIANCES. The Company
      intends to expand its business, increase its customer base, add network
      and circuit capacity, enter additional markets and develop new products
      and services through acquisitions, joint ventures and strategic alliances.
      The Company seeks to acquire interests in companies that have network
      facilities that complement those of the Company, new services or
      technologies and experienced management teams. Since the beginning of
      1996, the Company has completed five acquisitions, including the
      acquisition of data and network integration businesses in Mexico and a
      United States prepaid card provider focused on the U.S. Hispanic market.

       EXPAND NETWORK FACILITIES. The Company intends to continue to augment its
      network by investing in switching and transmission facilities where the
      volume of traffic justifies such investments. The Company believes that
      these investments will allow it to increase margins and profitability,
      ensure quality of service and enhance its service offerings.

       BUILD BRAND AWARENESS. The Company seeks to build brand awareness of its
      TELEFIESTA and TELEREUNION brands. The Company intends to use the
      TELEFIESTA brand name in additional Latin American countries as
      deregulation and market conditions permit. Management believes that it
      will be able to leverage the TELEFIESTA brand name with its U.S. customer
      base as it establishes termination arrangements in new international long
      distance markets throughout Latin America. Management intends to continue
      building the customer awareness of TELEREUNION in Mexico.

       GENERATE LOW COST INTERNATIONAL TRAFFIC. The Company provides wholesale
      services to other carriers, which enables the Company to increase its
      customer base and generate high volumes of international traffic while
      minimizing costs. By generating significant international traffic, the
      Company believes that it can negotiate reduced transmission rates based
      upon volume with underlying carriers and reduce costs of services as a
      percentage of revenues.

                            NETWORK AND OPERATIONS

SWITCHING FACILITIES

    The Company owns and operates switches in Houston, Mexico City and Lima,
Peru and is planning to install a number of switches in various Latin American
countries as the Company determines that the investment is justified. The
Company also has a partition agreement with a company in New York City that
utilizes a Nortel DMS 250. In addition, the Company is considering the
deployment of ATM switches from Newbridge Networks Corporation.

SATELLITE FACILITIES


   The Company plans to utilize satellite facilities to access certain Latin
American countries such as El Salvador. By the end of 1998, the Company
anticipates operating, either directly or through joint ventures, earth stations
in several major cities in Latin America. The Company will also be looking for
opportunities to acquire earth stations in the U.S.


NETWORK CAPACITY

    The Company purchases transmission services on a per minute basis and leases
transmission capacity on a fixed cost basis from a variety of carriers. The
Company is currently expanding its leased on-net capacity in an attempt to lower
costs in its largest distribution areas. The Company obtains private line
capacity from approximately five local, domestic and international carriers,
including MCI, WorldCom and IXC. The Company's agreements with these carriers
fix the private line cost for a minimum of one year. The Company's agreements
with these carriers provide that rates may fluctuate with rate change notice
periods varying from five days to one month. The variable nature of the cost of
services and many of the Company's contracts and agreements subject the Company
to the possibility of unanticipated cost increases and the loss of
cost-effective routing alternatives.

                            PRODUCTS AND SERVICES

INTERNATIONAL LONG DISTANCE

   WHOLESALE

   The Company serves the large and growing international long distance
telecommunications market as a wholesale provider of both switched and dedicated
services. The Company focuses its efforts on U.S.-originated traffic bound for
Latin America and a significant portion of the Company's revenues are being
derived from such business.

   RETAIL

   Through MSN, the Company is a leading provider of prepaid telephone calling
cards targeted at Hispanic communities in the United States. The Company sells
its services under the brand name TELEFIESTA, which is well-recognized in the
Hispanic community in the United States.

SYSTEMS INTEGRATION

   In Mexico, the Company is a fully-integrated systems integration provider.
The Company provides a broad range of voice, video and data solutions to major
public and private sector customers.

   VOICE SYSTEMS

   Since 1992, the Company has been one of five non-exclusive distributors in
Mexico of Nortel (Northern Telecom) telecommunications equipment. The Company
also distributes products of other leading manufacturers, including Centigram
and VTEL.

   DATA AND NETWORKING SYSTEMS

   The Company distributes, installs and maintains equipment in the data and
networking equipment market. The Company represents such data equipment
manufacturers as 3Com Corporation, Cisco, Nortel and Newbridge Networks.

   VALUE-ADDED SERVICES

   The Company was one of the first teleconferencing companies in Mexico and
launched one of the first conference call service bureaus in Mexico. Under the
name TELEREUNION, the Company offers the most comprehensive package of
teleconferencing products and services available in Mexico, including consulting
services for requirement detection, design, development and implementation of
specific teleconferencing applications; multipoint audioconferencing and
audiographics; design and implementation of videoconferencing rooms and design
and development of telecommunications projects for various teleconferencing
technologies.

   CALL CENTER SERVICES

   The Company's expanding presence in value-added telecommunications services
resulted in a five year, $20-$30 million outsourcing contract, signed in the
third quarter of 1997, with the United States Embassy in Mexico City. The system
is designed to automate the delivery of visa applications and enables callers to
request visa information from either a live operator or from an automated
touchtone system. The Company began implementing the system in December 1997 and
early results are very positive. In connection with this contract, the Company
established a call center in Mexico City, which the Company believes will serve
as a platform for additional growth.

                             MARKETING AND SALES

INTERNATIONAL LONG DISTANCE

   WHOLESALE

   The Company has a dedicated carrier resale effort. The Company markets
international outbound switched and dedicated services to Latin American
countries on a wholesale basis to other carriers through a direct sales effort.
At March 30, 1998, the Company had approximately 10 wholesale carrier agreements
in place. The Company intends to establish strategic relationships with entities
that have gateways to international destinations and, thus, provide a more
complete package of international rates to its customers. When appropriate, the
Company will establish in-country relationships for the termination of
international long distance.

   RETAIL

   The Company sells its prepaid calling card under the name TELEFIESTA. The
Company sells its cards through relationships with over thirty major wholesale
distributors nationwide. Since inception, the Company has focused on building a
substantial network of wholesale distributors which, in turn, sell to
sub-distributors and directly to retail outlets. The sub-distributors generally
sell only to retail outlets. Management estimates that TELEFIESTA prepaid phone
cards are being sold in over 25,000 independent retail outlets nationwide.

   The Company has targeted heavily populated metropolitan areas, with an
emphasis on areas with substantial Hispanic populations, which generate
significant international calling volume, in the development and expansion of
its distribution network. Many of the Company's distributors are members of such
Hispanic communities or otherwise have personal or business relationships in
such communities. In developing relationships with distributors, the Company
also focuses on expansion into new geographic and metropolitan areas, again with
an emphasis on those areas with substantial Hispanic community populations. The
Company believes that the success of its prepaid cards has created significant
brand loyalty and encourages distributors and retail outlets to actively market
the Company's products. The Company regularly provides distributors and retail
outlets with point of purchase advertising and explanatory materials, including
posters of various sizes presenting certain of the Company's current rates, and
detailed rate sheets.

SYSTEMS INTEGRATION

   The Company provides systems integration services, incorporating the sale of
voice and data networking equipment, through a combination of advertising, trade
shows, direct mail and telemarketing. The Company has historically utilized its
own direct sales force but recently started to develop a dealer network to
broaden its distribution channel. The Company's relationships in the voice and
data equipment business often lead to follow-on sales of advanced
telecommunications services, since many of the current customers have developed
confidence in the Company's ability to implement complex projects.
<PAGE>
                            CUSTOMERS AND SUPPLIERS

   INTERNATIONAL LONG DISTANCE

   During the year ended December 31, 1997, the Company derived revenues from a
single customer representing 56% of total revenues from wholesale international
telecommunications services and 28% of the Company's overall revenues. The
Company's customers are primarily other international carriers that are seeking
termination services in one or more Latin American countries. During the year
ended December 31, 1997, the Company made purchases from two suppliers of
telecommunications services, representing 45% and 44% of the Company's aggregate
telecommunications services for the year.

   SYSTEMS INTEGRATION

   The Company performs the vast majority of its systems integration business in
Mexico. During the year ended December 31, 1997, the Company derived revenues
from a single customer representing 14% of total revenues from systems
integration and 7% of the Company's overall revenues. During the year ended
December 31, 1997, the Company made purchases from one supplier of
telecommunications equipment representing 39% of the Company's aggregate
equipment purchases from that year.

                                 COMPETITION

INTERNATIONAL LONG DISTANCE

   The telecommunication services industry is intensely competitive. The Company
competes with other providers of prepaid cards and with providers of
telecommunications services in general. Many of the largest telecommunications
providers currently offer prepaid cards, in addition to the other
telecommunications services the Company is providing. As a service provider in
the long distance telecommunications industry, the Company competes with four
dominant providers, AT&T, MCI, Sprint and WorldCom, all of which are
substantially larger and have greater financial, technical, engineering,
personnel and marketing resources, longer operating histories, greater name
recognition and larger customer bases than the Company. The Company also
competes with smaller, emerging carriers in both the prepaid card retail market
and in the wholesale market, including IDT Corporation, Star Telecommunications,
Inc., Pacific Gateway Exchange, Inc., RSL Communications, SmarTalk Teleservices,
Inc., PT-1 Communications, Inc., FaciliCom International, Inc. and Telegroup,
Inc. To the extent the Company begins providing long distance service to
customers outside the U.S. market, it may compete with the large PTTs in those
respective markets.

   The telecommunications industry is rapidly evolving and subject to constant
technological change. The Company believes that existing competitors are likely
to continue to expand their service offerings and to develop new sales channels.
The ability of the Company to compete effectively in the telecommunications
services industry will depend in part upon the Company's continued ability to
develop additional products appealing to increasingly specialized segments of
the market for telecommunications service. The Company competes primarily on the
basis of price (particularly with respect to its sales to other carriers), and
also on the basis of customer service and its ability to provide a variety of
telecommunications products and services.

   Recent changes in the regulation of the telecommunications industry may
affect the Company's competitive position. The Telecommunications Act of 1996
("Telecommunications Act") is expected to open the long distance market to
competition from the Regional Bell Operating Companies ("RBOCs"). The entry of
these well-capitalized and well-known entities into the long distance market
likely will increase competition for long distance customers, including
customers who use prepaid cards to make long distance calls. The
Telecommunications Act also grants the Federal Communications Commission ("FCC")
the authority to deregulate other aspects of the telecommunications industry,
which in the future may, if authorized by the FCC, facilitate the offering of
telecommunications services by regulated entities, including the RBOCs, in
competition with the Company.

SYSTEMS INTEGRATION

   Among the Company's principal competitors in the Mexican systems integration
market are other distributors who sell the same products the Company sells, as
well as distributors of products that compete with the products the Company
sells. For instance, Lucent Technologies and Ericsson each have a substantial
presence in the Mexican market. Competition for equipment customers is based
primarily on price and quality of the equipment and services offered. The
Company believes that the price and quality of its equipment and services
generally compare favorably with those of its competitors. In addition, the
Company differentiates itself through its quality customer service.

   In 1994, Vextro was granted one of the few value-added licenses in Mexico to
provide teleconferencing and other interrelated services, which include the
resale of embedded domestic and international long distance services. However,
new regulations allow others to enter this market as both resellers and network
providers. In the former case, the competitors will be required to obtain a
permit similar to that of the Company, and in the latter, they will need a
concession from the Mexican government. A competitor may obtain a license
similar to that of Vextro's by meeting certain minimum requirements.

   There are numerous competitors in the call center services business in
Mexico, many of which have greater experience and financial resources than the
Company. However, the Company believes it differentiates itself on the basis of
its technological capabilities with respect to the equipment necessary to
establish an effective low cost call center solution and its superior customer
service.

                            GOVERNMENT REGULATION

GENERAL

    The global telecommunications industry is subject to international treaties
and agreements, and to laws and regulations which vary from country to country.
Enforcement and interpretation of these treaties, agreements, laws and
regulations can be unpredictable and are often subject to informal views of
government officials and ministries that regulate telecommunications in each
country. In certain countries, including certain of the Company's target Latin
American markets, such government officials and ministries may be subject to
influence by the local PTT. The Company has pursued and expects to continue to
pursue a strategy of providing its services to the maximum extent it believes,
upon consultation with counsel, to be permissible under applicable laws and
regulations. To the extent that the interpretation or enforcement of applicable
laws and regulations is uncertain or unclear, the Company's aggressive strategy
may result in the Company (i) providing services or using transmission methods
that are found to violate local laws or regulations or (ii) failing to obtain
approvals or make filings subsequently found to be required under such laws or
regulations. If the Company's interpretation of applicable laws and regulations
proves incorrect, it could lose, or be unable to obtain, regulatory approvals
necessary to provide certain of its services or to use certain of its
transmission methods. There can be no assurance that the Company will not be
subject to fines, penalties or other sanctions, including being denied the
ability to offer its products and services, as a result of violations regardless
of whether such violations are corrected. To the Company's knowledge, it is not
currently subject to any material regulatory inquiry or investigation.

    In certain countries where the Company operates or plans to operate, local
laws or regulations limit the ability of telecommunication companies to provide
telecommunications services in competition with state-owned or state-sanctioned
monopoly carriers. There can be no assurance that future regulatory, judicial,
legislative or political considerations will permit the Company to offer all or
any of its products and services in such countries, that regulators or third
parties will not raise material issues regarding the Company's compliance with
applicable laws or regulations, or that such regulatory, judicial, legislative
or political decisions will not have a material adverse effect on the Company.
If the Company is unable to provide the services which it presently provides or
intends to provide or to use its existing or contemplated transmission methods
due to its inability to obtain or retain the requisite governmental approvals
for such services or transmission methods, or for any other reason related to
regulatory compliance or lack thereof, such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations.

   On February 15, 1997 the United States and 68 other members of the WTO agreed
to open their respective telecommunications markets to competition and foreign
ownership and to adopt regulatory measures to protect market entrants against
anticompetitive behavior by dominant telephone companies pursuant to the WTO
Agreement. Although the Company believes that the WTO Agreement could provide
the Company with significant opportunities to compete in markets that were not
previously accessible, reduce its costs and provide more reliable services, it
could also provide similar opportunities to the Company's competitors. There can
be no assurance that the pro-competitive effects of the WTO Agreement will not
have a material adverse effect on the Company's business, financial condition
and results of operations or that members of the WTO will implement the terms of
the WTO Agreement.

UNITED STATES

    In the United States, to the extent that the Company offers services as a
carrier, the provision of the Company's services is subject to the provisions of
the Communications Act of 1934 (the "Communications Act"), the
Telecommunications Act and the regulations of the FCC thereunder. There can be
no assurance that future regulatory, judicial and legislative changes will not
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, to the extent that the interpretation or
enforcement of applicable laws and regulations is uncertain or unclear, the
Company's aggressive strategy may result in the Company (i) providing services
or using transmission methods that are found to violate the Communications Act
or FCC regulations or (ii) failing to obtain approvals or make filings
subsequently found to be required under such laws or regulations. If the
Company's interpretation of applicable laws and regulations proves incorrect, it
could lose, or be unable to obtain, regulatory approvals necessary to provide
certain of its services or to use certain of its transmission methods. There can
be no assurance that the Company will not be subject to fines, penalties or
other sanctions as a result of violations regardless of whether such violations
are corrected. There can be no assurance that if  interpretation of
applicable laws and regulations proves incorrect and/or if the Company is
subject to fines, penalties or other sanctions as a result, that these events
will not have a material adverse effect on the Company's business, financial
condition and results of operations.

    U.S. INTERNATIONAL LONG DISTANCE SERVICES

    The Company, to the extent that it offers services as a carrier, is subject
to FCC rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points, as well as to FCC rules which also regulate the manner in which
the Company's international services may be provided, including the
circumstances under which the Company may provide international switched
services by using private lines or route traffic through third countries. FCC
rules also require prior authorization before transferring control of or
assigning FCC authorizations, and impose various reporting and filing
requirements on companies providing international services under an FCC
authorization. The FCC also requires carriers such as the Company to report any
affiliations, as defined by the FCC, with foreign carriers. The Company is also
subject to the FCC's policy on i) private line resale, ii) transit and refile,
iii) tariff requirements for international long distance and iv) the
international settlements process. Failure to comply with the FCC's rules could
result in fines, penalties or forfeiture of the Company's FCC authorizations,
each of which could have a material adverse effect on the Company business,
financial condition and results of operations.

    As noted above, the FCC imposes on entities authorized to provide
telecommunications services prior approval requirements for "transfers of
control," including PRO FORMA transfers, acquisitions and securities issuances.
The Company did not obtain prior approval for its January 1998 acquisition of
MSN. MSN is a rapidly growing seller of prepaid cards that holds various state
and federal authorizations. The Company has filed the necessary papers with the
FCC seeking NUNC PRO TUNC (retroactive) approval of the transaction on the
grounds that the transaction serves certain important business needs of the
Company and enhances the Company's ability to market and provide services.
Although management is confident that the FCC will grant the NUNC PRO TUNC
approval, there can be no assurance that the FCC will grant the Company's
request for retroactive approval and/or will not impose fines, license
conditions, commence revocation proceedings or otherwise exercise their
authority to address violations of FCC regulations.

    U.S. DOMESTIC LONG DISTANCE SERVICES

    Until the acquisition of MSN, the Company provided an insignificant amount
of domestic long distance services. Management estimates that approximately 30%
of the traffic generated with the TELEFIESTA prepaid calling card is domestic
long distance. The Company's ability to provide domestic long distance service
in the United States is subject to regulation by the FCC and relevant state
Public Service Commissions ("PSCs") which regulate interstate and intrastate
rates, respectively, ownership of transmission facilities, and the terms and
conditions under which the Company's domestic U.S. services are provided. In
general, neither the FCC nor the relevant state PSCs exercise direct oversight
over prices charged for the Company's services or the Company's profit levels,
but either or both may do so in the future. In order to provide domestic long
distance services, the Company, however, is required by federal and state law
and regulations to file tariffs listing the rates, terms and conditions of
services provided. The FCC adopted an order on October 29, 1996 (the "October
29, 1996 Order") eliminating the requirement that non-dominant interstate
carriers, such as the Company, maintain FCC tariffs. However, on February 13,
1997, the United States Court of Appeals for the DC Circuit stayed the October
29, 1996 Order, pending judicial review of the Order. Elimination of tariffs
will require that the Company secure contractual agreements with its customers
regarding many of the terms of its tariffs or face possible claims over the
respective rights of the parties once these rights are no longer clearly defined
in tariffs.

    In addition, the FCC has adopted certain measures to implement the
Telecommunications Act that will impose new regulatory requirements, including
the requirement that the Company contribute some portion of its
telecommunications revenues to a "universal service fund" designated to fund
affordable telephone service for consumers, schools, libraries and rural health
care providers. These contributions became payable beginning in 1998 for all
interexchange carriers. The FCC has determined the amount of the contribution
for first and second quarter of 1998, which constitutes approximately 3.2% of
interstate and international gross end user telecommunications revenues and 0.8%
of intrastate, interstate and international gross end user telecommunications
revenues.

    Numerous state agencies also impose on entities authorized to provide
telecommunications services prior approval requirements for "transfers of
control," including PRO FORMA transfers, acquisitions and securities issuances.
The Company did not obtain prior approval for its January 1998 acquisition of
MSN. MSN holds various state authorizations. The Company has filed the necessary
papers at the relevant state PSCs seeking NUNC PRO TUNC (retroactive) approval
of the transaction on the grounds that the transaction serves certain important
business needs of the Company and enhances the Company's ability to market and
provide services. Although management is confident that the state PSCs will
grant the NUNC PRO TUNC approval, there can be no assurance that the state
commissions will grant the Company's request for retroactive approval and/or
will not impose fines, license conditions, commence revocation proceedings or
otherwise exercise their authority to address violations of state statutes and
regulations.

    These prior approval requirements imposed by the FCC and certain state
agencies on transfers of control, including pro forma transfers of control
(without public notice), and corporate reorganizations, and assignments of
regulatory authorizations may delay, prevent or deter a change in control of the
Company. The FCC may also impose restrictions on affiliations with certain
foreign telecommunications companies.

LATIN AMERICA

    MEXICO

    In 1995 the Mexican Government enacted a new Federal Telecommunications Law
(the "FTL"), opening the local and long distance telecommunications service
markets to competition and imposed varying levels of regulation on Mexican
telecommunications providers. The Secretariat of Communications and
Transportation (the "SCT") and the Federal Telecommunications Commission
("COFETEL") serve the administrative functions of the FTL and establish
telecommunications policy. The FTL imposes regulations only on public carriers,
those carriers that provide commercial telecommunications services to the public
at large. As a result, private carriers, those that operate telecommunications
networks used to satisfy the specific, non-public telecommunications needs of
specific individuals or entities, need not obtain approval to operate.
Facilities-based public carriers, those that use the radio spectrum, satellite
links or any form of land-based cables to provide telecommunications services,
must obtain concessions prior to providing service. Concessionaires may also
resell the facilities and services of other concessionaires. Vendors (resellers)
of telecommunications services may not own their own facilities but need only
obtain a permit to provide service. Although the FTL provides for the existence
of resellers, the Mexican government has not issued the implementing rules and
regulations to allow their entry into the market. Consequently, Mexican law does
not currently permit pure switched international resale. Carriers wishing to
offer value-added services need only register with the COFETEL's
Telecommunications Registry.

   In 1994, Vextro was issued a license to provide value-added
telecommunications services by the SCT. The license grants Vextro the right for
an unspecified term to provide these services throughout Mexico involving the
use of data, facsimile and voice transmissions, and the resulting embedded
international and long distance traffic generated.

   Vextro is required to pay a license fee quarterly to the Mexican government
equal to five percent of its revenues from value-added telecommunications
services. Under the license, Vextro is free to set its service rates without
government approval; however, the Vextro's rate schedule must be filed with the
SCT. Vextro has posted the required bond of pesos $500,000 to secure obligations
under the license.

    OTHER LATIN AMERICAN MARKETS

    Within Latin America, each country has a different national regulatory
scheme and is in a varying stage of deregulation. The requirements for the
Company to obtain the necessary approvals to offer value-added services and the
full range of telecommunications services, including voice telephony, vary from
country to country. Specifically, the Company has recently obtained the
authority to provide inbound and outbound international long distance, as well
as certain other telecommunications services, in El Salvador. The Company is
also exploring opportunities in other countries in Latin America.

    Historically, Latin American countries have prohibited the direct transport
and switching of speech in real-time between switched network termination points
("Voice Telephony") except by the PTT. The available opportunities and the
requirements for the Company to obtain necessary approvals to offer value-added
services, systems integration, or the full range of telecommunications services,
including Voice Telephony, vary considerably from country to country. The
nature, extent and timing of the opportunity for the Company to compete in these
markets will be determined, in part, by the actions taken by the governments in
these countries to implement competition and the response of incumbent carriers
to these efforts. There can be no assurance that any of these countries will
implement competition in the near future or at all, that the Company will be
able to take advantage of any such liberalization in a timely manner, or that
the Company's operations in any such country will be successful. There can be no
assurance that the Company has received all necessary approvals, filed
applications for such approvals, received comfort letters or obtained all
necessary licenses from the applicable regulatory authorities to offer
telecommunications services in the Latin American countries where it currently
provides services or those in which it seeks to provide services in the future,
or that it will do so in the future. The Company's failure to obtain, or retain
necessary approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.

    Moreover, the Company may be incorrect in its assumption that (i) each Latin
American country will abolish, on a timely basis, the respective PTT's monopoly
to provide Voice Telephony within and between other countries, (ii) deregulation
will continue to occur and (iii) the Company will be allowed to continue to
provide and to expand its services in the Latin American countries. There can be
no assurance that any or all of the Latin American countries will not adopt laws
or regulatory requirements that will adversely affect the Company. Additionally,
there can be no assurance that future regulatory, judicial or legislative
changes in any or all of the Latin American countries in which the Company
competes or intends to compete will not have a material adverse effect on the
Company or that regulators or third parties will not raise material issues with
regard to the Company's compliance with applicable laws or regulations. If the
Company is unable to provide the services it is presently providing or intends
to provide or to use its existing or contemplated transmission methods due to
its inability to receive or retain formal or informal approvals for such
services or transmission methods, or for any other reason related to regulatory
compliance or the lack thereof, such events could have a material adverse effect
on the Company's business, financial condition and results of operations.

                                  EMPLOYEES

   As of March 1, 1998, the Company had approximately 222 full-time employees
with 203 residing in Mexico and 19 residing in the U.S. Of the total employees
there are 5 in product development, 39 in sales and marketing, 50 in general and
administrative and 106 in operations, engineering, and manufacturing and
assembly. None of the Company's employees is subject to a collective bargaining
agreement, and the Company has not experienced any work stoppage. The Company
believes that its relations with its employees are good.

                     GOVERNMENTAL OR REGULATORY APPROVAL

   The Company is required in Mexico to have updated technical, safety and
regulatory approval for most of its products. In some instances these approvals
are obtained and paid for by the manufacturers, but in some other instances, the
Company absorbs the responsibility and costs involved in the process.

ITEM 2. PROPERTIES.

   The Company's international headquarters are located in Houston, Texas, where
the Company leases approximately 5,700 square feet of an office building. The
Company also leases additional facilities in Houston, Texas totaling 7,200
square feet relating to its prepaid phone card operations and to house
telecommunications equipment relating to its long distance services operations.
The Company leases facilities in Mexico City, Guadalajara and Tijuana, totaling
approximately 34,000 square feet and consisting of office and warehousing
facilities.

ITEM 3. LEGAL PROCEEDINGS.

   The Company has certain legal proceedings outstanding. A description of these
legal proceedings is contained in the Company's Current Report on Form 8-K dated
January 7, 1998, which is incorporated herein by reference and filed as an
Exhibit to this Annual Report on Form 10-K.

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

   There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
                                   PART II

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

   The Company's Common Stock traded on the Small Cap Market under the symbol
"PTMC" from August 10, 1994 until June 28, 1996, when it began trading under the
symbol "TSCP". The following table sets forth the range of the quarterly high
and low sales prices for the Common Stock, as reported by the NASDAQ Small Cap
Market, Inc. for each quarter within the last two fiscal years.

                                   High             Low
1996                               ----
----
First Quarter                   $ 4.500         $ 2.500
Second Quarter                    6.875           3.000
Third Quarter                     7.125           3.875
Fourth Quarter                    4.875           3.125

1997
----
First Quarter                     3.750           2.000
Second Quarter                    4.250           2.625
Third Quarter                     10.75           3.688
Fourth Quarter                    15.25           7.500

   As of March 30, 1998, there were approximately 90 holders of record of the
Company's Common Stock.

   The Company has never paid any cash dividends on its Common Stock. The
Company expects that it will retain all available earnings generated by its
operations for the development and growth of its business and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Company's ability to pay dividends may be adversely affected if, in the future,
the Mexican government were to impose restrictions on the Company's ability to
repatriate profits.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

      The following table sets forth certain historical financial data relating
to the Company. The information set forth below is not necessarily indicative of
the results of future operations and should be read in conjunction with "Item 7
- Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included in Item 8 of this Report
<TABLE>
<CAPTION>
                                                          1993            1994            1995             1996             1997
                                                      -----------     -----------     -----------     ------------     ------------
<S>                                                   <C>             <C>             <C>             <C>              <C>         
STATEMENT OF OPERATIONS DATA
      Revenues ...................................    $ 1,722,258     $   972,494     $ 1,108,473     $  5,705,313     $ 36,153,584
      Cost of revenues ...........................        887,078         439,387         619,431        3,040,919       24,395,656
                                                      -----------     -----------     -----------     ------------     ------------
      Gross Profit ...............................        835,180         533,107         489,042        2,664,394       11,757,928
      Selling, general and
         administrative expenses .................      1,470,491       1,032,010       1,349,194        4,159,077        8,154,034
                                                      -----------     -----------     -----------     ------------     ------------
      Operating income (loss) before
         depreciation and amortization ...........       (635,311)       (498,903)       (860,152)      (1,494,683)       3,603,894
      Depreciation and amortization ..............         22,516          36,018          48,494          263,758          621,731
                                                      -----------     -----------     -----------     ------------     ------------
          Operating income (loss) ................       (657,827)       (534,921)       (908,646)      (1,758,441)       2,982,163
      Other income (loss), net ...................        (98,203)          4,587         228,948          113,402         (231,908)
                                                                      -----------     -----------     ------------     ------------
      Income (loss) before income
         taxes and minority interests ............       (756,030)       (530,334)       (679,698)      (1,645,039)       2,750,255
      Income tax benefit (expense) ...............                                                          53,427          (84,465)
                                                      -----------     -----------     -----------     ------------     ------------
      Net income (loss) before
         minority interests ......................       (756,030)       (530,334)       (679,698)      (1,591,612)       2,665,790
      Minority interests .........................        359,951         (18,554)          6,633           (6,396)           5,900
                                                      -----------     -----------     -----------     ------------     ------------
      Net income (loss) ..........................    $  (396,079)    $  (548,888)    $  (673,065)    $ (1,598,008)    $  2,671,690
                                                      ===========     ===========     ===========     ============     ============


     Net income (loss)
         per share-Basic .........................    $     (0.81)    $     (0.44)    $     (0.36)    $      (0.52)    $       0.68
     Weighted average shares outstanding .........        491,303       1,254,689       1,890,442        3,046,594        3,903,470
     Net income (loss) per share- Diluted (1) ....            n/a             n/a             n/a              n/a     $       0.53
     Diluted weighted average shares
         outstanding (1) .........................            n/a             n/a             n/a              n/a        5,152,211
BALANCE SHEET DATA
    Cash, cash equivalents and short
         term investments ........................    $    97,741     $ 4,509,427     $ 3,644,870     $    494,781     $  4,733,780
    Current assets ...............................        353,301       5,178,539       4,293,813        4,664,920       18,506,278
    Property and equipment, net ..................        167,990         156,018         153,798          983,102        2,679,098
    Goodwill and other intangibles, net ..........           --              --              --          3,245,851       17,673,791
    Total assets .................................        521,291       5,334,557       4,497,931        9,371,038       39,635,027
    Notes payable and capital lease
         obligations .............................        444,649            --              --               --          3,184,152
    Stockholders' equity (deficit) ...............      $(812,133)    $ 4,445,729     $ 3,589,945     $  5,764,464     $ 22,087,513
</TABLE>
   (1) Inclusion of additional shares under a dilutive analysis is inappropriate
due to the anti-dilutive effect.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

   Certain statements in this Annual Report on Form 10-K made herein that are
not historical are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "estimates",
"will", "should", "plans", or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy.
These statements are based on numerous assumptions about future conditions that
could prove not to be accurate. Actual events, transactions and results may
materially differ from the anticipated events, transactions or results described
in such statements. Investors are cautioned that all forward-looking statements
are not guarantees of future performance and that actual results could vary
materially from those in the forward-looking statements. Investors are also
cautioned that forward-looking statements involve risks and uncertainties
including, without limitation, risks related to the effectiveness of
management's strategies and decisions, market acceptance of and demand for the
Company's products and services by customers, continued relationships with and
pricing dependence on third party suppliers, economic conditions, results of
financing efforts and regulatory approvals and developments. This report
identifies other factors that could cause such differences. No assurance can be
given that these are all of the factors that could cause actual results to vary
materially from the forward-looking statements. Statements with respect to
acquisitions and continued trends are forward-looking and involve risks and
uncertainties. Furthermore, the Company has significant operations in Mexico,
subjecting the Company to certain political and commercial risk. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect future events or circumstances.

                                   OUTLOOK

   The year ended December 31, 1997 was a year of significant growth for the
Company as management continued to position the Company as a fully-integrated
telecommunications provider, with a focus on Latin America. The Company's
strategy is to provide a complete telecommunications solution to its customers.
In May 1996, the Company acquired Telereunion which shifted the focus of the
Company to telecommunications sales and service in Mexico. In July 1997, the
Company completed the acquisition of Integracion, which expanded the Company's
presence in data and network systems integration. In October 1997, the Company
acquired N.S.I., an expert in advanced wide area network design. N.S.I. brings
to the Company the technological and managerial expertise necessary to enable
the Company to pursue opportunities in the telephony-over-television cable
arena. Through these strategic acquisitions, the Company has built the third
largest systems integration business in Mexico with pro forma 1997 revenues of
approximately $30 million.

   With the acquisition of Orion, additional management capabilities were added
and the Company has broadened its focus to include U.S.-originated international
long distance with an emphasis on Latin America. During the year ended December
31, 1997, the Company's revenues from international long distance grew
significantly from an insignificant amount in 1996 to over $17 million in 1997.
This significant growth trend is continuing as the Company expands its
geographical coverage and network capacity.

   In January 1998, the Company acquired MSN, a leading provider of pre-paid
telephone calling cards to US-based Hispanic consumers via the TELEFIESTA brand
name. The acquisition enhances the profile of the Company's long distance
business by establishing a retail platform for its international long distance
services and the ability to market additional products and services to Hispanic
customers.

   In March 1998, the Company acquired a license from the government of El
Salvador to provide inbound and outbound international long distance as well as
certain other telecommunications services. This license marks the first time
Telscape will offer international long distance services for calls originating
in Latin America. The Company plans to leverage the TELEFIESTA brand recognition
in El Salvador and other Latin American countries as regulations and licenses
permit.

      REVENUES. During 1997, the Company derived its revenues principally from
the provision of systems integration and value-added services in Mexico and from
the sale of U.S. outbound international long distance services to Latin America.
During 1997, the Company's revenues were derived approximately equally from its
two core businesses with systems integration providing 52% and long distance
services providing 48% of the Company's revenues. In 1998 the growth in
international long distance service revenues, including prepaid growth generated
by recently-acquired MSN, is expected to significantly outpace the growth in
systems integration revenues.

   The Company provides systems integration services to private and public
sector customers in Mexico. Revenues are derived from the sale of equipment and
value-added services. Revenues from this business have grown significantly
through both internal growth and strategic acquisitions in 1996 and 1997.

   The Company also provides international long distance services to wholesale
customers. Revenues are derived from the number of minutes of use (or fraction
thereof) billed by the Company and are recorded upon completion of calls. The
business has grown significantly from an insignificant amount in 1996 to over
$17 million in 1997. For the year ended December 31, 1997, one wholesale
customer accounted for approximately 56% of the Company's long distance services
revenues and 28% of the Company's overall revenues. As the Company expands its
network and customer base, this customer's revenues as a percentage of sales are
expected to decline.

   GROSS PROFIT. As the Company's product mix evolves to include proportionately
more value-added services of systems integration with proportionately less
equipment sales, management expects the Company's gross profit from systems
integration to improve. The Company has enjoyed strong gross profit from its
international long distance services to date; however, as this market becomes
more competitive, the Company may experience a decline in gross profit
percentage. The effects of this potential decline are expected to be mitigated
by the Company's strategy of focusing on deregulating markets, particularly in
Latin America, where it can enjoy higher gross profits. In addition, gross
profits from the Company's newly-acquired prepaid phone card business are
significantly lower than those of the wholesale international long distance and
systems integration businesses. As such, overall gross profit as a percentage of
sales is expected to decline in the near future.

   OPERATING INCOME. As the Company continues to expand its core businesses,
growth in revenues is expected to outpace decreases in overall gross margins.
Additionally, operating expenses are expected to grow at a lesser rate than that
of revenues. These factors should result in increased operating income to the
Company in the future.

                            RESULTS OF OPERATIONS

   The following table sets forth for the periods indicated certain financial
data as a percentage of revenues:

                                                      PERCENTAGE OF REVENUES
                                                      YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                     1995      1996      1997
                                                    ------    ------    ------
Revenues .........................................   100.0%    100.0%    100.0%
Cost of revenues .................................    55.9      53.3      67.5
Gross profit .....................................    44.1      46.7      32.5
Selling, general and administrative expenses .....   121.7      72.9      22.5
Operating income (loss) before depreciation
and amortization .................................   (77.6)    (26.2)     10.0
Depreciation and amortization ....................     4.4       4.6       1.7
Operating income (loss) ..........................   (82.0)    (30.8)      8.3
Other income (expense) ...........................    20.7       2.0      (0.7)
Income (loss) before income taxes and
minority interest ................................   (61.3)    (28.8)      7.6
Income tax benefit (expense) .....................     0.0       0.9      (0.2)
Net income (loss) before minority interests ......   (61.3)    (27.9)      7.4
Minority interests in subsidiaries ...............     0.6      (0.1)      0.0
Net income (loss) ................................   (60.7)    (28.0)      7.4

<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

   REVENUES increased from $5,705,000 in 1996 to $36,154,000 in 1997. This
increase of $30,449,000, or 534%, was due principally to the significant growth
in the international long distance business and, to a lesser extent, the
acquisitions of Telereunion, Integracion and N.S.I. During the year ended
December 31, 1997, the Company's revenues from international long distance
services grew $16,750,000 from $640,000 in 1996 to $17,390,000, or 2617%.
Revenues from systems integration services and equipment sales increased
$13,699,000 from $5,065,000 to $18,764,000, or 270%. Although some of the growth
is attributable to the effect of including Telereunion for a full year in 1997,
Telereunion also experienced growth in revenues in 1997.

   COST OF REVENUES increased from $3,041,000 in 1996 to $24,396,000 in 1997, or
$21,355,000. The increase in cost of revenues was due principally to the
incremental cost of revenues associated with the significant growth in the
international long distance business and, to a lesser extent, the incremental
cost of revenues associated with the acquisitions of Telereunion, Integracion
and N.S.I. The cost of revenues as a percentage of revenues increased from 53.3%
to 67.5%, or 14.2%. The increase in cost of revenues as a percentage of revenues
was due principally to a significant change in the Company's product mix. During
1997, the Company experienced an increase in the cost of revenues as a
percentage of revenues in the systems integration businesses in Mexico and
Poland which was offset by the lower cost of revenues as a percentage of
revenues in the international long distance services business.

   SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$4,159,000 in 1996 to $8,154,000 in 1997, or $3,995,000. The increase in SG&A
was due principally from the incremental SG&A associated with the acquisitions
of Telereunion, and, to a lesser extent, the additional administrative staff
added to handle the significant growth in the international long distance
business and the incremental costs associated with the acquisitions of
Integracion and N.S.I. In 1996, the Company also incurred certain non-recurring
expenses of approximately $350,000 relating to non-cash compensation expense
that was recorded in 1996 in compliance with "FAS 123: Accounting for
Stock-Based Compensation," approximately $100,000 in fees associated with the
Orion merger, and approximately $146,000 in consulting fees. These consulting
fees were paid under agreements, which have been terminated.

   Overall SG&A as a percentage of revenues decreased from 72.9% to 22.5%, or
50.4%. This decrease was due principally to the economies of scale associated
with the significant growth in revenues in each of the Company's core businesses
while containing costs.

   DEPRECIATION AND AMORTIZATION increased from $264,000 in 1996 to $622,000 in
1997, or $358,000. This increase is due to an increase in goodwill amortization
primarily due to the Integracion and N.S.I. acquisitions completed during 1997
and a full year's amortization of goodwill in 1997 associated with the
Telereunion acquisition.

   OTHER INCOME (EXPENSE) decreased from income of $113,000 in 1996 to an
expense of ($232,000) in 1997, or $345,000. The decrease in other income was due
principally to the Company recognizing a foreign exchange loss of ($126,000)in
1997, primarily from the Polish operations, as compared to a foreign exchange
gain of $161,000, primarily from the Mexican operations, in 1996. In addition,
interest expense increased by $138,000 primarily due to debt incurred in
connection with the Integracion acquisition. In 1997, the Company also wrote off
its investment in a joint venture, realizing a loss of $196,000, and incurred
certain litigation settlement expenses of $128,000.

   PROVISION (BENEFIT) FOR INCOME TAXES increased from a benefit of $53,000 in
1996 to an expense of ($84,000) in 1997. This increase is primarily due to tax
expense from the Company's Mexican operations offset by a benefit realized from
the utilization of net operating loss carryforwards.

   NET INCOME (LOSS) was $2,672,000 in 1997 compared to a net loss of
($1,598,000) in 1996. The change in net income was due to a combination of the
factors discussed above.

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

   REVENUES increased from $1,108,000 in 1995 to $5,705,000 in 1996. This
increase of $4,597,000, or 415%, was due principally to the merger of
Telereunion and, to a lesser extent, the merger of Orion. Revenues for the
Polish operations increased only slightly from $1,108,000 in 1995 to $1,143,000
in 1996.

   COST OF REVENUES increased from $619,000 in 1995 to $3,041,000 in 1996, or
$2,422,000. The increase in cost of revenues was due principally to the
incremental cost of revenues attributable to the acquisition of Telereunion and,
to a lesser extent, the merger of Orion. This increase was offset partially by a
decrease of $121,000 in the Polish operations. The cost of revenues as a
percentage of revenues decreased from 55.9% to 53.3%, or 2.6%. The decrease in
cost of revenues as a percentage of revenues was due principally to the
improvements in the Polish operations and the addition of higher margin sales
from the Orion merger.

   SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$1,349,000 in 1995 to $4,159,000 in 1996, or $2,810,000. The increase in SG&A
was due principally to the incremental SG&A attributable to the acquisition of
Telereunion and, to a lesser extent, the merger of Orion. The Company also
incurred certain non-recurring expenses of approximately $596,000. These
expenses included approximately $350,000 of non-cash compensation expense that
was recorded in 1996 in compliance with "FAS 123: Accounting for Stock-Based
Compensation," approximately $100,000 in fees associated with the Orion merger,
and approximately $146,000 in consulting fees. These consulting fees were paid
under agreements which have been terminated.

   On approximately the same revenues, SG&A for the Polish operations decreased
by $84,000 due principally to a reduction in work force. Overall SG&A as a
percentage of revenues decreased from 121.7% to 72.9%, or 48.8%. This decrease
was due principally to the lower SG&A as a percentage of revenues associated
with Telereunion and, to a lesser extent, efficiency improvements in the Polish
operations. These improvements were offset by the non-recurring expenses and
additional recurring expenses described above.

   DEPRECIATION AND AMORTIZATION increased from $48,000 in 1995 to $264,000 in
1996, or $216,000. This increase is due to an increase in goodwill amortization
related to the Telereunion acquisition and the incremental depreciation expense
associated with those operations.

   OTHER INCOME decreased from $229,000 in 1995 to $113,000 in 1996, or
$116,000. The decrease in other income was due principally to the decrease in
net interest income from $231,000 to $14,000 and the recognition of a $63,000
loss in connection with the forfeiture of an earnest money deposit for an
aborted acquisition attempt. This decrease was offset by an increase in the
Company's foreign exchange gain of approximately $160,000.

   PROVISION (BENEFIT) FOR INCOME TAXES increased from a provision of $0 in 1995
to a tax benefit of $53,000 in 1996, resulting primarily from the increase in
deferred tax assets in Vextro.

   NET LOSS increased from a net loss of $673,000 in 1995 to a net loss of
$1,598,000 in 1996. The increase in net loss was due to a combination of the
factors discussed above.

                       LIQUIDITY AND CAPITAL RESOURCES

   Since its inception, the Company has financed its operations primarily
through the issuance of debt and equity and through cash generated by
operations. On August 10, 1994, the Company issued 1,050,000 shares of its
common stock and 525,000 redeemable common stock purchase warrants in its
initial public offering ("IPO") for net cash proceeds of approximately
$6,000,000. Approximately $630,000 of these funds were utilized to repay
existing indebtedness of the Company.

   During 1997, the Company generated significant cash from operations of
$4,588,000, which was more than adequate to finance its operations. The Company
ended the year with $4,734,000 in cash, up from $495,000 at December 31, 1996.
Capital investments were funded mainly out of cash flow from operations with the
exception of one equipment purchase of $329,000, which was financed through a
capital lease. The Company ended the year with no indebtedness for borrowed
money from financial institutions. Notes payable outstanding at year end were
issued to sellers in connection with the acquisition of Integracion and to
purchase treasury shares as part of a settlement agreement.

   Net cash provided by (used in) operating activities was ($2,731,000) and
$4,588,000 for the years ended December 31, 1996 and December 31, 1997,
respectively. The increase in net cash provided by operations in 1997 as
compared to 1996 was due primarily to the significant increase in the Company's
operations during 1997 and the resultant significant increase in working
capital.

   Net cash provided by (used in) investing activities was $2,489,000 and
($1,799,000) for the years ended December 31, 1996 and December 31, 1997,
respectively. During 1997, the Company expended $1,682,000 for the purchase of
property and equipment. In 1996, the net cash provided by investing activities
was due primarily to the difference between the purchase of short-term
investments and the redemption of such investments.

   Net cash provided by financing activities was $564,000 and $1,450,000 for the
years ended December 31, 1996 and December 31, 1997, respectively. In 1997, the
Company generated $1,004,000 from the exercise of warrants and options and
$600,000 from the collection of capital subscriptions receivables. In 1996, the
Company raised $564,000 through issuance of common stock.

   As of December 31, 1997, the Company had cash and cash equivalents of
$4,734,000 and positive working capital of $3,670,000. In December 1997, the
Company announced its intention to redeem publicly traded warrants to purchase
an aggregate of 525,000 common shares with a 30 day notice requirement. This
announcement resulted in 475,535 warrants being exercised prior to the
redemption date. The Company realized net proceeds from these exercises of
$3,804,000, of which $989,000 was received prior to year end.

   In January 1998, the Company completed the acquisition of MSN by issuing to
the sellers $3,250,000 in cash, $750,000 in non-interest bearing promissory
notes and 100,000 shares of common stock. This acquisition utilized the majority
of the funds realized from the warrant exercises.

   In the first quarter of 1998, the Company continued its strategic plans to
significantly expand the Company's facilities and capacity related to its long
distance services and prepaid phone card business lines. Through March 23, 1998,
the Company has expended or placed purchase orders for equipment purchases for a
total in excess of $4 million relating to these business expansions. Management
does not expect that cash generated from operations will be adequate to fund
these capital investments.

   The Company intends to finance its growth and additional capital investments
required for its planned facility expansions through cash generated from
operations, additional financing through commercial lenders' and additional
lease financing and the sale of debt, additional equity (or a combination of
both). There can be no assurance that the cash generated from operations will be
sufficient nor that the Company will be able to obtain additional financing on
commercially reasonable terms, if at all. Additional funding through the
incurrence of debt or sale of additional equity (or a combination of both) may
be required to meet the Company's growth plans, although there can be no
assurance that such additional funds can be obtained on acceptable terms, if at
all. If necessary funds are not available, the Company's business and results of
operations and the future expansion of its business could be materially
adversely affected.

   On March 12, 1998, the Company entered into a revolving credit facility with
a commercial bank which provides for borrowings up to $1,250,000 subject to
adequate levels of eligible accounts receivable. Borrowings are secured by the
accounts receivable of the Company's Telscape USA and MSN subsidiaries. This
facility provides that borrowings will bear interest at floating rates of prime
plus 1% and expires in six months. The Company also has negotiated terms with
several of its equipment vendors which call for extended payment terms and
increased credit lines (including $2,000,000 lines of credit with 60 day and 90
day payment terms, respectively, obtained from two of its equipment vendors).

ESCROW AGREEMENT

   Pursuant to the Texas Securities Act of 1957, the Texas State Securities
Commissioner has the discretion to require that an issuer offering and selling
securities to the residents of Texas in a public offering deposit certain
outstanding securities in escrow. In that regard, certain former officers and
directors of the Company, including Gary Panno, Kris Murthy, and Dal Berry, as
well as three other individuals (collectively, the "Shareholders"), are parties
to a Stock Escrow Agreement (the "Escrow Agreement") dated August 8, 1994. The
Escrow Agreement was required by the Texas State Securities Commissioner as a
condition to the registration of securities in Texas in connection with the
Company's IPO. The Escrow Agreement provides that a total of 415,503 shares of
Common Stock ("Shares") and 55,779 shares of Common Stock issuable upon the
exercise of options ("Options") be held in escrow for a period of not less than
two years and not more than ten years. The terms of the Escrow Agreement provide
further that Shares and Options held in escrow may be released provided certain
performance requirements of the Company ("Performance Requirements") are met.
For instance, if the Company's common stock trades at a price per share of at
least $11.81 for at least ninety (90) consecutive trading days then the Shares
and Options are automatically released from escrow.

   During the first quarter of 1998, the Company and the Shareholders entered
into a series of agreements, which will result in the early termination of the
Escrow Agreement in the second quarter of 1998, the repurchase by the Company of
certain of the Shares at a significant discount to market and the resolution of
a disagreement with certain of the Shareholders concerning the validity of the
Options. The agreements call for the Shareholders to sell a total of 101,417
Shares to the Company for $985,580 or $9.72 per share to be paid 25% upon
closing and 75% within ninety (90) days. Closing is expected to take place
during the first half of April 1998. In addition, the Shareholders agreed to
sign a ninety (90) day lock-up ("Lock-Up"), commencing on the closing date, for
any Shares which were not sold to the Company; provided, however, that should
any of the Performance Requirements be met during the Lock-Up, the Lock-Up will
terminate automatically. Finally, certain of the Shareholders agreed to the
termination of approximately 40,000 of the Options, which had an exercise price
of $0.80 per share.

                                UNCERTAINTIES

   The Company continues to face many risks and uncertainties, including general
and specific market economic risks. The exploitation of the opportunities
presented by the Mexican market are expected to require substantial capital. To
the extent the Company's Mexican subsidiaries do not have a positive net cash
flow from its operations in 1998, it can be expected that the Company would have
to fund any shortfalls from its working capital. In addition, any capital
expenditures needed to expand the operations of the Mexican subsidiaries would
likely be funded out of the working capital of the parent corporation. Any such
fundings would reduce the funds available to finance and expand the Company's
strategy to compete in the international long distance services business. Also,
any economic crises in Mexico could result in the need to fund any cash flow
shortfalls of the Company's Mexican subsidiaries.

   As in any recently deregulated market, drastic changes and adjustments of
regulations or changes in government policies may occur from time to time that
will directly affect the Company. The Company's competitive position in the
telecommunications services and long distance markets depends heavily on the
license granted by the Mexican government. Should this permit be revoked for
whatever reason, the Company would be severely impaired or unable to provide
many of its telecommunications services. See discussion on "Permit" above. In
addition, the Company relies on other carriers to complete the transmission of
certain telecommunications services. To the extent that any of these carriers
was to no longer do business with the Company, the Company would either have to
find an alternate source or not be able to provide those services.

   The international long distance market, although large and rapidly growing,
is also very competitive. The Company competes in this market with companies
that have greater experience and substantially greater resources, both financial
and otherwise. In addition, the Company faces certain additional risks in
competing in this market, including changes in U.S. and foreign government
regulations and telecommunications standards, dependence on strategic partners,
tariffs, taxes and other trade barriers, the potential for nationalization and
economic downturns and political instability in foreign countries. In addition,
the Company could be adversely affected by a reversal in the trend toward
deregulation of telecommunication markets. The Company will be increasingly
exposed to these risks as the Company expands its presence in this market.

   The prepaid phone card market represents a new market for the Company. While
the former owners of MSN are currently officers of the Company and continue to
actively manage the prepaid phone card operations, this is a rapidly growing and
very competitive market. As with international long distance services, the
Company will compete in this market with companies that have greater experience
and have substantially greater resources. In addition, the prepaid phone card
industry is subject to extensive U.S. federal and state regulation including the
imposition of various excise taxes and fees, including the "universal service
fund" (see discussion in "Government Regulation" in Part I, Business). The
Company's growth in this business is dependent on its ability to expand its
capacity through investments in additional facilities or entering in partnering
arrangements for outsourcing the telecommunications services related to calls
initiated on the prepaid phone cards it serves. There can be no assurance that
the Company will be successful in raising the capital required to fund the
additional facilities in which case the Company's operations, the future growth
in this business and the ability to compete effectively against competitors with
significantly more resources could be materially adversely affected.

   The Company is also pursuing a strategy of growth through selective
acquisitions. However, there can be no assurance that any acquisition will be
completed, that attractive candidates will be identified in the future, or that,
if completed, any acquisition will be beneficial to the Company.

FOREIGN CURRENCY RISK

   The general economic conditions of Mexico are greatly affected by the
fluctuations in exchange rates and inflation. The Company's foreign currency
risk is mitigated in Mexico due to the fact that many of the Company's customers
are multinational firms that transact and pay in U.S. dollars. In addition, most
of the customers that do pay in pesos pay at the spot exchange rate in effect at
the time of payment as opposed to the exchange rate at the time the receivable
is created. The Company's functional currency in Mexico is the U.S. dollar
because the majority of its transactions are in such currency. However, from
time to time the Company transacts in the local currency and thus faces foreign
currency risk with respect to these transactions. U.S.-originated calls will be
paid in U.S. dollars; however, the Company also expects to derive a certain
portion of its revenues from calls originated outside of the U.S. thus exposing
the Company to additional exchange rate risk. In addition, the Company pays its
termination partners in Latin America in their respective local currencies,
exposing the Company to additional exchange rate risk. The Company may choose to
limit its exposure to foreign currency risk through the purchase of forward
foreign exchange contracts or similar hedging strategies. There can be no
assurance that any foreign currency hedging strategy would be successful in
avoiding exchange-related losses.

YEAR 2000 PLANS

   In anticipation of the year 2000, management has developed a plan to review
software that was internally developed or externally purchased or licensed, and
also to review with its key vendors and service providers their software, for
compliance with Year 2000 processing requirements. In accordance with Emerging
Issues Task Force Opinion No. 96-14, "ACCOUNTING FOR THE COSTS ASSOCIATED WITH
MODIFYING COMPUTER SOFTWARE FOR THE YEAR 2000," the Company will expense all
costs as incurred. The Company does not believe that such costs will have a
material impact on the financial results of the Company.

NEW ACCOUNTING PRONOUNCEMENTS

   Statement of Financial Accounting Standards No. 130, "REPORTING COMPREHENSIVE
INCOME," establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.

   Statement of Financial Accounting Standards No. 131, "DISCLOSURE ABOUT
SEGMENTS OF A BUSINESS ENTERPRISE," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing performance.

   SFAS 130 and 131 are effective for financial statements for the periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Adoption of these statements are not expected to
have a material effect on the Company's financial statement disclosures.

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

   The Company's market capitalization on January 28,1997 was less than $2.5
billion, and therefore, information responsive to this item should be included
in the Report on Form 10-K for the fiscal year ending December 31, 1998.


<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

   Index to Consolidated Financial Statements:


                                                                            PAGE
                                                                            ----
     Reports of Independent Certified Public Accountants                     24

     Consolidated Financial Statements:

     Consolidated Balance Sheets - As of December 31, 1996 and 1997          26

     Consolidated Statements of Operations - For the years ended
       December 31, 1995, 1996 and 1997                                      27

     Consolidated Statements of Stockholders' Equity - For the
       years ended December 31, 1995, 1996 and 1997                          28

     Consolidated Statements of Cash Flows - For the years ended
       December 31, 1995, 1996 and 1997                                      29

     Notes to Consolidated Financial Statements                              31
<PAGE>
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Telscape International, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Telscape
International, Inc. and subsidiaries (formerly Polish Telephones and Microwave
Corporation) as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telscape
International, Inc. and subsidiaries at December 31, 1996 and 1997, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.



                                BDO SEIDMAN, LLP
Houston, Texas
March 9, 1998
<PAGE>
                         INDEPENDENT AUDITORS' REPORT



The Board of Directors
Polish Telephones and Microwave Corporation

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Polish Telephones and Microwave
Corporation and subsidiaries for the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Polish Telephones and Microwave Corporation for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.




                                    Hoffman, McBryde & Co., P.C.

Dallas, Texas
March 27, 1996
<PAGE>
                TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS


                                     ASSETS
<TABLE>
<CAPTION>
                                                                      December 31,
                                                             ----------------------------
                                                                 1996            1997
                                                             ------------    ------------
<S>                                                          <C>             <C>         
CURRENT ASSETS:
  Cash and cash equivalents ..............................   $    494,781    $  4,733,780
  Accounts receivable, less allowance for doubtful
accounts of
  $57,000 and $200,000, respectively .....................      2,034,728       6,275,923
  Inventories ............................................      2,045,195       4,305,084
  Prepaid expenses and other .............................         90,216       2,674,492
  Deferred income taxes ..................................           --           516,999
                                                             ------------    ------------
   Total current assets ..................................      4,664,920      18,506,278
PROPERTY AND EQUIPMENT, net of accumulated
depreciation .............................................        983,102       2,679,098
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization .............................................      3,245,851      17,673,791
DEFERRED INCOME TAXES ....................................        192,167          76,728
INVESTMENT IN AFFILIATES .................................           --           295,132
OTHER ASSETS .............................................        284,998         404,000
                                                             ------------    ------------
              Total assets ...............................   $  9,371,038    $ 39,635,027
                                                             ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable .......................................   $  1,756,016    $ 10,756,477
  Accrued expenses .......................................        723,832       3,302,781
  Current portion of notes payable and capital
lease obligations ........................................           --           507,701
  Deferred income taxes ..................................        371,948         269,649
                                                             ------------    ------------
   Total current liabilities .............................      2,851,796      14,836,608
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS ..............           --         2,676,451
MINORITY INTERESTS .......................................        754,398          34,075
COMMITMENTS AND CONTINGENCIES
SERIES B NON-VOTING PREFERRED STOCK, $.001 par
value, 380,000 shares authorized issues and
outstanding, mandatorily redeemable upon
achievement of certain performance measures ..............            380             380
STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value, 5,000,000
shares authorized;
  without defined preference rights ......................           --              --
  Series A preferred stock, $.001 par value,
1,000,000 shares
  authorized .............................................           --              --
  Common stock, $.001 par value, 25,000,000 shares
  authorized; 3,935,969 and 4,104,027 shares issued and
outstanding, respectively ................................          3,936           4,104
  Additional paid-in capital .............................     11,883,719      25,231,876
  Capital subscriptions receivable .......................       (600,000)           --
  Accumulated deficit ....................................     (5,523,191)     (2,851,501)
  Treasury stock .........................................           --          (296,966)
                                                             ------------    ------------
   Total stockholders' equity ............................      5,764,464      22,087,513
                                                             ------------    ------------
   Total liabilities and stockholders'equity .............   $  9,371,038    $ 39,635,027
                                                             ============    ============
</TABLE>
  The accompanying notes are an integral part of these financial statements.
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                        -----------------------------------------
                                           1995          1996           1997
                                        ------------  ------------  -------------
<S>                                    <C>            <C>            <C>         
REVENUES ...........................   $ 1,108,473    $ 5,705,313    $ 36,153,584
COST OF REVENUES ...................       619,431      3,040,919      24,395,656
                                       -----------    -----------    ------------
GROSS PROFIT .......................       489,042      2,664,394      11,757,928
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ...........................     1,349,194      4,159,077       8,154,034
                                       -----------    -----------    ------------
OPERATING INCOME (LOSS) BEFORE
DEPRECIATION
AND AMORTIZATION ...................      (860,152)    (1,494,683)      3,603,894
DEPRECIATION AND AMORTIZATION ......        48,494        263,758         621,731
                                       -----------    -----------    ------------
OPERATING INCOME (LOSS) ............      (908,646)    (1,758,441)      2,982,163

OTHER INCOME (EXPENSE):
  Interest income ..................       232,438        142,649         170,772
  Interest expense .................        (1,639)      (128,224)       (265,899)
  Foreign exchange gain (loss) .....        (1,851)       161,199        (125,936)
  Other, net .......................          --          (62,222)        (10,845)
                                       -----------    -----------    ------------
      Total other income (expense),
net ................................       228,948        113,402        (231,908)
                                       -----------    -----------    ------------

INCOME (LOSS) BEFORE INCOME TAXES
AND
MINORITY INTERESTS .................      (679,698)    (1,645,039)      2,750,255
INCOME TAX BENEFIT (EXPENSE) .......          --           53,427         (84,465)
                                       -----------    -----------    ------------
INCOME (LOSS) BEFORE MINORITY
INTERESTS ..........................      (679,698)    (1,591,612)      2,665,790
MINORITY INTERESTS IN SUBSIDIARIES .         6,633         (6,396)          5,900
                                       ===========    ===========    ============

NET INCOME (LOSS) ..................   $  (673,065)   $(1,598,008)   $  2,671,690
                                       ===========    ===========    ============

EARNINGS (LOSS) PER SHARE:

  Basic ............................   $     (0.36)   $     (0.52)   $       0.68
  Diluted (1) ......................           n/a            n/a    $       0.53
WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic ............................     1,890,442      3,046,594       3,903,470
  Diluted (1) ......................           n/a            n/a       5,152,211
</TABLE>
(1) Inclusion of additional shares under a diluted analysis is inappropriate due
to the anti-dilutive effect

   The accompanying notes are an integral part of these financial statements.
<PAGE>
 TELSCAPE INTERNATIONAL, INC.                       
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY             
 YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997                  
<TABLE>
<CAPTION>
                                                                                       Capital           
                                               Common Stock          Additional     Subscriptions        
                                             Shares     Amount     Paid-in Capital    Receivable          
                                            ------------------     ---------------  -------------
<S>                                         <C>         <C>         <C>               <C>        
Balance, December 31, 1994                  1,890,442   $1,890      $8,113,238        $(600,000) 
                                                                                                 
Reclassification of accumulated losses                                                
acquired from minority interest in                                                 
subsidiary ..............................        --       --              --               --    
                                                                                      
Net loss ................................        --       --              --               --    
                                                                                      
Balance, December 31, 1995 ..............   1,890,442    1,890       8,113,238         (600,000) 
                                                                                      
Issuance of stock in acquisition of                                                   
subsidiary ..............................   1,605,000    1,605       2,855,295             --    
                                                                                      
Issuance of stock in connection with                                                  
merger ..................................     400,000      400         525,000             --    
                                                                                      
Issuance of stock in connection with                                                  
stock options exercised .................      40,527       41          38,181             --    
                                                                                      
Compensation related to warrants granted         --       --           352,005             --    
                                                                                      
Net loss ................................        --       --              --               --    
                                                                                      
Balance, December 31, 1996 ..............   3,935,969    3,936      11,883,719         (600,000) 
                                                                                      
Issuance of stock in connection with                                                  
warrants and options exercised ..........     148,058      148       1,003,708             --    
                                                                                      
Compensation related to common stock ....      20,000       20         188,277             --    
and warrants granted                                                                  
                                                                                      
Repurchase of treasury shares ...........        --       --              --               --    
                                                                                      
Release of stock in escrow ..............        --       --              --            600,000  
                                                                                      
Additional consideration recognized .....        --       --        12,156,172             --    
upon vesting of warrants                                                              
                                                                                      
Net income ..............................        --       --              --               --    
                                                                                      
Balance, December 31, 1997 ..............   4,104,027   $4,104     $25,231,876               $-  
</TABLE>
<TABLE>
<CAPTION>
                                                                                Total         
                                             Accumulated     Treasury       Stockholders' 
                                                Deficit        Stock           Equity       
                                             -----------     --------       ------------
<S>                                          <C>                 <C>       <C>        
Balance, December 31, 1994                   $(3,069,399)        $-        $4,445,729 
                                                                  
Reclassification of accumulated losses
acquired from minority in interest in
subsidiary ..............................       (182,719)        --          (182,719)

Net loss ................................       (673,065)        --          (673,065)

Balance, December 31, 1995 ..............     (3,925,183)        --         3,589,945

Issuance of stock in acquisition of
subsidiary ..............................           --           --         2,856,900

Issuance of stock in connection with
merger ..................................           --           --           525,400

Issuance of stock in connection with
stock options exercised .................           --           --            38,222

Compensation related to warrants granted            --           --           352,005

Net loss ................................     (1,598,008)        --        (1,598,008)

Balance, December 31, 1996 ..............     (5,523,191)        --         5,764,464

Issuance of stock in connection with
warrants and options exercised ..........           --           --         1,003,856

Compensation related to common stock ....           --           --           188,297
and warrants granted

Repurchase of treasury shares ...........           --       (296,966)       (296,966)

Release of stock in escrow ..............           --           --           600,000

Additional consideration recognized .....           --           --        12,156,172
upon vesting of warrants

Net income ..............................      2,671,690         --         2,671,690

Balance, December 31, 1997 ..............    $(2,851,501)   $(296,966)   $ 22,087,513
</TABLE>
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                        ----------------------------------------
                                            1995          1996          1997
                                        ------------   -----------   -----------
<S>                                     <C>            <C>           <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) ..................  $   (673,065)  $(1,598,008)  $ 2,671,690
  Adjustments to reconcile net income
    (loss) to net cash provided
    by (used in) operating activities:
  Provision for doubtful accounts ....          --           8,640       277,282
  Depreciation and amortization ......        48,494       263,758       621,731
  Provision for inventory obsolescence          --          55,000        52,531
  Write-off investment in operating
    venture ..........................          --            --         196,462
  Deferred income tax benefit ........          --        (111,720)   (1,565,966)
  Interest amortized on discounted
    short-term investments ...........       (64,526)       (8,196)         --
  Imputed interest on non-interest
    bearing notes payable ............          --            --         136,152
  Minority interest in subsidiaries'
    income (loss) ....................        (6,633)        6,397        (5,900)
  Decrease in minority interests for
    equipment credits utilized .......        55,041        52,555          --
  Changes in assets and liabilities:
    Accounts receivable ..............        75,523      (952,193)   (1,622,990)
    Inventories ......................        14,564      (719,792)   (2,358,949)
    Prepaid and other assets .........      (117,308)       35,485    (2,634,064)
    Accounts payable .................      (114,447)     (123,939)    6,953,589
    Accrued liabilities ..............       (34,864)      360,580     1,866,359
                                        ------------   -----------   -----------
Net cash provided by (used in)
  operating activities ...............      (817,221)   (2,731,433)    4,587,927
                                        ------------   -----------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of short-term investments .   (10,943,692)   (4,898,790)         --
  Redemption of short-term investments    11,499,763     8,378,601          --
  Purchases of property and equipment        (46,274)     (440,843)   (1,682,303)
  Acquisition of Telereunion, net of
    cash acquired ....................          --        (353,169)         --
  Acquisition of Integracion, net of
    cash acquired ....................          --            --         117,038
  Acquisition of N.S.I., net of cash
    acquired .........................          --            --         (49,048)
  Investment in BCH Holdings .........          --            --        (184,953)
  Purchase of minority interest ......       (62,658)         --            --
  Investment in joint venture ........        (2,930)     (196,462)         --
                                        ------------   -----------   -----------
Net cash provided by
  investing activities ...............       444,209     2,489,337    (1,799,266)
                                        ------------   -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on capital lease
    obligations ......................          --            --        (103,518)
  Payments on notes payable ..........          --            --         (50,000)
  Proceeds from capital subscriptions           --            --         600,000
  Issuance of common stock ...........          --         563,622          --
  Proceeds from warrants and options
    exercised ........................          --            --       1,003,856
                                        ------------   -----------   -----------
  Net cash provided by (used in)
    financing activities .............          --         563,622     1,450,338
                                        ------------   -----------   -----------
  Net increase (decrease) in cash and
    cash equivalents .................      (373,012)      321,526     4,238,999
                                        ------------   -----------   -----------
  Cash and cash equivalents at
    beginning of year ................       546,267       173,255       494,781
                                        ------------   -----------   -----------
  Cash and cash equivalents at end of
    year .............................  $    173,255   $   494,781   $ 4,733,780
                                        ============   ===========   ===========
</TABLE>
   The accompanying notes are an integral part of these financial statements.
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                            --------------------------------------------
                                                              1995              1996              1997
                                                            ---------        ---------         ---------
Supplemental disclosure of cash flow information:
<S>                                                          <C>           <C>               <C>        
    Interest paid .........................................  $  1,639      $   176,410       $   121,069
    Taxes paid ............................................      --             80,063           505,298
Non-cash transactions:
Property and equipment acquired by execution of
capital lease obligation ..................................      --               --             328,985

Issuance of notes and acquisition of treasury
shares
in litigation settlement:
    Litigation settlement .................................      --               --              (3,034)
    Treasury stock ........................................      --               --            (296,966)
    Notes payable .........................................      --               --             300,000

Issuance of preferred and common stock in exchange
for shares of common stock in
with reverse triangular merger:
    Excess of cost over net assets acquired ...............      --          2,857,280              --
    Common stock ..........................................      --             (1,605)             --
    Preferred stock .......................................      --               (380)             --
    Additional paid-in capital ............................      --         (2,855,295)             --
Issuance of promissory notes in connection with
the acquisition of Integracion ............................      --               --           2,555,401

Issuance of common stock and warrants in
exchange for services provided or in connection
with severance agreement ..................................      --            352,005           188,297

Reduction of subsidiary stock subscription
receivable in exchange for credits on equipment ...........    55,041           52,555              --

Additional contingent consideration recorded:
2,175,000 warrants issued in connection with
Telereunion and Integracion acquisitions
vesting upon achievement of certain operating
performance measures ......................................      --               --           12,156,17

Accrual of redemption of 380,000 shares of 
Series B preferred stock to be
redeemed based upon achievement of
certain operating performance measures ....................      --               --             380,000
</TABLE>
   The accompanying notes are an integral part of these financial statements.
<PAGE>
                 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

   Telscape International, Inc. (collectively with its subsidiaries, the
"Company") is an emerging, fully-integrated telecommunications company. The
Company supplies U.S.-originated international long distance services on a
wholesale and retail basis, via switched and dedicated networks, with an
emphasis on Latin America. In addition, the Company provides a full range of
systems integration and value-added telecom services in Mexico to major public
and private sector customers.

   Through its Telscape USA, Inc. ("Telscape USA") subsidiary, the Company is a
facilities-based long distance telecommunications services company providing
international long distance services for calls originating in the United States
and terminating in other countries, primarily in Latin America.

   Through its Mexican subsidiaries, Vextro de Mexico, S.A. de C.V. ("Vextro"),
Integracion de Redes, S.A. de C.V. ("Integracion"), and N.S.I. de S.A. de C.V.
("N.S.I."), the Company is engaged in the distribution and sale of voice, data
and networking equipment and provides value-added services in network
integration. Each of these Mexican entities is owned principally by Telereunion,
Inc. ("Telereunion"), a wholly-owned subsidiary of the Company.

   Through its newly-acquired subsidiary, MSN Communications, Inc. ("MSN"), the
Company is engaged in the distribution and sale of prepaid phone cards across
the United States, targeted mainly at the Hispanic community.

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

   The consolidated financial statements include the accounts of the Company and
all wholly and majority owned subsidiaries. The Company records minority
interests expense, which represents the portion of majority owned subsidiaries
attributable to minority owners. Investments in affiliates in which the Company
owns a 20% to 50% ownership interest, and in which the Company exercises
significant influence over operating and financial policies, are accounted for
by the equity method. Investments of less than 20% ownership are recorded at
cost, which does not exceed the estimated net realizable value of such
investments. All significant intercompany transactions and balances have been
eliminated in consolidation.

RECLASSIFICATIONS

   Certain prior year amounts have been reclassified to conform to current year
presentation.

MANAGEMENT'S ESTIMATES AND ASSUMPTIONS

   The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. The actual results could
differ from those estimates.

REVENUE RECOGNITION

   The Company recognizes revenue from long distance telecommunications services
at the time of customer usage. Revenue from sales of equipment are recognized at
time of shipment. Revenue from data and network integration value-added services
are recognized when services are performed.


<PAGE>



CASH AND CASH EQUIVALENTS

   The Company considers cash in banks and short-term investments with original
maturities of three months or less as cash and cash equivalents.

FINANCIAL INSTRUMENTS

   The Company follows the guidance of Statement of Financial Accounting
Standards No. 107, "DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS," which
requires the disclosures of the fair value of financial instruments; however,
this information does not represent the aggregate net fair value of the Company.
Some of the information used to determine fair value is subjective and
judgmental in nature; therefore, fair value estimates, especially for less
marketable securities may vary. The amounts actually realized or paid upon
settlement or maturity could be significantly different.

   Unless quoted market price indicates otherwise, the fair values of cash and
cash equivalents, short-term investments, escrowed deposits and investments
(certificates of deposit) generally approximate market value because of the
short maturity of these instruments. The Company's notes payable and capital
lease obligations also approximate market value as the underlying borrowing
rates are similar to other financial instruments with similar maturities and
terms.

INVENTORIES

   Inventories consist principally of telecommunications equipment acquired from
manufacturers for distribution and are stated at the lower of cost (first-in,
first-out) or market.

PROPERTY AND EQUIPMENT

   Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in the Consolidated Statement of
Operations. Depreciation of property and equipment for financial reporting
purposes is computed using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements and capital leases are amortized
over the lesser of the life of the lease or the useful life of the asset. For
income tax purposes, accelerated methods of depreciation are used. The following
is a summary of the Company's property and equipment and their estimated useful
lives:

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

                                                              Estimated
                                    As of December 31,      Useful Lives
                                  -----------------------
                                    1996         1997          (Years)
                                  ----------  -----------  ----------------
    Computer equipment and      
    software                        314,079      569,159          3
    Telecommunications equipment    466,926    1,183,999         5-7
    Office equipment                270,517      380,357         5-7
    Leasehold improvements          196,344      229,456          7
    Transportation equipment        157,207      295,148          5
    Call center equipment                 -      704,729          5
                                  ----------  -----------
                                  1,405,073    3,362,848
    Less, accumulated
    depreciation                  (421,971)    (683,750)
                                  ----------  -----------
                                   983,102    2,679,098
                                  ==========  ===========

   -----------------------------------------------------------------------
<PAGE>
GOODWILL AND INTANGIBLES

   The major classes of intangible assets are summarized below:

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

                                                            Amortization
                                  As of December 31,           Period
                              ---------------------------
                                  1996          1997          (Years)
                              -------------  ------------  ---------------
    Goodwill                     3,311,748    18,037,099         15
    Organization costs              73,292        73,292         5
    Less, accumulated
    amortization                 (139,189)     (436,600)
                              -------------  ------------
                                 3,245,851    17,673,791
                              =============  ============

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

      Intangible assets are amortized using the straight-line method for periods
noted above.

   Goodwill is recognized for the excess of the purchase price of the various
business combinations over the estimated fair value of the identifiable net
tangible and intangible assets acquired. In connection with certain of the
Company's acquisitions, the Company issued performance-based warrants. The
Company records such contingent consideration at the time the contingency is
resolved and the consideration becomes issuable or when the outcome of the
contingency is determinable beyond a reasonable doubt. During the year ended
December 31, 1997, 2,095,000 warrants, issued in connection with the Telereunion
acquisition, vested as a result of certain operating performance measures being
achieved. In addition, 380,000 shares of preferred stock were mandatorily
redeemable at December 31, 1997 at $1.00 per share based upon the Company
meeting certain operating performance measures. The preferred shares were
redeemed in the first quarter of 1998. As a result, the Company recorded
$12,114,000 in additional consideration in connection with the Telereunion
acquisition. Additionally, during the year ended December 31, 1997, 80,000
warrants, issued in connection with the Integracion acquisition, vested as a
result of certain operating performance measures being achieved. The Company
recorded $422,000 in additional consideration in connection with the Integracion
acquisition. See Note 2 for further discussion regarding the Company's
acquisitions. Realization of long-lived assets, including goodwill, is
periodically assessed by the management of the Company based on the current and
expected future profitability and net cash flows of acquired companies and their
contribution to the overall operations of the Company. In management's opinion,
there is no impairment of such assets at December 31, 1997.

WARRANTY RESERVES

   The Company generally provides its systems integration customers a warranty
on each sale of equipment and related products and accrues warranty expense at
time of sale based upon actual claims history. Actual warranty costs incurred
are charged against such accrual when paid.

PREPAID EXPENSES AND OTHER CURRENT ASSETS:

   Prepaid expenses and other current assets include the following:

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

                                              As of December 31,
                                          ---------------------------
                                              1996          1997
                                          -------------  ------------

    Value-added taxes receivable                     -     1,749,226
    Deposits                                    13,713       448,121
    Prepaid insurance and other expenses        13,566       197,470
    Other                                       62,937       279,675
                                          -------------  ------------
                                                90,216     2,674,492
                                          =============  ============
                                                     `
    -------------------------------------------------------------------

ACCRUED EXPENSES:

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

                                              As of December 31,
                                          ---------------------------
                                              1996          1997
                                          -------------  ------------
    Customer prepayments                       405,859       799,085
    Accrued carrier costs                            -       560,000
    Accrued wages                               15,143       579,005
    Taxes payable                              145,489       508,482
    Preferred stock redemption payable               -       380,000
    Other                                      157,341       476,209
                                          -------------  ------------
                                               723,832     3,302,781
                                          =============  ============

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

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

   The Company has determined that the U.S. dollar is the functional currency
for its operations outside the U.S. As such, gains and losses resulting from the
translation of financial statements of such operations are included in the
Consolidated Statements of Operations.

INCOME TAXES

   Income taxes are calculated using the liability method specified by Statement
of Financial Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES." Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when differences are expected to reverse. A valuation allowance is
used to reduce deferred tax assets to the amount that is more likely than not to
be realized.

EARNINGS (LOSS) PER SHARE

   In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 128, Earnings Per Share. SFAS 128
is effective for the year ended December 31, 1997. SFAS 128 simplifies the
standards required under current accounting rules for computing earning per
share and replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings per share
("basic EPS") and diluted earnings per share ("diluted EPS"). Following is a
summary of the basic and diluted per share calculations:

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

                                            For the Year Ended December 31,
                                         ---------------------------------------
                                            1995           1996          1997
                                         ------------  -------------  ----------
       BASIC
       Net income (loss) as reported        (673,065)    (1,598,008)   2,671,690
       Weighted average common shares
       outstanding                         1,890,442      3,046,594    3,903,470
       Basic earnings (loss) per share      $  (0.36)      $  (0.52)     $  0.68

       DILUTED
       Net income (loss) as reported        (673,065)    (1,598,008)   2,671,690
       Interest expense on 
       convertible debt                            -              -       42,255
       Net income (loss) applicable to
       common stockholders                  (673,065)    (1,598,008)   2,713,945

       Weighted average common shares
       outstanding                         1,890,442      3,046,594    3,903,470
       Weighted average dilutive
       potential common shares
       outstanding                            91,773        114,642    1,248,741
       Weighted average common and
       dilutive potential common shares
       outstanding                         1,982,215      3,161,236    5,152,211
       Diluted earnings (loss) per share    $  (0.34)      $  (0.51)     $  0.53

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

   Diluted EPS for the years ended December 31, 1995 and 1996 was not disclosed
on the Consolidated Statement of Operations as the effect is anti-dilutive.
Certain performance based warrants vested at December 31, 1997 upon the
achievement of certain operating performance measures (See Note 2). In
accordance with SFAS 128, these contingently issuable shares were included in
the calculation of diluted EPS when all the necessary conditions were met. If
all the necessary conditions have not been satisfied by the end of the period,
the number of contingently issuable shares that would have been issued if the
reporting period was the end of the contingency period are included in the
calculation as if those shares were issued at the beginning of that period. For
year to date calculations, contingent shares are weighted for the interim
periods in which they are included in the computation of diluted EPS.
Accordingly, 1,000,000 warrants were included in the calculation of diluted EPS
for the year ended December 31, 1997 as if those shares were issued on July 1,
1997 and 1,175,000 warrants were included as if those shares were issued on
October 1, 1997. At December 31, 1997, there were 500,000 warrants which had not
vested which were not included in the calculation of diluted EPS. Additionally,
525,000, 525,000 and 666,270 options and warrants outstanding at December 31,
1995, 1996, and 1997, respectively, were not included in the calculation of
diluted EPS as their exercise prices were greater than the average market price
of the Company's common stock during the period and inclusion of these
securities in the calculation would result in an anti-dilutive effect.

NEW ACCOUNTING PRONOUNCEMENTS

   Statement of Financial Accounting Standards No. 130, "REPORTING COMPREHENSIVE
INCOME," establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.

   Statement of Financial Accounting Standards No. 131, "DISCLOSURE ABOUT
SEGMENTS OF A BUSINESS ENTERPRISE," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that are evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing performance.

   SFAS 130 and 131 are effective for financial statements for the periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Adoption of these statements is not expected to
have a material effect on the Company's financial statement disclosures.

2.    MERGERS AND ACQUISITIONS

TELEREUNION ACQUISITION

   On May 17, 1996, the Company acquired all of the outstanding common stock of
Telereunion, which had previously acquired a 97% ownership of Vextro in a
triangular reverse acquisition, accounted for as a purchase. Vextro is engaged
in the distribution and sale of voice, data and networking equipment and
provides value-added telecommunications services and network integration
services in Mexico. In late 1994, Vextro was issued a license to provide
value-added telecommunications services by the Mexican Secretaria de
Comunicaciones y Transportes ("SCT"). The license grants Vextro the right for an
unspecified term to provide these services throughout Mexico involving the use
of data, facsimile and voice transmissions, and the resulting embedded
international and long distance traffic generated.

   Under the terms of the acquisition, the Company issued to the shareholders of
Telereunion 1,605,000 shares of common stock of the Company, 380,000 shares of
non-voting, non-participatory Series B preferred stock and warrants to purchase
up to 2,595,000 additional common shares at $2.19 per share. The warrants vest
and become exercisable upon Vextro meeting certain operating performance
measures and expire seven years after closing. The preferred stock was
mandatorily redeemable at $380,000 in the aggregate upon the Company meeting
certain operating performance measures. In addition, the Company converted and
amended certain non-qualified options outstanding under the Telereunion 1995
Stock Option and Appreciation Rights Plan to provide for the right to acquire an
aggregate of 216,618 shares of common stock of the Company at an exercise price
of $1.35 per share. The acquisition was accounted for under the purchase method
of accounting. The operations of Telereunion and Vextro have been included in
the Company's financial statements since the date of acquisition.
   The consideration paid for Telereunion measured at the acquisition date was
$3,210,000, net of cash received of approximately $132,000, and consisted of
common stock valued at $2,722,000, 216,618 stock options valued at $135,000 and
transaction costs of $485,000. The purchase price was allocated to the acquired
company's assets and liabilities based upon an estimate of fair values at the
date of acquisition and resulted in $3,312,000 of goodwill, which is being
amortized over 15 years. During the year ended December 31, 1997, certain of the
operating performance measures were met resulting in 2,095,000 warrants vesting
and the 380,000 preferred shares being mandatorily redeemable at $1.00 per
share. The preferred shares were redeemed in the first quarter of 1998. As a
result, $12,114,000 in additional contingent consideration and the related
goodwill was recognized relating to the acquisition of Telereunion at December
31, 1997.

ORION MERGER

   On July 26, 1996, the Company entered into an Agreement and Plan of Merger,
pursuant to which the Company acquired on September 5, 1996, all of the
outstanding common stock of Orion Communications, Inc. ("Orion"), a Texas
corporation in exchange for 400,000 shares of its common stock. Orion was a
reseller of U.S. domestic long distance services. This transaction has been
accounted for under the pooling-of-interests method and, accordingly, the
accompanying consolidated statements of operations include the results of the
operations of Orion since its inception on April 10, 1996. At the time of the
merger, the name of Orion was changed to Telscape USA, Inc. Expenses of $102,500
related to the merger with Orion were charged to expense during 1996.
INTEGRACION ACQUISITION

   Effective July 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of Integracion. Integracion is a systems
integrator engaged in the distribution and sale of data and network equipment
and also provides value-added services in network integration in Mexico.

   Under the terms of the transaction, the Company paid the following to the
selling shareholders of Integracion: i) the sum of $130,000 in cash, ii) an
aggregate of $2,201,000 in non-interest bearing promissory notes maturing at
various dates through January 1, 2001, iii) an aggregate of $999,000 in
non-interest bearing convertible notes maturing on September 1, 1999, which are
convertible into 333,000 shares of common stock of the Company at a price of
$3.00 per share, representing the quoted market price of the Company's common
stock on the date of the transaction, iv) warrants for the purchase of up to
100,000 shares of common stock of the Company based on Integracion meeting
certain performance requirements and v) a covenant by the Purchasers to pay
$280,000 in the event that Integracion meets certain performance requirements
over the cumulative periods beginning January 1, 1997 and ending December 31,
2000. The acquisition was accounted for under the purchase method of accounting.
The financial position and results of operations of Integracion have been
included in the Company's consolidated financial statements since the effective
date of the acquisition.
<PAGE>
   The consideration paid for Integracion measured at the acquisition date was
$2,745,000 and consisted of cash of $130,000, promissory notes with a discounted
value of $2,555,000 and transaction costs of $60,000. The purchase price was
allocated to the acquired company's assets and liabilities based upon an
estimate of fair values at the date of acquisition and resulted in $1,756,000 of
goodwill, which is being amortized over 15 years. During the year ended December
31, 1997, certain of the operating performance measures were met resulting in
80,000 warrants vesting. The remaining 20,000 warrants were forfeited. As a
result, $422,000 in additional contingent consideration and the related goodwill
was recognized on the acquisition of Integracion at December 31, 1997.

N.S.I. ACQUISITION

   On October 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of N.S.I. N.S.I. is a systems integrator
engaged in the distribution and sale of data and network equipment and also
provides value-added services in network integration in Mexico.

   Under the terms of the acquisition, the Company paid cash of $1,000 to the
shareholders of N.S.I. and agreed to guarantee the repayment of approximately
$260,000 of N.S.I. debt to one of the sellers. The purchase price was allocated
to the acquired company's assets and liabilities based upon an estimate of fair
values at the date of acquisition and resulted in $430,000 of goodwill, which is
being amortized over 15 years. The acquisition was accounted for under the
purchase method of accounting. The financial position and results of operations
of N.S.I. have been included in the Company's consolidated financial statements 
since the effective date of the acquisition.

   The balances included in the Consolidated Balance Sheets related to the
current year acquisitions are based on preliminary information and are subject
to change when additional information concerning final asset and liability
valuations are obtained. Management does not expect that such adjustments will
be material. In addition, changes in the balances recorded where contingent
consideration was issued are subject to change as those contingencies are
resolved. In certain cases, the contingent consideration is payable in equity
securities where valuation of those securities is not determined until the
respective contingency is resolved. As such, it is not possible to compute the
amount that could be recorded in the future. In such cases, the amount of
contingent consideration recorded in the future may be significant. As of
December 31, 1997, there were 500,000 warrants issued in connection with the
Telereunion acquisition, which are subject to vesting upon the meeting of
certain operating performance measures. If such operating performance measures
were met and the warrants were valued as of December 31, 1997, $2,906,000 in
additional consideration and related goodwill would have been recognized.

MSN ACQUISITION

   Effective January 1, 1998, the Company acquired all of the outstanding common
stock of MSN. MSN, through its TELEFIESTA brand, markets prepaid telephone
calling cards across the United States primarily to the Hispanic community.
Under the terms of the transaction, the Company paid the following to the
shareholders of MSN: i) the sum of $3,250,000 in cash, ii) $750,000 in
non-interest bearing promissory notes payable in eight equal quarterly
installments, and iii) 100,000 shares of the Company's common stock. The
acquisition will be accounted for under the purchase method of accounting. In
addition the two selling shareholders were each granted 50,000 options to
purchase the Company's common stock at $11.00 per share. The financial position
and results of operations of MSN will be included in the Company's financial
statements from the effective date of the acquisition.

   The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1996 and 1997, as if the acquisitions of
Telereunion, Integracion, N.S.I. and MSN had occurred on January 1, 1996:

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

                                          For the Year Ended December 31,
                                         -----------------------------------
                                               1996               1997
                                         -----------------   ---------------
                                                             (unaudited)
   Pro forma revenues                           15,661,558       68,776,302
   Pro forma operating income                 (2,158,294)         2,188,871
   Pro forma net income (loss)                (2,171,148)         2,040,833
   Pro forma basic net income (loss)
   per share                                     $ (0.71)            $ 0.51
   Pro forma diluted net income (loss)
   per share  (1)                                     n/a            $ 0.39

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

   (1) Inclusion of additional shares under a diluted analysis for 1996 is
inappropriate due to the anti-dilutive effect.
<PAGE>

   The unaudited pro forma consolidated financial statements of Telereunion,
Integracion, N.S.I. and MSN have been prepared as if the business combinations
had been consummated as of January 1, 1996. The information is not necessarily
indicative of the results of operations and financial position of the Company as
they may be in the future or as they might have been had the business
combinations been consummated as of January 1, 1996.

DTS/ZWUT

   Digital Communications Systems/Zaklady Wytworcze Urzadzen Telefonicznych
("DTS/ZWUT"), a Polish limited liability company, was a 90%-owned subsidiary of
the Company. DTS/ZWUT manufactures and markets telephone switching equipment in
Poland. On December 12, 1997, the Company exchanged its 90% interest in DTS/ZWUT
for a 31% interest in BCH Holding Company, Inc. ("BCH"), a Nevada corporation
with a full service telecommunications operation based in Warsaw, Poland. As a
result of this transaction, the Company's investment in BCH will be accounted
for under the equity method.

3.  CONCENTRATION OF RISK

CONCENTRATION OF RISK-MEXICO

   The devaluation of the Mexican peso in late 1994 caused Mexico to experience
an economic crisis characterized by exchange rate instability, increased
inflation, high domestic interest rates, reduced consumer purchasing power and
high unemployment. Consequently, the Mexican government has exercised, and
continues to exercise, significant influence over the Mexican economy.
Accordingly, Mexican governmental actions could have a significant effect on
Mexican companies, including the Company's customers, and overall market
conditions.

   The Company's foreign currency risk is mitigated in Mexico due to the fact
that many of the Company's customers are multinational firms that pay in U.S.
dollars. In addition, most of the customers that do pay in pesos pay at the spot
exchange rate in effect at the time of payment as opposed to the exchange rate
at the time the receivable is created. Nevertheless, significant adverse effects
from any material devaluation in the Mexican peso could result in an adverse
effect on the Company's operations.

SIGNIFICANT CUSTOMERS

   The Company's credit risks primarily consist of accounts receivable from its
customers, many of which are located in Mexico. Management performs ongoing
credit valuations of its customers and provides allowances for credit losses
when necessary.

   Major customers are those that individually account for more than 10 percent
of the Company's total revenues. For the year ended December 31, 1997, one
customer accounted for 28% of the Company's total revenues and 56% of the
Company's long distance services revenues. For the year ended December 31, 1997,
one customer accounted for 7% of the Company's overall revenues and 14% of total
revenues from system integration services. For the years ended December 31, 1996
and 1995, no customer represented greater than 10% of revenues.
<PAGE>

4.  NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

   The Company's notes payable and capital lease obligations consist of the
following:

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                                                                              <C>
                                                                                  As of December 31,
                                                                               -------------------------
                                                                                  1996          1997
                                                                               ------------  -----------
Non-interest bearing promissory notes, imputed interest at 10%, unamortized
discount of $348,297, issued in connection with Integracion acquisition,
maturing at various dates through January 1, 2001  
(See Note 2)                                                                             -    1,852,703

Non-interest bearing promissory note, imputed interest at 10%, unamortized
discount of $140,851, issued in connection with Integracion acquisition,
convertible into 333,000 shares of common stock, and
maturing on September 1, 1999 (See Note 2)                                               -      838,850
                                                                                
Promissory note issued to repurchase common stock,                              
payable in six semi-annual installments through May                             
20, 2000, and bearing interest at 6% (See Note 7)                                        -      250,000
                                                                                
Capital lease obligation payable in monthly                                     
installments of $11,244 including principal and                                 
interest maturing February 28, 2000                                                      -      242,599
                                                                             
                                                                               ------------  -----------
Total notes payable and capital leases                                                   -    3,184,152
                                                     
Current portion                                                                          -      507,701
                                                                               ------------  -----------
Long-term portion                                                                        -   2,676,451
                                                                               ============  ===========
</TABLE>
--------------------------------------------------------------------------------

   The annual maturities of the debt indicated above for the five years
following December 31, 1997, are $507,701 in 1998, $1,429,348 in 1999, $565,200
in 2000 and $681,903 in 2001.

      On March 12, 1998, the Company entered into a revolving credit facility
with a commercial bank which provides for borrowings up to $1,250,000 subject to
adequate levels of eligible accounts receivable. Borrowings are secured by the
accounts receivable of the Company's Telscape USA and MSN subsidiaries. This
facility provides that borrowings will bear interest at floating rates of prime
plus 1%. The Company also has negotiated terms with several of its equipment
vendors which call for extended payment terms and increased credit lines
(including $2,000,000 lines of credit with 60 day and 90 day payment terms,
respectively, obtained from two of its equipment vendors).

5.  INCOME TAXES
   Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A significant difference
relates to the treatment of inventories under the Mexican Tax Law. Under this
law, the cost of sales for financial statement purposes is not deductible for
income tax purposes. Instead, inventory purchases are deductible for income tax
purposes in the year the purchases are made.
<PAGE>
      Significant components of the Company's deferred tax liabilities and
assets at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
    ---------------------------------------------------------------------------------
                                              1996                     1997
                                     -----------------------  -----------------------
                                     United                   United
                                       States      Foreign      States      Foreign
                                     -----------  ----------  -----------   ---------
<S>                                                              <C>         <C>    
    CURRENT:
    Operating loss carryforwards 
    and tax credits                           -           -      189,409     151,714

    Accrued carrier costs                     -           -      190,400           -
    Accrued wages                             -           -       52,190           -
    Other accrued liabilities                 -           -       34,000           -

    Allowance for doubtful accounts      13,264       6,032       51,000       10,509
    Inventories                               -   (515,972)            -    (703,560)

    Customer prepayments                      -     137,992            -     271,688
    Valuation allowance                (13,264)           -            -           -
                                     -----------  ----------  -----------   ---------
    Net current deferred tax asset  
    (liability)                               -   (371,948)      516,999    (269,649)
                                     ===========  ==========  ===========   =========

    LONG-TERM:
    Operating loss carryforwards  
    and tax credits                   1,079,024     171,882            -           -
    Basis differences in assets          17,577      13,622        6,367      57,733
    Accrued employee benefits           119,682       6,663            -      12,628
    Valuation allowance              (1,216,283)          -            -           -
                                     -----------  ----------  -----------   ---------
    Net long term deferred   
    tax asset                            -        192,167          6,367      70,361
                                     ===========  ==========  ===========   =========
</TABLE>
    ----------------------------------------------------------------------------

   The Company records valuation allowances based upon judgments as to the
future realization of deferred tax benefits supported by demonstrated trends in
the Company's operating results. At December 31, 1996, the Company had recorded
a valuation allowance equal to its deferred tax assets. At December 31, 1997, no
valuation allowance was recorded.
   Significant components of the provision (benefit) for income taxes are as
follows:

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

                                    For the Year Ended December 31,
                                  -------------------------------------
                                     1995         1996         1997
                                  -----------  -----------  -----------
    Current:
        Federal                   -            -            1,146,618
        Foreign                            -       58,293      503,813
                                  -----------  -----------  -----------
              Total current                -       58,293    1,650,431
    Deferred:
        Federal                            -            -   (1,544,589)
        Foreign                            -    (111,720)     (21,377)
                                  -----------  -----------  -----------
               Total deferred              -    (111,720)   (1,565,966)
                                  ===========  ===========  ===========
                   Total     
    provision (benefit)           -            (53,427)     84,465
                                  ===========  ===========  ===========

    -------------------------------------------------------------------
<PAGE>
      The following is a reconciliation of income taxes calculated at the United
States federal statutory rate to the income tax provision (benefit):

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

                                         For the Year Ended December 31,
                                      --------------------------------------
                                         1995         1996         1997
                                      -----------   ----------  ------------
    Provision for income taxes at
    U.S. statutory rate                 (34%)         (34%)         34%
    Non-deductible amortization of
    intangible assets                                   3            7
    Non-deductible litigation loss                                   2
    Other items, net                                   (3)           4
    Effect of utilization of net
    operating loss carryforwards,
    tax credits and reversal of
    valuation allowance                   34           31          (44)
                                      ===========   ==========  ============
        Income tax provision
    (benefit)                             -           (3%)          3%
                                      ===========   ==========  ============

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

   At December 31, 1997, the Company had available for US federal income tax
purposes unused net operating loss carryforwards of approximately $368,000 which
may provide future tax benefits and which will expire in years 2005 through
2011. Additionally, as of December 31, 1997, the Company had approximately
$65,000 in alternative minimum tax credits which can be utilized to offset
future tax liabilities.
   In accordance with Mexican Tax Law, companies may carryforward an income tax
loss for ten years. Also, in accordance with Mexican Tax Law, a company is
subject to income taxes based upon the greater of 34% of taxable income and 1.8%
of net assets, as defined in the tax law. Any tax on assets paid is recoverable
and can be carried forward for ten years in the event a company begins paying
taxes on income. At December 31, 1996, the Company had available for Mexican
income tax purposes operating loss carryforwards of approximately $328,000 which
expire in 2007 and net asset taxes credits of approximately $40,000 which expire
in 2007.

6.    STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

1993 STOCK OPTION PLAN
   Under the terms of its 1993 Stock Option Plan, the Company may grant
incentive and/or non-qualified stock options to purchase up to 218,145 shares of
its common stock to the Company's employees, directors or consultants. Options
must be granted at not less than the fair market value of the Company's common
stock at the date of grant as determined by the Company's Board of Directors
(110% of fair market value for stockholders owning 10% or more of the Company's
common stock) for incentive stock options, or not less than 85% of the fair
market value for non-qualified stock options. Options granted under this plan
may be for a term of up to 10 years (5 years for incentive stock options granted
to stockholders owning 10% or more of the Company's common stock) and are
exercisable as determined by the Board of Directors. 1994 DIRECTORS STOCK OPTION
PLAN
   Effective June 1, 1994, the Company adopted the 1994 Directors Stock Option
Plan, which provides that the Company may grant non-qualified options to
directors of the Company or any majority-owned subsidiary who are not salaried
employees to purchase up to 31,163 shares of its common stock. Options must be
granted by June 1, 2004, at prices not less than the fair market value of the
Company's common stock at the date of grant and must be exercised within ten
years of the date of grant.

TELEREUNION 1995 STOCK OPTION PLAN
   As stated in Note 2, the Company assumed Telereunion's Stock Option Plan in
connection with the acquisition of Telereunion. Under the terms of this Plan,
the Company may grant non-qualified or incentive stock options to employees,
directors and consultants. Options must be granted at not less than the fair
market value of the Company's common stock at the date of grant as determined by
the Company's Board of Directors (110% of fair market value for stockholders
owning 10% or more of the Company's common stock) for incentive stock options,
or not less than 85% of the fair market value for non-qualified stock options.
The terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's common stock).

1996 STOCK OPTION AND APPRECIATION RIGHTS PLAN
   During 1996, the Company adopted the 1996 Stock Option and Appreciation
Rights Plan, which provides that the Company may grant non-qualified or
incentive stock options to purchase up to 1,200,000 shares of its common stock
to the Company's employees, directors or consultants. The plan also provides for
grants of stock appreciation rights in connection with the grant of options
under the plan. Options must be granted at not less than the fair market value
of the Company's common stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's common stock) for incentive stock options, or not
less than 85% of the fair market value for non-qualified stock options. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's common stock).

   A summary of the status of the Company's fixed option plans as of December
31, 1995, 1996 and 1997 is presented below:

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                             TOTAL         WTD. AVG.
                                             1993 PLAN      1994 PLAN       1995 PLAN        1996 PLAN      ALL PLANS     EXER.PRICE
                                             ---------       --------       ---------       ----------      ---------     ----------
Options outstanding at
<S>         <C>                                <C>                                                                <C>           <C> 
    January 1, 1995 ..................         64,440           --              --                --              64,440        0.80
Options granted ......................         58,000         30,000            --                --              88,000        2.23
Options exercised ....................           --             --              --                --                --          --
Options cancelled ....................           --             --              --                --                --          --
                                                             -------        --------        ----------        ----------        ----
Options outstanding at
    December 31, 1995 ................        122,440         30,000            --             148,440           152,440        1.61
Max. shares
exercisable ..........................        118,440         30,000            --                --             152,440        1.61
Options granted ......................           --           10,000         216,618         1,190,809         1,417,427        3.62
Options exercised ....................         (4,000)          --              --                --              (4,000)       2.25
Options cancelled ....................        (32,408)       (30,000)       (141,618)         (204,026)                         1.39
                                                             -------        --------        ----------        ----------        ----
Options outstanding at
    December 31, 1996 ................         86,032         10,000          75,000         1,190,809         1,361,841        3.95
Max. shares
exercisable ..........................         86,032         10,000          75,000           225,000           396,032        3.49
Options granted ......................           --             --           525,000           525,000                          5.73
Options exercised ....................        (15,828)          --           (10,000)          (25,828)                         1.87
Options cancelled ....................         70,204           --              --            (505,809)         (505,809)       3.91
                                                             =======        ========        ==========        ==========        ====
Options outstanding at
    December 31, 1997 ................           --           10,000          75,000         1,200,000         1,355,204        4.76
                                                             =======        ========        ==========        ==========        ====
Max. shares exercisable ..............         70,204         10,000          75,000           393,333           548,537        3.89
</TABLE>
--------------------------------------------------------------------------------

   SFAS 123 requires the Company to provide pro forma information regarding net
income (loss) applicable to common stockholders and income (loss) per share as
if compensation cost for the Company's stock options granted had been determined
in accordance with the fair value based method prescribed in that Statement. The
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995, 1996 and 1997: dividend yield of 0% for all
years; expected volatility ranging from 20% to 33%; 80% to 85%, and 80% to 90%
risk-free interest rates ranging from 5.92% to 6.78%; 6.15% to 6.41%, and 5.65%
to 5.80% and expected lives ranging from 7.75 to 9.33 years, 1.33 to 9.87 years,
and 7.25 to 9.91 years, respectively.
<PAGE>
   Under the accounting provisions of SFAS 123, the Company's net income (loss)
applicable to common stockholders and income (loss) per share would have been
revised to the pro forma amounts indicated below:

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

                                  For the Year Ended December 31,
                               ---------------------------------------
                                  1995          1996          1997
                               ------------  ------------  -----------
     Net income (loss):
           As reported           (673,065)   (1,598,008)    2,671,690
           Pro Forma             (738,285)   (3,095,842)    1,954,774
     Net income (loss) per
     share:
       Basic
           As reported            $  (.36)      $  (.52)       $  .68
           Pro Forma              $  (.39)       $(1.02)       $  .50
       Diluted
           As reported                 n/a           n/a       $  .53
           Pro Forma                   n/a           n/a       $  .38

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

WARRANTS

   Following is a description of the Company's warrants outstanding at December
31,1997:

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

                                                                          #
                       DESCRIPTION OF WARRANTS:                      OUTSTANDING

    Series A Warrants (unregistered) issued in connection with
    the Company's acquisition of Telereunion on May 17, 1996,
    exercisable at $2.19 at stated percentages only upon the
    Company achieving certain operating performance measures or
    fully vesting upon the Company maintaining a $12 share price
    for 90 consecutive trading days; expiration date of May 16,
    2003, 2,000,000 of which vested at December 31, 1997 (See
    Note 2)                                                            2,500,000

    Series B Warrants (unregistered) issued in connection with the
    Company's acquisition of Telereunion on May 17, 1996, currently
    exercisable at $2.19 as certain operating performance measures were
    achieved during the year ended December 31, 1997, expiration date
    May 16, 2003 (See Note 2)                                             95,000

    Registered  warrants  (NASDAQ)  issued in connection  with the
    IPO  exercisable  at  any  time  at  $8  per  share  prior  to
    expiration on August 10, 1998                                        393,770

    Warrants    (unregistered)    issued   to   IPO   underwriters
    exercisable  at any  time at  $8.10  prior  to  expiration  on
    August 10, 1999                                                      105,000

    Warrants (unregistered) issued on February 29, 1996, in connection
    with former officer's severance agreement exercisable at any time at
    $2.94 prior to expiration on February 28, 2001                       150,000

    Warrants (unregistered) issued in connection with the Company's
    acquisition of Telereunion on May 17, 1996, exercisable at any time
    at $2.19 prior to expiration on May 16, 2001                          78,191

    Warrants (unregistered) issued on April 30, 1997, in connection with
    former officer's severance agreement exercisable at any time at
    $3.88 - $5.00 prior to expiration on April 30, 1999                   25,000

     Warrants (unregistered) issued in connection with the Company's
     acquisition of Integracion effective July 1, 1997, currently
     exercisable at $3.00 as certain operating performance measures were
     achieved during the year ended December 31, 1997, expiration date of
     July 1, 2003 (See Note 2)                                            80,000

                                                                       ---------
                     Total warrants                                    3,426,961
                                                                       =========
                                                            
    ------------------------------------------------------------------------

   The IPO warrants were redeemable at the Company's option at any time with 30
days written notice at a redemption price of $0.20 per share. During the fourth
quarter 1997, the Company exercised its redemption privileges. As a result,
475,535 warrants were exercised, including 131,230 warrants as of December 31,
1997, resulting in net proceeds to the Company of approximately $3,804,000, of
which $989,000 was received prior to December 31, 1997.

7.    COMMITMENTS AND CONTINGENCIES

COMMITMENTS
   The Company is obligated under certain long-term non-cancelable lease
agreements for office and warehouse space as follows:

                                                     Amount
                                                 -----------
                    1998                         $  449,000
                    1999                            564,000
                    2000                            585,000
                    2001                            626,000
                    2002                            655,000
                                                 -----------
                                                 $2,879,000
                                                 ===========

   Total rent expense under leases was $131,000 and $229,000, respectively, for
the years ended December 31, 1996 and 1997.

   At December 31, 1997, the Company has employment agreements with six
officers, which expire in 1999. Future minimum commitments under these
agreements, excluding incentive bonuses or stock options, as of December 31,
1997, are as follows:

                                                     Amount
                                                 -----------
                    1998                         $  410,000
                    1999                            221,000
                                                 -----------
                                                 $  631,000
                                                 ===========

   Vextro is required to pay a license fee quarterly to the Mexican government
equal to five percent of its revenues from value-added telecommunications
services. Under the license, Vextro is free to set its service rates without
government approval; however, Vextro's rate schedule must be filed with the SCT.

   On December 16, 1997, the Company entered into a purchase agreement with an
equipment manufacturer whereby it agreed to purchase a telecommunications switch
for a total cost of $1,060,000. No amounts had been funded pursuant to this
commitment as of December 31, 1997. On March 16, 1998, the Company entered into
a second purchase agreement with the same manufacturer to expand the capacity of
the telecommunication switch for an incremental cost of $854,000. As of March
1998, the Company had placed orders for additional telecommunications equipment
of over $1.8 million.

ESCROW AGREEMENT

   Pursuant to the Texas Securities Act of 1957, the Texas State Securities
Commissioner has the discretion to require that an issuer offering and selling
securities to the residents of Texas in a public offering deposit certain
outstanding securities in escrow. In that regard, certain former officers and
directors of the Company, including Gary Panno, Kris Murthy, and Dal Berry, as
well as three other individuals (collectively, the "Shareholders"), are parties
to a Stock Escrow Agreement (the "Escrow Agreement") dated August 8, 1994. The
Escrow Agreement was required by the Texas State Securities Commissioner as a
condition to the registration of securities in Texas in connection with the
Company's IPO. The Escrow Agreement provides that a total of 415,503 shares of
Common Stock ("Shares") and 55,779 shares of Common Stock issuable upon the
exercise of options ("Options") be held in escrow for a period of not less than
two years and not more than ten years. The terms of the Escrow Agreement provide
further that Shares and Options held in escrow may be released provided certain
performance requirements of the Company ("Performance Requirements") are met.
For instance, if the Company's common stock trades at a price per share of at
least $11.81 for at least ninety (90) consecutive trading days then the Shares
and Options are automatically released from escrow.

   During the first quarter of 1998, the Company and the Shareholders entered
into a series of agreements, which will result in the early termination of the
Escrow Agreement in the second quarter of 1998, the repurchase by the Company of
certain of the Shares at a significant discount to market and the resolution of
a disagreement with certain of the Shareholders concerning the validity of the
Options. The agreements call for the Shareholders to sell a total of 101,417
Shares to the Company for $985,580 or $9.72 per share to be paid 25% upon
closing and 75% within ninety (90) days. Closing is expected to take place
during the first half of April 1998. In addition, the Shareholders agreed to
sign a ninety (90) day lock-up ("Lock-Up"), commencing on the closing date, for
any Shares which were not sold to the Company; provided, however, that should
any of the Performance Requirements be met during the Lock-Up, the Lock-Up will
terminate automatically. Finally, certain of the Shareholders agreed to the
termination of approximately 40,000 of the Options, which had an exercise price
of $0.80 per share.

CONTINGENCIES

   The Company has been named in two lawsuits filed by former employees and
consultants of the Company seeking damages in the aggregate in excess of
$1,000,000. The Company denies these allegations and intends to vigorously
defend against these allegations, although there can be no assurance as to the
successful defense of this matter. The Company believes that the results of this
litigation will not have a materially adverse effect on the Company's financial
condition.

   The Company was a defendant in a suit filed on November 8, 1997 by the estate
of a former shareholder. Effective May 23, 1997, the Company entered into a
compromise and settlement agreement with respect to this lawsuit. Pursuant to
the agreement, the Company agreed to repurchase all of the 83,359 shares of
Company common stock owned by the plaintiffs for total consideration of
$425,000, which was comprised of $125,000 and a three year $300,000 promissory
note bearing interest at 6%. In return for this consideration, the plaintiffs
have agreed to release the Company and the other defendant from any and all
claims in connection with the lawsuit. The Company recorded a loss on the
settlement of $128,000, which represents the excess of the consideration paid
over the trading value of the stock on the date of settlement.

YEAR 2000 PLANS

   In anticipation of the year 2000, management has developed a plan to review
software that was internally developed or externally purchased or licensed, and
also to review with its key vendors and service providers their software, for
compliance with Year 2000 processing requirements. In accordance with Emerging
Issues Task Force Opinion No. 96-14, "ACCOUNTING FOR THE COSTS ASSOCIATED WITH
MODIFYING COMPUTER SOFTWARE FOR THE YEAR 2000," the Company will expense all
costs as incurred. The Company does not believe that such costs will have a
material impact on the financial results of the Company.

8.  CAPITAL SUBSCRIPTIONS RECEIVABLE

   On December 15, 1993, the Company executed stock purchase agreements with two
individuals and a company that entitled each holder to purchase 125,000 shares
of the Company's common stock at $2 per share. In accordance with the terms of
the stock purchase agreements, each holder paid $50,000 of the purchase price
and received 25,000 shares; the remaining 100,000 shares were held in escrow
until the balance for each holder of $200,000 is paid in full by the holder,
which is due December 15, 1998. During 1997, the remaining balance of the
purchase price was paid to the Company resulting in the shares being released
from escrow.

9. SEGMENT INFORMATION

   The Company operates in two business segments, international long distance
and systems integration services. Long distance services operations are
conducted in the United States of America. Systems integration services are
performed in Mexico and Poland.

   Revenues, operating information and identifiable assets by business segment
and location are as follows:

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

                                        For the Year Ended December 31,
                                  ---------------------------------------------
                                      1995           1996            1997
                                  -------------  --------------  --------------
    Revenues-
      Long distance services   
      (United States)                        -       1,212,583      17,390,088
      Systems Integration:
          Mexico                             -       3,350,086      18,030,194

          Poland                     1,108,473       1,142,644         733,302
                                  -------------  --------------  --------------
              Total revenues         1,108,473       5,705,313      36,153,584
                                  =============  ==============  ==============
<PAGE>
    Operating income (loss)-
      Long distance services      
      (United States)                        -     (1,933,134)       2,428,447
      Systems Integration:
          Mexico                             -         129,944         768,226
          Poland                     (908,646)          44,749       (214,510)
                                  -------------  --------------  --------------
              Total operating     
      income (loss)                  (908,646)     (1,758,441)       2,982,163
                                  =============  ==============  ==============

                                               As of December 31,
                                  ---------------------------------------------
                                      1995           1996            1997
                                  -------------  -------------  ---------------
    Identifiable assets-
       Long distance services  
       (United States)                       -      4,136,304        6,612,029
       Systems Integration:
            Mexico                           -      4,164,550       32,013,443
            Poland                   4,497,931      1,070,184        1,009,555
                                  -------------  -------------  ---------------
                Total        
       identifiable assets           4,497,931      9,371,038       39,635,027
                                  =============  =============  ===============

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

10.   INVESTMENT IN OPERATING VENTURES
   During 1996, the Company invested $196,462 for a 7.21% interest in a venture
with Elterix, a Polish company developing a private network for 70,000 telephone
lines. During 1997, this venture lost its license to provide such services.
Accordingly, the Company realized a loss equal to its investment in 1997.

11.   QUARTERLY INFORMATION (UNAUDITED)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
        1996              FIRST       SECOND       THIRD        FOURTH       YEAR
<S>                      <C>          <C>        <C>          <C>         <C>       
Revenues                 $509,238     $840,846   $1,474,413   $2,880,816  $5,705,313
Operating loss           (210,467)   (265,475)    (362,174)    (920,325)   (1,758,441)
Income (loss) before
taxes and minority                                                               
interests                (173,570)   (186,299)    (286,683)    (998,487)   (1,645,039)
Net loss                 (181,108)   (206,486)    (299,098)    (911,316)   (1,598,008)
Basic EPS                $ (0.10)     $  (.07)    $  (0.08)    $  (0.23)   $  (0.52)

        1997              FIRST       SECOND       THIRD        FOURTH       YEAR
Revenues                 $3,770,920  $6,170,381  $12,192,390  $14,019,893  $36,153,584
Operating      income
(loss)                   (386,236)     696,066    1,169,276    1,503,057   2,982,163
Income (loss) before
taxes and minority
interests                (359,469)     402,804    1,110,125    1,596,795   2,750,255
Net income (loss)        (323,958)     537,855    1,202,148    1,255,645   2,671,690
Basic EPS                $ (0.08)      $  0.14      $  0.31      $  0.32     $  0.68
Diluted EPS (1)               n/a      $  0.13      $  0.22      $  0.18     $  0.53
</TABLE>
--------------------------------------------------------------------------------

(1) Inclusion of additional shares under a diluted analysis for loss period is
inappropriate due to the anti-dilutive effect.

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

   On November 6, 1996, the Company filed a current report on Form 8-KA#1,
reporting the Company's change of its independent accounting firm. The language
set forth in that filing is incorporated herein by reference. The Board of
Directors of the Company, upon the recommendation of the Audit Committee,
concluded that the engagement of BDO Seidman, LLP as the Company's independent
accountants was in the best interests of the Company. At the November 16, 1996
shareholders' meeting, the shareholders of the Company ratified the decision of
the Board to retain BDO Seidman, LLP as the Company's independent accountants
for the fiscal year ended December 31, 1996. In connection with the audits for
the two most recent years and through December 31, 1995, there have been no
disagreements with the Company's former independent accounting firm Hoffman,
McBryde Co., P.C. ("Hoffman") on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope of procedures,
which disagreements if not resolved to the satisfaction of Hoffman would have
caused them to make reference thereto in their report on the financial
statements for such years. None of the reports of Hoffman have contained an
adverse opinion or disclaimer of opinion or was qualified as to uncertainty,
audit scope or accounting principles.

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth certain information with respect to the
Directors, Executive Officers and certain key employees of the Company (as of 
April 28, 1998):

NAME                     AGE     POSITION
----                     ---     --------
E. Scott Crist (1)       34      Director; President and Chief Executive Officer
                                 
Manuel Landa (1)         37      Chairman of the Board; Director and Executive
                                 Vice-President of Operations; Chief Executive 
                                 Officer of Telereunion(3) and President and 
                                 Chief Executive Officer of Vextro(3)
                                 
Oscar Garcia (2)         37      Director; Vice-President of Telereunion(3);
                                 Vice-President of Operations of Vextro(3)
                                 
Ricardo Orea             37      Director; Vice-President of Telereunion(3);
                                 Vice-President of Sales and Marketing of
                                 Vextro(3)
                                 
Todd M. Binet (2)        33      Director; Executive Vice-President, Secretary,
                                 Treasurer and Chief Financial Officer
                                 
Stuart Newman            43      President of MSN Communications, Inc.(3)
                                 
Bryan T. Emerson         37      Vice President of Business Development and
                                 International Marketing
                                 
Melissa Dalton           26      Director of Operations - U.S.
                                 
Kori Moore               27      Director of Carrier Sales
                                 
Jesse Morris             30      Corporate Controller
                                 
Darrel O. Kirkland(1)(2) 57      Director
                                 
Enrique Orihuela         51      Director
-----------------                
                             
(1)  Member of the Compensation Committee of the Board of Directors.

(2)  Member of the Audit Committee of the Board of Directors.

(3)  Subsidiaries of the Company.

   E. SCOTT CRIST has served as President and Chief Executive Officer of the
Company since August 1996 and has been a member of the Board of Directors since
November 14, 1996. Prior to joining Telscape, Mr. Crist was a founder of Orion
Communications, Inc., a reseller of long distance and internet access services
and was President and Chief Executive Officer for Matrix Telecom, a
long-distance company which ranked #7 on THE INC. MAGAZINE list of 500 fastest
growing private companies in 1995. He also founded DNS Communications in January
1993, a reseller of long distance, and served as its Chief Executive Officer
from inception until DNS's merger with Matrix Telecom. Mr. Crist was also
formerly Vice President of Acquisitions for Trammel Crow Group with specific
focus on U.S. capital market transactions. Prior to joining Trammel Crow, Mr.
Crist worked in acquisitions for AMLI Corporation of Chicago, an investment
company and was responsible for sourcing and underwriting income-producing
assets on behalf of the firm's institutional clients. Prior to that, he worked
in New York as a strategy consultant for KSM, Inc., where he was responsible for
investigating competitive business situations for Fortune 200 technology
companies. In addition, he was a design engineer for IBM corporation in Research
Triangle, North Carolina. Mr. Crist has an MBA from the J.L. Kellogg School at
Northwestern University, and received a B.S. magna cum laude in Electrical
Engineering with emphasis on telecommunications design from North Carolina State
University.

  MANUEL LANDA is Chairman of the Board of Directors of Telscape and has been a
member of the Board of Directors since May 1996. Mr. Landa is a co-founder of
Telereunion and has been President and Chief Executive Officer of Vextro since
1989, and has also been Chief Executive Officer and a Director of Telereunion
since August 1995. From 1986 until he joined Telereunion, Mr. Landa served as
Export Sales Manager for Condumex, the largest Mexican manufacturer of
electrical products with exports to the USA, Canada, Latin America and Europe.
Also within Condumex Mr. Landa was in charge of the Insulating Materials
Division as Plant Manager. Prior to that Mr. Landa worked for Philips, a Dutch
company in the consumer and industrial electronics business, serving as Design
Engineer for its Industrial Audio-Video Division. Also, Mr. Landa worked for
IPESA, a Mexican construction and engineering firm, with projects in the
petrochemical, industrial and touristic sectors of Mexico. Mr. Landa received an
undergraduate degree in Electronic and Communications Engineering from La Salle
University in Mexico City, and has a diploma in Total Quality management from
the Instituto Tecnologico de Estudios Superiores Monterrey.

   OSCAR GARCIA has been a member of the Board of Directors of the Company since
May 1996. Mr. Garcia is a co-founder of Vextro and Telereunion and has been Vice
President of Operations since 1988 for Vextro, and a Director of Telereunion
since August 1995. From 1987 until he co-founded Vextro, Mr. Garcia served as
Engineering Manager for Infosistemas, at that time, the exclusive AT&T telephone
equipment distributor in Mexico. Mr. Garcia was Sales Support Manager for
Macrotel de Mexico SA de CV, a subsidiary of Macrotel, Inc., a Florida telephone
key systems company with exports to Mexico and Latin America and held the
position of design engineer for the R&D department of GTE, the leading U.S.
telecommunications company involved at that time, in PBX and KSU manufacturing
in Mexico. Mr. Garcia holds an undergraduate degree in Electronic and
Communications Engineering from La Salle University in Mexico City, a diploma in
Marketing from La Salle University and is currently obtaining a diploma in
Business Administration from Berkley University in Mexico City.

   RICARDO OREA has been a member of the Board of Directors of the Company since
May 1996. Mr. Orea is a co-founder of Vextro and Telereunion and has been Vice
President of Sales and Marketing since 1988 for Vextro, and a Director of
Telereunion since August 1995. Prior to joining Vextro, Mr. Orea was Electronic
Control Systems Plant Manager for Asea Brown Boveri (ABB), a Swedish electrical
control and switchgear equipment manufacturer from 1985 to 1988. From April 1982
to June 1985, Mr. Orea worked for GTE in the Purchasing and Logistics Department
as System Integrator and Supplier Development Manager. From 1979 to 1982, he was
Technical Service Manager for MISA, a Mexican computer mainframes and
telecommunications maintenance service company which served major financial
accounts and universities. Mr. Orea received an undergraduate degree in
Electronic and Communications Engineering from La Salle University in Mexico
City and has a diploma in Business Administration from Berkley University in
Mexico City.

   TODD M. BINET has been Executive Vice President and Chief Financial Officer
since January 1997 and a member of the Board of Directors since March 1997. Mr.
Binet has over 10 years of business and management experience. From January 1,
1996 to December 1997 he was an officer and director of St. James Capital Corp.,
which served as the general partner to St. James Capital Partners, a merchant
banking fund. From June 1992 to December 1995, he was Treasurer and Corporate
Counsel for Alamo Group Inc., an international company listed on the New York
Stock Exchange. Mr. Binet received a B.B.A. in finance from Southern Methodist
University and graduated Cum Laude. In May 1992, he received a M.B.A. from the
Wharton School of Business and a J.D. from the University of Pennsylvania law
school. Mr. Binet also holds a license to practice law with the State of Texas,
although such license is currently inactive.

   STUART NEWMAN has been President of MSN Communications, Inc. since it was
founded in 1996. Mr. Newman first entered the telecommunications industry in
1979 at Amtel Consulting where he was responsible for assisting many Fortune 500
customers in Texas. BellSouth and AT&T were among his clients. He helped
corporate clients establish networks and was involved in auditing billing
systems. In 1992, Mr. Newman founded New West Telecom, Inc., one of the nation's
first prepaid calling card companies. From 1994 to 1996, Mr. Newman was
Executive Vice President for a switch based provider of long distance services.

   BRYAN T. EMERSON has been Vice President of Development since August 1996.
Mr. Emerson served as International Sales Manager for C & L Communications,
Inc., a NYSE company, from December 1993 to March 1995, where he was responsible
for distributing telecommunications equipment in Mexico, Spain and Japan. From
May 1992 to December 1993, Mr. Emerson was Vice President of Marketing for ISDN
de Mexico, S.A. de C.V. He also served as a Product Manager for WilTel focused
on developing products including original switched, 800, conference calling,
voice mail, and travel and domestic card services for domestic and international
services. Mr. Emerson was also responsible for identifying and signing
distributor contracts between WilTel and companies in Mexico and Guatemala. Mr.
Emerson received a B.A. from Hamilton College and graduated cum laude. He also
received a M.B.A. from Rice University.

   MELISSA DALTON has been Director of Operations - U.S. for the Company since
January 1997. Previously Ms. Dalton was Project Manager for Matrix Telecom, a
long-distance reseller, from September 1995 through January 1997. Prior to that
she worked for DNS Communications, a long-distance company, as Operations
Manager from June 1994 through September 1995. Ms. Dalton is a member of the
national honor society Phi Beta Kappa. Ms. Dalton received a B.A. from the
University of Texas at Austin and graduated Magna Cum Laude in May 1994.

   KORI MOORE has been Director of Carrier Sales since January 1998 when she
joined the Company. Prior to joining the Company, from January 1997, Ms. Moore
served as Carrier Sales Manager for Primus Telecommunications, a multi-national
telecommunications company focused on international long distance service, where
she was responsible for negotiating and maintaining international wholesale
carrier accounts. Before her employment with Primus, Ms. Moore was employed by
EqualNet Corporation as Senior Account Executive and later as Regional Carrier
Sales Manager for its Unified Network Services subsidiary. Prior to her
employment with EqualNet, Ms. Moore was a buyer for the May Company. Ms. Moore
received her B.B.A. in Marketing from the University of Texas.

   JESSE MORRIS has been Corporate Controller since October 1997 when he joined
the Company. Prior to joining the Company, Mr. Morris worked from January 1992
to October 1997 with Arthur Andersen LLP, a multi-national accounting and
consulting professional services firm, where he left as Experienced Audit
Manager. Mr. Morris received his B.B.A. in Accounting and Finance and his
Masters in Professional Accountancy from the University of Texas. Mr. Morris is
a Certified Public Accountant with the State of Texas.

   DARREL O. KIRKLAND has been a member of the Board of Directors of the Company
since March 1996. Mr. Kirkland is a principal consultant with Kirkland &
Associates, a management consulting firm specializing in telecommunications. A
registered Professional Engineer, Mr. Kirkland has many years experience in long
distance, microwave, wireless, fiber and local transmission services. He has
held general management and marketing positions with MCI Air Signal, CPI
Microwave and Discovery Communications. Current and recent clients include MCI,
Skytel, IXC Communications, Prime Cable and Winstar Wireless. Mr. Kirkland
received a B.B.A. from the University of Texas and a M.S. in Industrial
Engineering from the University of Houston.

   ENRIQUE ORIHUELA has been a member of the Board of Directors of the Company
since March 1998. Mr. Orihuela is a founder and a owner of the Andean Satellite
System (ANDESAT). Since 1997 he has served as a member of the Board of Directors
of ANDESAT. ANDESAT is a multinational corporation constituted by members of the
five Andean countries: Venezuela, Colombia, Ecuador, Peru and Bolivia. Mr.
Orihuela has been responsible for the negotiations with Satmex, the Mexican
satellite operator, for the space in C Band to be used by ANDESAT until its
satellite launch planned for the year 2000. He has also conducted the
negotiations with Nahuelsat, the Argentinean satellite operator, for the space
in Ku Band to be used by Andesat for the same purpose. In 1991, Mr. Orihuela
founded Vector Communication Network Corp., a Florida-based satellite services
provider and has served as its President since that time. Mr. Orihuela also
founded Vector Comnet S.A. de C.V. and Industrias Electro Electronicas S.A.,
both Peruvian telecommunication corporations, in 1992 and 1979, respectively,
and has served as the President of both companies since their respective
founding. During the last 19 years, Mr. Orihuela has worked in the
telecommunications industry, including system design and integration. Mr.
Orihuela has also been significantly involved in the Peruvian-American Chamber
of Commerce, a non-profit organization in which he is a life-time Governor. Mr.
Orihuela studied at the University La Molina, specializing in Soil and Water
Engineering Resources. He then went on to graduate level studies in the field of
computers and communications. Vector Communication Network Corp. provides
satellite communications services to the Company (See Certain Relationships and
Related Information).

   Each officer of the Company holds office until such officer's successor is
chosen and qualified in such officer's stead or until such officer's death or
until such officer's resignation or removal from office. Certain officers have
employment contracts with the Company. (See Employment Agreements).

   Each of the directors, except Mr. Orihuela, were elected at the Company's
Annual Meeting held on June 23, 1997 and currently hold office until the next
annual meeting of the Company's stockholders on June 23, 1998 or until their
successors are elected and qualified. Pursuant to the Company's By-Laws, Mr.
Orihuela was elected on March 23, 1998 to the Company's Board of Directors by
the Board of Directors to fill a vacancy. Mr. Orihuela will hold office until
the next annual meeting of the Company's stockholders or until his successor is
elected and qualified.

           
 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

   Section 16(a) of the Exchange Act requires the Company's executive officers
and directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the NASDAQ. Executive
officers, directors and greater than 10% stockholders are required by certain
regulations to furnish the Company with copies of all Section 16(a) forms they
file.

   Based solely on its review of the copies of Forms 3 and 4, as furnished to
the Company, pursuant to the Exchange Act during its most recent fiscal year,
and Forms 5 with respect to its most recent fiscal year, it is the Company's
belief that any such forms required to be filed pursuant to Section 16(a) of the
Exchange Act were timely filed, as necessary by the officers, directors and
security holders required to file the same during the fiscal year ended December
31, 1997 with the exception that Mr. Binet gifted 10,000 Series A Common Stock 
Warrants to his minor child and did not file the necessary Form 5 on a timely 
basis. This Form 5 was subsequently filed on May 20, 1998.

ITEM 11. EXECUTIVE COMPENSATION

         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

   During the fiscal year ended December 31, 1997, Scott Crist and Manuel Landa,
each executive officers of the Company, served as members of the Company's Board
of Directors Compensation Committee. The Compensation Committee establishes
compensation and incentives for the Company's executive officers and administers
the Company's incentive compensation and benefit plans, including Mr. Crist's
and Mr. Landa's compensation. The third Compensation Committee member was
Darrell Kirkland, a non-employee director.

                             EXECUTIVE COMPENSATION

                        REPORT ON EXECUTIVE COMPENSATION

   Prior to March 1997, the compensation of the executive officers was
administered and determined directly by the Board of Directors. In March 1997,
the Company established a Compensation Committee of the Board which is comprised
of Mr. Kirkland, a non-employee director, and Mr. Crist and Mr. Landa, two
employee directors, and it is responsible for administering the Company's
executive compensation programs and policies. The Company's executive
compensation programs are designed to attract, motivate and retain the executive
talent needed to optimize stockholder value in a competitive environment. The
programs are intended to support the goal of increasing stockholder value while
facilitating the business strategies and long-range plans of the Company.

      The following is the Board of Directors' report addressing the
compensation of the Company's executive officers for fiscal 1997.

                       COMPENSATION POLICY AND PHILOSOPHY

   The Company's executive compensation policy is designed to establish an
appropriate relationship between executive pay and the Company's annual
performance, its long term growth objectives and its ability to attract and
retain qualified executive officers. The Company's policy is based on the belief
that the interests of the executives should be closely aligned with the
Company's stockholders. The Board attempts to achieve these goals by integrating
annual base salaries with (i) annual incentive bonuses based on corporate
performance, based on the achievement of specified performance objectives set
forth in the Company's financial plan for such fiscal year, and based on
individual performance, and (ii) stock options through the Company's stock
option plans. The Board's philosophy is to review salaries paid to executive
officers with comparable responsibilities in comparable businesses and offer
salaries to its executives which are in the lower range of those offered by such
comparable businesses. In addition, the components of each executive officer's
compensation is weighted to the bonus and option components. This results in a
meaningful portion of each executive's compensation being placed at-risk and
linked to the accomplishment of specific results that are expected to lead to
the creation of value for the Company's stockholders from both the short-term
performance and long term success of the Company. The Board considers all
elements of compensation and the compensation policy when determining individual
components of pay.

   The Board believes that leadership and motivation of the Company's employees
are critical to achieving the objectives of Company. The Board is responsible
for ensuring that its executive officers are compensated in a way that furthers
the Company's business strategies and which aligns their interests with those of
the stockholders. To support this philosophy, the following principles provide a
framework for executive compensation: (i) offer compensation opportunities that
attract the best talent to the Company; (ii) motivate individuals to perform at
their highest levels; (iii) reward outstanding achievement; (iv) retain those
with leadership abilities and skills necessary for building long-term
stockholder value; (v) maintain a significant portion of executives' total
compensation at risk, tied to both the annual and long-term financial
performance of the Company and the creation of incremental stockholder value;
and (iv) encourage executives to manage from the perspective of owners with an
equity stake in the Company.

                        EXECUTIVE COMPENSATION COMPONENTS

   As discussed below, the Company's executive compensation package is primarily
comprised of three components: base salary, annual incentive bonuses and stock
options.

   Base Salary. For fiscal 1997, the Board approved the base salaries of the
Named Executive Officers (as defined below) based on (i) salaries paid to
executive officers with comparable responsibilities employed by companies with
comparable businesses, (ii) performance and accomplishment of the Company in
fiscal 1997 which is the most important factor, and (iii) individual performance
reviews for fiscal 1997 for most executive officers. The Board's philosophy is
to review salaries paid to executive officers with comparable responsibilities
in comparable businesses and offer salaries to its executives which are in the
lower range of those offered by such comparable businesses. In addition, the
components of each executive officer's compensation is weighted to the bonus and
option components. This results in a meaningful portion of each executive's
compensation being placed at-risk and linked to the accomplishment of specific
results that are expected to lead to the creation of value for the Company's
stockholders from both the short-term performance and the long term success of
the Company. The Board reviews executiv ing placed at-risk and linked to the
accomplishment of specific results that are expected to lead to the creation of
value for the company. officer salaries annually and exercises its judgement
based on all the factors described above in making its decision, subject to the
terms of such officer's employment agreement. No specific formula is applied to
determine the weight of each criteria.

   Annual Incentive Bonuses. Annual incentive bonuses for the Named Executive
Officers are based upon the following criteria: (i) the Company's financial
performance for the current fiscal year, (ii) the furthering of the Company's
strategic position in the marketplace, and (iii) individual merit. The Company
paid incentive bonuses to the Named Executive Officers as depicted in the
Summary Compensation Table.

   Long Term Incentive Compensation. Stock options encourage and reward
effective management which results in long-term corporate financial success, as
measured by stock price appreciation. The Board believes that option grants
afford a desirable long-term compensation method because they closely ally the
interests of management with stockholder value and that grants of stock options
are the best way to motivate executive officers to improve long-term stock
market performance. The vesting provisions of options granted under the
Company's stock option plans are designed to encourage longevity of employment
with the Company and generally extend over a three year period.


                   COMPENSATION OF CHIEF EXECUTIVE OFFICER

   The Board believes that E. Scott Crist, the Company's Chief Executive
Officer, provides valuable services to the Company and that his compensation
should therefore be competitive with that paid to executives at comparable
companies. In addition, the Board believes that an important component of his
compensation should be based on Company performance. Mr. Crist's annual base
salary for fiscal 1997 was $95,000. The factors which the Board considered in
setting his annual base salary were his individual performance and pay practices
of peer companies relating to executives of similar responsibility.
Additionally, Mr. Crist received an annual incentive bonus of $75,000 which was
determined by the Board after considering the Company's performance in fiscal
year 1997 in relation to the Company's financial plans for 1997 as well as Mr.
Crist's individual performance.

                      INTERNAL REVENUE CODE SECTION 162(M)

   Under Section 162(m) of the Internal Revenue Code (the "Code"), the amount of
compensation paid to certain executives that is deductible with respect to the
Company's corporate taxes is limited to $1,000,000 annually, if certain
requirements of section 162(m) are not met. It is the current policy of the
Board to maximize, to the extent reasonably possible, the Company's ability to
obtain a corporate tax deduction for compensation paid to executive officers of
the Company to the extent consistent with the best interests of the Company and
its stockholders.


                                               The Compensation Committee
                                               Darrel O. Kirkland
                                               E. Scott Crist
                                               Manuel Landa

<PAGE>
                           SUMMARY COMPENSATION TABLE

      The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Chief Executive Officer and the four other most highly compensated
executive officers of the Company (together, the "Named Executive Officers") who
served as such during the 1997 fiscal year.
<TABLE>
<CAPTION>
                                                                                              Long-Term Compensation
                                                                            --------------------------------------------------------
                                           Annual Compensation (1)                      Awards                      Payouts
                          ------------------------------------------------  ---------------------------   --------------------------

                                                                                             SECURITIES     
                                                                OTHER                        UNDERLYING                   ALL
    NAME AND                                                   ANNUAL         RESTRICTED      OPTIONS/       LTIP        OTHER
    PRINCIPAL                                    BONUS         COMPEN           STOCK           SARS        PAYOUTS      COMPEN
  POSITION (2)            YEAR    SALARY($)     ($)(3)         SATION($)      AWARDS($)(4)       (#)          (#)        SATION($)
--------------------   -------   ----------    ---------     -------------   -------------   ----------   -----------  -------------
<S>                       <C>    <C>           <C>                                             <C>                            
Scott Crist; .......      1997   $ 87,308      $  75,000          --              --              --            --
President ..........      1996   $ 14,423         --              --              --           350,000          --           --
and Chief
Executive
Officer

Manuel Landa;.......      1997   $ 80,000      $  75,000          --              --              --            --
Chairman, EVP ......      1996   $ 33,000         --              --              --            75,000          --           --
of Operations,
and CEO of
Telereunion
and Vextro

Oscar Garcia; ......      1997   $ 80,000      $  50,000          --              --               --           --           --
V.P. of ............      1996   $ 33,000         --              --              --            75,000          --           --    
Telereunion,
V.P. Operations
of Vextro

Ricardo Orea; ......      1997   $ 80,000      $  50,000          --              --               --            --           --
V.P. of ............      1996   $ 33,000         --              --              --             75,000          --           --   
Telereunion,
V.P. of
Marketing
of Vextro

Todd M.Binet; ......      1997   $ 74,346      $  50,000          --              --            250,000          --           --
EVP, Secretary, ....      1996       --          --               --              --               --            --           -- 
Treasurer and
CFO
</TABLE>

(1) Each of the Company's officers received perquisites and other personal
benefits in addition to salary and bonuses. The aggregate amount of such
perquisites and other personal benefits, however, does not exceed the lesser of
$50,000 or 10 percent of the total of the annual salary and bonus reported for
any of the Named Executive Officers for each of the reported years.
   (2)The following summarizes each executive's employment commencement dates: 
Mr. Crist, August, 1996; Mr. Landa, May, 1996; Mr. Garcia, May, 1996; Mr. Orea, 
May, 1996; Mr. Binet, January, 1997. Compensation information is provided for 
each Named Executive Officer from such officer's employment commencement date.
<PAGE>
   (3)Represents annual bonus award earned for the fiscal year noted, even
though such bonus was paid in the following fiscal year.
   (4)The number and value of aggregate restricted stock holdings for Messrs.
Crist, Landa, Garcia, Orea and Binet of the end of the last fiscal year, based
on the closing price of the Common Stock on NASDAQ on December 31, 1997 were
566,000; 360,000; 360,000; 360,000 and 162,375 shares, respectively with a value
of $4,457,250; $2,835,000; $2,835,000; $2,835,000; and $1,278,703, respectively
(without giving effect to the consideration paid by the Named Executive
Officers).

      The following table sets forth certain information with respect to options
granted during the last fiscal year to the Named Executive Officers.

                 OPTION/SAR GRANTS IN LAST FISCAL YEAR (1997)
                 --------------------------------------------
                            % of Total
               Number of   Options/SARs                              Fair
               Securities   Granted to                               Market
               Underlying   Employees                                Value at
              Options/SARs  in FISCAL     Exercise     EXPIRATION    Date of
    NAME      GRANTED (#)      YEAR     PRICE ($/SH)     DATE        GRANT (1)
    ----      -----------      ----     ------------     ----      ---------
Scott Crist......    --         --         --             --           --
Manuel Landa.....    --         --         --             --           --
Oscar Garcia.....    --         --         --             --           --
Ricardo Orea.....    --         --         --             --           --
Todd             83,333        15%        $3.25     January 13, 2007  $ 89,264
Binet........   166,667        30%        $4.00     January 13, 2007  $219,730

   (1)The calculation of fair market value was performed utilizing the
Black-Scholes model utilizing the following assumptions: expected volatility of
75%, risk-free rate of return of 5.6%, dividend yield of 0%, and expected life
of 10 years.

   AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
                                OPTION/SAR VALUES

      The following table sets forth certain information with respect to options
exercised during fiscal 1997 by the Named Executive Officers and with respect to
unexercised options held by such persons at the end of fiscal 1997.

<TABLE>
<CAPTION>
                                                        NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                             SHARES                         UNDERLYING                     IN-THE-MONEY
                            ACQUIRED                   UNEXERCISED AT FISCAL          OPTION/SARS AT FISCAL
                               ON                            YEAR END (#)                YEAR END ($)(1)
                            EXERCISE    Value       ------------------------------ --------------------------
    NAME                      (#)      REALIZED     EXERCISABLE     UNEXERCISABLE  EXERCISABLE    UNEXERCISABLE
    ----                      ---      --------     -----------   ---------------- ------------  ---------------
<S>                                                   <C>              <C>           <C>           <C>       
Scott Crist ........          --          --          116,667          233,333       $393,750      $  787,500
Manuel Landa .......          --          --          100,000             --         $300,000            --
Oscar Garcia .......          --          --          100,000             --         $300,000            --
Ricardo Orea .......          --          --          100,000             --         $300,000            --
Todd Binet .........          --          --             --            250,000           --        $1,031,250
</TABLE>

      (1) The calculations of the value of unexercised options are based on the
difference between the closing price of $7.875 per share on NASDAQ of the Common
Stock on December 31, 1997, and the exercise price of each option, multiplied by
the number of shares covered by the option.
<PAGE>
                            COMPENSATION OF DIRECTORS

            Directors are reimbursed for their ordinary and necessary expenses
incurred in attending meetings of the Board of Directors or a committee thereof.
The Company pays directors who are not also employees of the Company $500 for
each meeting of the Board of Directors they attend. Directors of the Company are
eligible to participate in the Company's 1996 Stock Option and Appreciation
Rights Plan and the Company's 1994 Directors Stock Option Plan.

            Non-employee directors may receive an annual grant of options to
purchase 10,000 shares of the Company's Common Stock.

                              EMPLOYMENT AGREEMENTS

            The Company entered into an employment agreement with Mr. E. Scott
Crist, effective August 1, 1996, which agreement provides that Mr. Crist will
serve as President and Chief Executive Officer. The agreement terminates on the
third anniversary thereof unless terminated sooner for cause. The agreement
provides that Mr. Crist will be entitled to receive annual compensation of
$95,000 and options to purchase 350,000 shares of Common Stock at $4.50 per
share, vesting one-third each year commencing August 1, 1997, and automaticlly
vest if the Company's Common Stock exceeds $13 per share for 20 consecutive
trading days. In addition, Mr. Crist is entitled to a bonus determined by the
Board of Directors based on individual and Company performance.

   In connection with the Company's acquisition of Telereunion, Inc., the
Company entered into employment agreements with each of Messrs. Landa, Garcia
and Orea, effective as of May 14, 1996. The employment agreements provide, among
other things, that Mr. Landa will serve as President and CEO of Telereunion and
that Messrs. Garcia and Orea will each serve as a vice president of Telereunion.
Each employment agreement terminates May 14, 1999, unless earlier terminated by
Telereunion for cause. Messrs. Landa, Garcia and Orea are entitled to each
receive annual compensation of $80,000 under his respective employment
agreement.

   On January 13, 1997, the Company entered into an employment agreement with
Mr. Binet. The agreement provides, among other things, that Mr. Binet will serve
as Executive Vice President and Chief Financial Officer of the Company. The
employment agreement terminates on January 13, 2000, unless terminated earlier
for cause. Mr. Binet is entitled to a minimum annual compensation of $70,000
under the employment agreement and a bonus based on Company and personal
performance. The minimum annual compensation is adjusted to the extent that Mr.
Binet receives a raise in annual salary. As part of the employment agreement,
Mr. Binet was granted an option to purchase 250,000 shares of Common Stock,
166,667 at $4.00 and 83,333 at $3.25 which vest over a three year period on a
quarterly basis after the first year. In connection with a change in control of
the Company that results in Mr. Binet no longer maintaining the position of
Executive Vice President and CFO of the surviving company, the option becomes
immediately exercisable.
<PAGE>
                 STOCKHOLDER RETURN PERFORMANCE PRESENTATION

            Set forth below is a line graph comparing the yearly change in the
Company's Common Stock since the Company's initial public offering in August
1994 against the NASDAQ Telecommunications Industry Index and the NASDAQ Stock
Market Index.

                 [LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]

                                  8/94      1994      1995      1996      1997
                                 -------   -------   -------   -------   -------
Telscape International........    100.00     57.69     42.31     48.07    122.10
                                 -------   -------   -------   -------   -------
NASDAQ Telecom ($) ...........    100.00     96.00    125.70    128.52    190.27
                                 -------   -------   -------   -------   -------
NASDAQ US ($) ................    100.00    104.89    148.34    182.46    223.95
                                 -------   -------   -------   -------   -------

(1) The graph assumes that $100 was invested in August 1994 in the Company's
Common Stock and in the NASDAQ Stock Market Index and the NASDAQ
Telecommunications Index, and that all dividends were invested. No dividends
have been declared or paid in the Company's Common Stock. Stockholder returns
over the indicated period should not be considered indicative of future
stockholder returns.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            The following table sets forth certain information, as of April 28,
1998, with respect to the beneficial ownership of Common Stock by each director,
each Named Executive Officer included in the Summary Compensation Table, the
directors and executive officers as a group and each stockholder known to
management to own beneficially more than 5% of the Common Stock. Unless
otherwise noted, the persons listed below have sole voting and investment power
with respect to such shares.

NAME AND                               NUMBER OF SHARES        PERCENTAGE
ADDRESS                               BENEFICIALLY OWNED    BENEFICIALLY OWNED
--------                              ------------------    ------------------
E. Scott Crist ......................   1,241,200(1)                 16.4%  
2700 Post Oak Boulevard, Suite 1000                               
Houston, Texas 77056                                              
                                                                  
Manuel Landa ........................   1,016,133(2)(3)              13.5%
Moras No. 430                                                     
Col. Del Valle, Del Benito Juarez                                 
03100 Mexico, D.F
                                                                  
Ricardo Orea ........................   1,016,133(3)(5)              13.4%
Moras No. 430                                                     
Col. Del Valle, Del Benito Juarez                                 
03100 Mexico, D.F
                                                                  
Oscar Garcia ........................   1,011,333(3)(4)              13.5%
Moras No. 430                                                     
Col. Del Valle, Del Benito Juarez                                 
03100 Mexico, D.F

Todd M. Binet .......................     338,741(6)                  4.5%
2700 Post Oak Boulevard, Suite 1000                               
Houston, Texas 77056                                              
                                                                  
Darrel Kirkland .....................      10,000(7)                  ---*
803 Forest View                                                   
Austin, TX 78746                                                  
                                                                  
Enrique Orihuela ....................        --                       ---*
13000 S.W. 133rd Court                                            
Miami, FL 33186                                                   
                                                                  
All directors and executive .........   4,633,539(8)                 61.3%
officers as a group (7 persons)                                   
                                                             
------------------------------------------------------------------------------
*     Less than 1%

      (1) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and are exercisable with respect to
rights to purchase 36,200 shares of Common Stock at $2.19 per share owned by Mr.
Crist and as well as rights to purchase 240,000 shares of Common Stock held by
Delaware Guaranteed Trust Co. F/B/O Mr. Crist. Excludes shares of Common Stock
issuable upon exercise of the Series A Common Stock Warrant representing the
right to purchase 9,050 shares of Common Stock at $2.19 per share owned directly
by Mr. Crist as well as a Series A Common Stock Warrant representing the right
to purchase 60,000 shares of Common Stock at $2.19 per share held by Delaware
Guarantee & Trust Co. F/B/O Mr. Crist. The Series A Common Stock Warrant will
vest and become exercisable, if at all, with respect to right to purchase the
remaining shares of Common Stock, upon the Company's fiscal year earnings before
depreciation, amortization, and non-cash charges, as defined, equaling $0.75 per
share. Notwithstanding the foregoing, the Series A Common Stock Warrant will
vest and become fully exercisable as to any shares not vested if, for any ninety
(90) consecutive trading days, the closing price for a share of Common Stock
equals or exceeds $12.00. The Series A Common Stock Warrant lapses on May 16,
2003. Also, included are the shares of Common Stock issuable upon exercise of a
Series B Common Stock Warrant representing the right to purchase 49,000 shares
of Common Stock at $2.19 per share held by Delaware Garanteed Trust Co. F/B/O
Mr.Crist. The Series B Common Stock Warrant is currently exercisable and expires
on May 16, 2003. Includes options to purchase 350,000 shares of Common Stock at
$4.50 per share which are presently exercisable. Reference is also made to the
Schedule 13D filed with the Securities and Exchange Commission by Mr. Crist on
or about February 4, 1997.

      (2) Includes shares of Common Stock issuable upon exercise of a Series A
Common Stock Warrant which have vested and become exercisable with respect to
rights to purchase 197,766 shares of Common Stock at $2.19 per share owned by
Mr. Landa, as well as rights to purchase 358,366 shares of Common Stock held by
Forest International, L.L.C. ("Forest"). Mr. Landa is the beneficial owner of
Forest. Excludes shares of Common stock issuable upon the exercise of the Series
A Common Stock Warrant representing the right to purchase 49,441 shares of
Common stock owned by Mr. Landa as well as rights to purchase 89,592 shares of
Common stock held by Forest. The Series A Common Stock Warrant lapses on May 16,
2003. For the discussion of vesting provisions for the Series A Common Stock
Warrant, please see footnote 1 above. Reference is also made to the Schedule 13D
filed with the Securities and Exchange Commission by Mr. Landa on or about June
4, 1996.

      (3) Includes options to purchase 25,000 and 75,000 shares of Common Stock
at $1.35 and $4.875 per share, respectively, all of which options are presently
exercisable.

      (4) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect to
rights to purchase 197,766 shares of Common Stock at $2.19 per share owned by
Mr. Garcia, as well as rights to purchase 358,366 shares of Common Stock held by
Sky International, L.L.C. ("Sky"). Mr. Garcia is the beneficial owner of Sky.
Excludes shares of Common Stock issuable upon the exercise of the Series A
Common Stock Warrant representing the right to purchase 49,441 shares owned by
Mr. Garcia as well as rights to purchase 89,592 shares of Common Stock held by
Sky. The Series A Common Stock Warrant lapses on May 16, 2003. For the
discussion of vesting provisions for the Series A Common Stock Warrant, please
see footnote 1 above. Reference is also made to the Schedule 13D filed with the
Securities and Exchange Commission by Mr. Garcia on or about June 4, 1996.

      (5) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect to
rights to purchase 197,766 shares of Common Stock at $2.19 per share owned by
Mr. Orea, as well as rights to purchase 358,366 shares of Common Stock held by
Cloud International, L.L.C. ("Cloud"). Mr. Orea is the beneficial owner of
Cloud. Excludes shares of Common Stock issuable upon the exercise of the Series
A Common Stock Warrant representing the right to purchase 49,441 shares owned by
Mr. Orea, as well as rights to purchase 89,592 shares of Common Stock held by
Cloud. The Series A Common Stock Warrant lapses on May 16, 2003. For the
discussion of vesting provisions for the Series A Common Stock Warrant, please
see footnote 1 above. Reference is also made to the Schedule 13D filed with the
Securities and Exchange Commission by Mr. Orea on or about June 4, 1996.

      (6) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant representing the right to purchase 47,200 shares of Common
Stock at $2.19 per share. Excludes shares of Common stock issuable upon the
exercise of the Series A Common Stock Warrant representing the right to purchase
1,800 shares of Common stock. Also, included are shares of Common Stock issuable
upon exercise of a Series B Common Stock Warrant representing the right to
purchase 25,000 shares of Common Stock at $2.19 per share. The Series A Common
Stock Warrant and the Series B Common Stock Warrant both expire on May 16, 2003.
For the discussion of vesting provisions for the Series A Common Stock Warrant,
please see footnote 1 above. Includes options to purchase 83,333 shares of
Common Stock at $3.25 per share and options to purchase 20,833 shares of Common
Stock at $4.00 per share, all of which are presently exercisable. Excludes
options to purchase 145,834 shares of Common Stock at $4.00 per share as such
options are not exercisable within sixty (60) days of this table. Excludes
10,000 Series A Warrants and 10,000 Series B Warrants which are held in trust
for the benefit of Mr. Binet's two minor children. Mr. Binet disclaims
beneficial ownership of these shares.

      (7) Includes options to purchase 10,000 shares of Common Stock at $3.75
per share, all of which options are presently exercisable.

      (8) Includes options and warrants to purchase 2,155,998 shares of Common
Stock, all of which are exercisable within sixty (60) days of the date of this
table.
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED INFORMATION

                CERTAIN RELATIONSHIPS AND RELATED INFORMATION

      Vector Communications Network Corp ("Vector"), of which Enrique Orihuela,
a director of the Company, is President, provides the Company with satellite
communication services under various one year contracts through April 1999. The
Company paid Vector a total of $215,000 for these services in fiscal year 1997
and $290,000 through April of 1998.

      The Company has also signed a letter of intent with Vector whereby the
Company and Vector intend to form a joint venture which will conduct operations
in Latin America. The structure of the joint venture and the extent of the
operations are yet to be determined.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

   (a) Exhibits. See Index to Exhibits on page 53. Each of the following
exhibits described on the index to exhibits is a management contract or
compensatory plan or arrangement: 10.1, 10.2, 10.11, 10.12, 10.13, 10.15, 10.16.

   (b) Financial Statement Schedules: None.

   (c) Reports on Form 8-K.

   On October 15, 1997, the Company filed a Current Report on Form 8-K
(subsequently amended by Form 8-KA, dated November 5, 1997) reporting the
Company's acquisition of all of the outstanding shares of N.S.I., S.A. de C.V.,
a Mexican corporation based in Mexico City, from Jose Martin Pena Nunez, Carlos
Joaquin De Lara Y Campos, Jorge Pena Nunez and Martha Teresita Martin del Campo
Gutierrez.
<PAGE>
                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                          TELSCAPE INTERNATIONAL, INC.
                                          (Registrant)



May 19, 1998                            /s/ E. SCOTT CRIST
                                          E. Scott Crist
                                          President and Principal Executive
                                          Officer


May 19, 1998                            /s/ TODD M. BINET
                                          Todd M. Binet
                                          Principal Financial and Accounting
                                          Officer

   Pursuant to 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 and on the dates indicated.

SIGNATURE                           TITLE                DATE
---------                           -----                ----
/s/ E. SCOTT CRIST                  Director          April 8, 1998
E. Scott Crist

/s/ MANUEL LANDA                    Director          April 8, 1998
Manuel Landa

/s/ OSCAR GARCIA                    Director          April 8, 1998
Oscar Garcia

/s/ RICARDO OREA                    Director          April 8, 1998
Ricardo Orea

/s/ TODD M. BINET                   Director          April 8, 1998
Todd M. Binet

/s/ DARREL O. KIRKLAND              Director          April 8, 1998
Darrel O. Kirkland
<PAGE>
                               INDEX OF EXHIBITS

EXHIBIT NO.                       DESCRIPTION

  3.1       -     Articles of Incorporation of the Registrant, as amended
                  (filed as Exhibit 3.1 to the Company's Registration
                  Statement No. 33-80542-D and incorporated herein by
                  reference)
  3.2       -     Bylaws of the Registrant, as amended (filed as Exhibit 3.2
                  to the Company's Registration Statement No. 33-80542-D and
                  incorporated herein by reference)
  3.3       -     Articles of Incorporation of Polish Microwave, Inc. (filed
                  as Exhibit 3.3 to the Company's Registration Statement No.
                  33-80542-D and incorporated herein by reference)
  3.4       -     Bylaws of Polish Microwave, Inc. (filed as Exhibit 3.4 to
                  the Company's Registration Statement No. 33-80542-D and
                  incorporated herein by reference)
  3.5       -     Contract of Limited Liability Company of DTS/ZWUT (filed as
                  Exhibit 3.5 to the Company's Registration Statement No.
                  33-80542-D and incorporated herein by reference)
  4.1       -     Form of Certificate evidencing Common Stock (filed as
                  Exhibit 4.1 to the Company's Registration Statement No.
                  33-80542-D and incorporated herein by reference)
  4.2       -     Form of Warrant Agreement between American Stock Transfer &
                  Trust Company and the Company (filed as Exhibit 4.2 to the
                  Company's Registration Statement No. 33-80542-D and
                  incorporated herein by reference)
  4.3       -     Form of Warrant Certificate evidencing the Warrants (filed
                  as Exhibit 4.3 to the Company's Registration Statement No.
                  33-80542-D and incorporated herein by reference)
  4.4       -     Form of Statement of the establishment of the Series B
                  non-voting, nonparticipating Preferred Stock (filed as
                  Exhibit 4.1 to the Company's Report on Form 10-QSB for the
                  quarter ended March 31, 1996 and incorporated herein by
                  reference)
 10.1       -     1994 Employee Stock Option Plan (filed as Exhibit 10.1 to
                  the Company's Registration Statement No. 33-80542-D and
                  incorporated herein by reference)
 10.2       -     1994 Stock Option Plan for Directors (filed as Exhibit 10.2
                  to the Company's Registration Statement No. 33-80542-D and
                  incorporated herein by reference)
 10.3       -     Form of Representative's Warrants (filed as Exhibit 10.8 to
                  the Company's Registration Statement No. 33-80542-D and
                  incorporated herein by reference)
 10.4       -     Distribution Agreement dated May 2, 1995 between the
                  Registrant and DSC International Corporation (filed as
                  Exhibit 10.11 to the Company's Report on Form 10-KSB for the
                  year ended December 31, 1995 and incorporated herein by
                  reference)
 10.5       -     Warrant Agreement between the Company and S.P. Krishna
                  Murthy (filed as Exhibit 10.13 to the Company's Report on
                  Form 10-KSB for the year ended December 31, 1995 and
                  incorporated herein by reference)
 10.6       -     Stock Purchase agreement between the Company and Elterix
                  S.A. (filed as Exhibit 10.14 to the Company's Report on Form
                  10-KSB for the year ended December 31, 1995 and incorporated
                  herein by reference)
 10.7       -     Letter of intent between the Company and Telereunion, Inc.
                  (filed as Exhibit 10.15 to the Company's Report on Form
                  10-KSB for the year ended December 31, 1995 and incorporated
                  herein by reference)
 10.8       -     Agreement and Plan of Merger (filed as Exhibit 10.3 to the
                  Company's Report on Form 10-QSB for the quarter ended March
                  31, 1996 and incorporated herein by reference)
 10.9       -     Form of Series A Common Stock Warrant (filed as Exhibit 10.4 
                  to the Company's Report on Form 10-QSB for the quarter ended 
                  March 31, 1996 and incorporated herein by reference)
 10.10      -     Form of Series B Common Stock Warrant (filed as Exhibit 10.5
                  to the Company's Report on Form 10-QSB for the quarter ended
                  March 31, 1996 and incorporated herein by reference)
 10.11      -     Form of Employment Agreement for Manuel Landa, Ricardo Orea
                  Gudino and Oscar Garcia Mora (filed as Exhibit 10.6 to the
                  Company's Report on Form 10-QSB for the quarter ended March
                  31, 1996 and incorporated herein by reference)
 10.12      -     Form of Non-Qualified Stock Option Certificate and
                  Agreement, as amended, for Manuel Landa, Ricardo Orea Gudino
                  and Oscar Garcia Mora (filed as Exhibit 10.7 to the Company's
                  Report on Form 10-QSB for the quarter ended March 31, 1996 and
                  incorporated herein by reference)
 10.13      -     Form of Series A Common Stock Warrant dated May 17, 1996
                  between the Company and Manuel Landa, Ricardo Orea Gudino,
                  Oscar Garcia Mora and Christopher Efird (filed as Exhibit 10.1
                  to the Company's Report on Form 8-K dated June 3, 1996 and
                  incorporated herein by reference)
 10.14      -     Agreement and Plan of Merger between the Company and Orion
                  Communications, Inc. (filed as Exhibit 10.9 to the Company's
                  Report on Form 10-QSB for the quarter ended June 30, 1996 and
                  incorporated herein by reference)
 10.15      -     Employment Agreement for E. Scott Crist (filed as Exhibit
                  10.1 to the Company's Report on Form 10-QSB for the quarter
                  ended September 30, 1996 and incorporated herein by reference)
 10.16      -     Employment agreement for Todd Binet (filed as Exhibit
                  10.29 to the Company's Report on Form 10-KSB for the year
                  ended December 31, 1996 and incorporated herein by reference)
 10.17      -     Form of Promissory Note dated July 1, 1997, between
                  Telereunion and Jose Luis Apan Wong, Raul de la Parra Zavala
                  and Alejandro Apan Wong (filed as Exhibit 10.4 to the
                  Company's Current Report on Form 8-K dated August 5, 1997 and
                  incorporated herein by reference)
 10.18      -     Form of Convertible Promissory Note dated July 1, 1997,
                  between the Company and Telereunion and Jose Luis Apan Wong,
                  Raul de la Parra Zavala and Alejandro Apan Wong (filed as
                  Exhibit 10.4 to the Company's Current Report on Form 8-K dated
                  August 5, 1997 and incorporated herein by reference)
 10.19      -     Form of Common Stock Warrant dated July 1, 1997, between the
                  Company and Jose Luis Apan Wong, Raul de la Parra Zavala and
                  Alejandro Apan Wong (filed as Exhibit 10.4 to the Company's
                  Current Report on Form 8-K dated August 5, 1997 and
                  incorporated herein by reference)
 10.20      -     Stock Purchase Agreement dated July 1, 1997, by and among
                  the Company, Telscape USA, Telereunion and Jose Luis Apan
                  Wong, Raul de la Parra Zavala and Alejandro Apan Wong (filed
                  as Exhibit 10.4 to the Company's Current Report on Form 8-K
                  dated August 5, 1997 and incorporated herein by reference)
 10.21      -     Stock Purchase Agreement dated October 1, 1997, by and among
                  Telscape USA, Inc., Telereunion, Inc. and Jose Martin Pena
                  Nunez, Carlos Joaquin De Lara Y Campos, Jorge Pena Nunez,
                  Martha Teresita Martin Del Campo Gutierrez (filed as Exhibit
                  10.1 to the Company's Current Report on Form 8-K dated October
                  15, 1997 and incorporated herein by reference)
 10.22      -     Stock Purchase Agreement dated January 22, 1998, by and among
                  the Company; MSN Communications, Inc.; Stuart Newman; and
                  Michael Newman, together with Form of Promissory Note dated
                  January 23, 1998 in the principal amount of $375,000.payable
                  to Stuart Newman attached as Exhibit B-1 and Form of
                  Promissory Note dated January 23,1 998 in the principal amount
                  of $375,000 payable to Michael Newman attached as Exhibit B-2
                  (filed as Exhibit 10.1 to the Company's Current Report on Form
                  8-K dated February 6, 1998 and incorporated herein by
                  reference)
 16.1       -     Letter on change in certifying accountant (Hoffman, McBryde
                  & Co., P.C.) (filed as Exhibit 1.1 to the Company's Report
                  on Form 8-KA dated November 6, 1996 and incorporated herein
                  by reference)
 *21.1      -     Subsidiaries of the registrant
 *27.1      -     Financial Data Schedule 1997
 *27.2      -     Financial Data Schedule 1996
 *27.3      -     Financial Data Schedule 1995
 *99.1            Current Report on Form 8-K dated January 7, 1998, relating to
                  certain outstanding litigation
----------------
 * Filed herewith