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

                                   FORM 10-KSB
(Mark One)

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF 1934 (Fee Required)
                For the fiscal year ended DECEMBER 31, 1996

[_]     TRANSITIONAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 (No Fee Required)
                For the transitional period from __________ to ___________

Commission File Number 0-24622

                          TELSCAPE INTERNATIONAL, INC.
                 (Name of small business issuer in its charter)

                 TEXAS                             75-2433637
    (State or other jurisdiction of             (I.R.S. Employer
     incorporation or organization)           identification number)

    4635 SOUTHWEST FREEWAY, SUITE 800, HOUSTON, TEXAS          77027
         (Address of principal executive offices)            (Zip Code)

Issuer's telephone number including area code -- (713) 968-0968

Securities registered under Section 12(b) of the Exchange Act:

                                               Name of each exchange on
                  Title of each class                which traded
                  -------------------                ------------
                           None

Securities registered under Section 12(g) of the Exchange Act:

                         Common Stock ($.001 Par Value)
                         ------------------------------
                                (Title of class)

                    Redeemable Common Stock Purchase Warrant
                    ----------------------------------------
                                (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year: $5,705,313

Aggregate market value of the common stock held by non-affiliates of the
registrant on March 14, 1997, based on the closing price of the common stock on
the NASDAQ Small-Cap Market on that date was approximately $5,139,760.

3,935,969 shares of registrant's common stock($.001 Par Value) were outstanding
as of March 14, 1997.

Transitional Small Business disclosure format Yes [ ] No [X]
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                                TABLE OF CONTENTS
                               FORM 10-KSB REPORT
                                DECEMBER 31, 1996

                                                                            Page
                                                                            ----
Part I.

         Item 1. Description of Business                                      1

         Item 2. Description of Property                                      7

         Item 3. Legal Proceedings                                            8

         Item 4. Submission of Matters to a vote of Security Holders          9

Part II.

         Item 5. Market for Common Equity and Related Stockholder Matters    10

         Item 6. Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                         11

         Item 7. Financial Statements                                        16

         Item 8. Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure                         17

Part III.

         Item 9. Directors, Executive Officers, Promoters and
                 Control Persons; Compliance With Section 16(a)
                 of the Exchange Act                                         17

         Item 10. Executive Compensation                                     20

         Item 11. Security Ownership of Certain
                  Beneficial Owners and Management                           22

         Item 12. Certain Relationships and Related
                  Transactions                                               26

         Item 13. Exhibits and Reports on Form 8-K                           28

<PAGE>
                                     PART I

ITEM 1. DESCRIPTION OF  BUSINESS

                                     HISTORY

        Telscape International, Inc., formerly Polish Telephones and Microwave
Corporation, (collectively with its subsidiaries, "Telscape" or the "Company")
was founded in 1992 with the objective of becoming a significant participant in
the emerging Eastern European telecommunications equipment market. The Company's
efforts in the Eastern European telecommunications equipment market have been
and continue to be focused on Poland through its 90% interest in Digital
Telecommunications Systems/ZWUT, a Polish limited liability company
("DTS/ZWUT"). The remaining 10% of DTS/ZWUT is owned by Cortelco, Inc.
("Cortelco"), a U.S. manufacturer of telecommunications products.

        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 telecommunications equipment and service company
with operations 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 Telscape. 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 strategy is to increase internal growth and to identify and acquire
companies which fit into its objectives of providing telecommunications products
and services with an emphasis on Latin America. The management capabilities that
came with the Orion merger have also enabled the Company to expand its strategy
to include international long distance.

                      INDUSTRY BACKGROUND AND MARKET DEMAND
MEXICO

        The most significant issue affecting the Mexican telecommunications
market is the introduction of full competition in the long distance market. The
monopoly of Telefonos de Mexico ("Telmex") ended in August of 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 should spread gradually across the
country during 1997. Like the U.S. market in the early 1980s 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, although the Mexican market has greater risk because of Mexico's
political and commercial uncertainty.

        Mexico has a growing and deregulating marketplace. 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 dollar and the Mexican
economy has a pent-up demand that is expanding important markets like
telecommunications. Mexico has one-third the population of the U.S. and the
telecommunications market is growing in excess of 15% annually. The telephone
density (number of telephones per capita) is only one-sixth that of the U.S. The
overall market for telecommunications services in Mexico is concentrated in
three cities, namely Mexico City, Guadalajara, and Monterrey, where 65% of the
usage resides.

                                       1
<PAGE>
POLAND

        Poland, which until 1989 had a communist form of government, has been
undergoing fundamental political and economic change. Capitalism and free
enterprise have only recently been introduced and, consequently, Poland is in
the early stages of establishing a framework for dealing with private
enterprise. However, the Polish government has exercised and continues to
exercise substantial influence over Poland's economy, which has been
characterized by recessionary and inflationary conditions. Uncertainties exist
with respect to the future governance of, and economic policies in, Poland. Any
political or economic instability, including popular unrest, or any governmental
policies that make Poland less hospitable to privately owned or foreign
companies, including expropriation, confiscatory taxation, foreign exchange
restrictions or nationalization, could have a material adverse effect on the
Company.

        The government body responsible for regulating Polish telecommunications
has stated that its fundamental objectives are to oversee the modernization and
development of Poland's telecommunications. The Polish telephone market is still
very immature. In fact, the INTERNATIONAL HERALD TRIBUNE, published March 13,
1997, indicates that as of 1995 there were only 15 main phone lines per 100
inhabitants as compared to the U.S. which in 1995 had 62.5 main phone lines per
100 inhabitants.

INTERNATIONAL LONG DISTANCE

        As of December 31, 1996, the Company had generated an insignificant
amount of revenues from the sale of international long distance services.
However, management expects that the amount of revenues generated from the sale
of U. S.-originated international long distance will be an increasingly
significant portion of the Company's revenues, with a particular emphasis on
Latin America.

        The international long distance telecommunications services industry
consists of all transmissions of voice and data that originate in one country
and terminate in another. This industry is in the midst of some fundamental
changes that present the Company with an opportunity to take advantage of the
substantial growth in international telecommunications traffic. According to
industry sources, worldwide sales for providers of international voice telephone
service were approximately $57 billion in 1995 and the volume of international
traffic on the public telephone network is expected to grow at a compound annual
growth rate of 12% or more from 1995 through the year 2000.

        The Company believes that a number of trends in the international
telecommunications market will continue to drive growth in international long
distance traffic, including:

o       continuing deregulation and privatization of telecommunications markets;

o       pressure to reduce international outbound long distance rates paid by
        end users driven by increased competition among U.S. long distance
        carriers and among emerging foreign long distance carriers in
        deregulated countries;

o       the dramatic increase in the availability of telephones and the number
        of access lines in service around the world;

                                       2
<PAGE>
o       the increasing globalization of commerce, trade and travel;

o       the proliferation of communications devices such as faxes, cellular
        telephones, pagers and data communications devices;

o       increasing demand for data transmission services, including the
        Internet; and

o       the increased utilization of high quality digital undersea cable and
        resulting expansion of bandwidth availability.

                              PRODUCTS AND SERVICES
MEXICO

        The Company's revenues in Mexico are generated from a combination of
equipment sales and services. One of the Company's principal strategies in
Mexico is to be a provider of complete telecommunications solutions, both from a
services and equipment standpoint. The Company sells its products in Mexico
under three brand identities, namely VEXTRO, TELEREUNION AND UNITEL.

VEXTRO

        TELEPHONE EQUIPMENT. Since 1992, the Company has been one of five
non-exclusive distributors in Mexico of Nortel (Northern Telecom)
telecommunications equipment. In 1993 the Company was named one of Nortel's
leading distributors in the Latin America/Mexico region. In 1996 the Company was
also selected by VTEL, a leading supplier of videoconferencing systems, as
"Partner of the Year" for the Latin American region.

        The Company, distributing under the name Vextro, is one of the largest
telecommunication equipment distributors and system integrators in Mexico, with
more than 10 years in the marketplace, 125 employees and a very strong customer
base with over 600 systems installed in companies such as EDS, Bank of Boston,
Goldman Sachs, Hewlett Packard, General Electric, Apple Computers, Banco
Mexicano, Bancomext, Serfin, ICA, JP Morgan , and Kodak. Vextro distributes
products of the following leading manufacturers:

o       Nortel (Northern Telecom): PBX , Call centers, and voice equipment
o       Micom - Magellan: WAN Networking equipment for voice, data and video
o       Octel Communications : a leader in voice mail products for Fortune 500
        companies
o       Centigram: a leader in Unified Messaging Systems
o       VTEL: videoconferencing equipment

TELEREUNION

        TELECONFERENCING EQUIPMENT AND SERVICES. The Company was the first
teleconferencing company in Mexico and launched the first conference call
service bureau in Mexico. Under the name Telereunion, the Company offers the
most comprehensive package of teleconferencing products and services available
in Mexico, including:

                                       3
<PAGE>

o       Consulting services for requirement detection, design, development and
        implementation of specific teleconferencing applications such as
        distance education and training, sales motivation and coordination
        programs, product launching, investor relations, etc.
o       Multipoint audioconference, and audiographics (data conferencing over
        Internet)
o       Audioconference equipment for conference rooms: Polycom SoundStation
o       AudioGraphics equipment for conference rooms: Polycom ShowStation
o       DataBeam software for users (FarSite) and for Internet-Intranet servers
        (neT.120).
o       VTEL room and PC-based videconferencing equipment
o       VTEL telemedicine systems and peripherals
o       Design and implementation of videoconferencing rooms
o       Design and development of telecommunications projects for various
        teleconferencing technologies.

UNITEL

        TELECOMMUNICATIONS OUTSOURCING. Over the last several years, many
Mexican multi-regional companies have invested millions of dollars in
state-of-the-art private networks to carry their voice and data traffic. These
networks were necessary given the generally poor state of service of the public
telephone network. Several years after their installation many companies who had
invested in private networks are disappointed in their cost/benefit performance.

        This disappointment, and the very pressing need for these companies to
secure cash for a non-performing asset, have created a demand for an outsourcing
program that will effect a "sale-leaseback" transaction for the company's
telecommunications infrastructure. These transactions generally will involve the
purchase by Telscape of all the telephone and data network assets of a company
including the PBX switches, multiplexors, telephone handsets and datalink
equipment. For companies with a small amount of long distance traffic that does
not justify the complete outsourcing programs, or that are reluctant to try
radical changes, Unitel offers them network administration programs, where
typically the contracting and negotiation with the telephone service providers
is the responsibility of Unitel. Once Unitel has established itself as a partner
on this basis, the program may evolve, if justified, into a complete outsourcing
program that involves asset ownership.

        The Company's telecommunications outsourcing program is being developed
to allow the Company: 1) to acquire market share within the more-long
distance-intensive users in Mexico: the business sector; and 2) to provide the
Company nationwide points of presence for its telecommunications services
program without the sometimes substantial investments required by other
international long-distance companies. As a provider of outsourced
telecommunications services, the Company provides its customers with
telecommunications hardware, software, maintenance, moves, adds and changes,
traffic engineering, network planning, management of and coordination with other
telecommunications suppliers, telecommunications consultation, and competitive
long-distance and dial tone through personnel and facilities owned by the
Company and leased to its customers.

POLAND

        The Company's products in Poland are based on existing Western
telecommunications technologies supplied principally by Cortelco. Pursuant to an
agreement with Cortelco, the Company has been granted the right to manufacture
and market telecommunications products designed by Cortelco exclusively in
Poland and on a non-exclusive basis in the remainder of Eastern Europe. The
Company is also licensed to market, distribute, install and service

                                       4
<PAGE>
microwave transmission products designed by California Microwave, Inc.
("California Microwave"). None of the intellectual property rights associated
with any product that the Company is allowed to manufacture and market pursuant
to the Cortelco Agreement or pursuant to the Company's agreement with California
Microwave has been transferred to the Company. Except for the rights under the
Cortelco Agreement and California Microwave Agreement, the Company owns no such
intellectual property rights. The Company's Polish engineers and employees
perform design modifications and other customization of the Cortelco
technologies to make the products suitable for the Polish telecommunications
equipment market and to meet customers' individual specifications. The Company's
products are designed or modified to be compatible with and connected to the
Public Switched Telephone Network ("PSTN") and to be generally compatible with
equipment comprising the existing telecommunications transmission infrastructure
in Poland. In addition, because substantially all of the Company's products are
sold for connection to the PSTN, substantially all of the Company's products
must be tested and approved by the Polish Institute of Communications (a Polish
governmental agency) prior to sale in Poland.

        The Company is in the process of phasing out certain products but is
also phasing in certain others. For instance, the Company has homologated the
Cortelco Millenium PBX and is currently selling this product. In addition, the
Company is currently diversifying its product and service mix to address other
segments of the Polish market.

INTERNATIONAL LONG DISTANCE

        The Company intends to serve the large and growing international long
distance telecommunications market as a wholesale provider of both switched and
dedicated services. The Company intends to establish key strategic relationships
with suppliers of international gateways and intends to market these gateways to
current and prospective customers. See Marketing and Sales - International Long
Distance below.

                               MARKETING AND SALES

        The Company markets its products primarily through the following
methods:

        EQUIPMENT. The equipment in both Poland and Mexico is promoted through a
combination of advertising, trade shows, direct mail and telemarketing. The
Company utilizes mostly its own direct sales force but just recently has started
to develop a dealer network to broaden its distribution channel.

        SERVICES. In Mexico, the Company markets its telecommunications services
through advertising in trade magazines, telemarketing, direct mail and attending
trade shows. In addition, the Company's equipment customer base provides an
excellent platform for the follow-on sales of advanced telecommunications
services, since many of the current customers have developed confidence in the
Company's abilities to implement complex projects.

        INTERNATIONAL LONG DISTANCE. The Company intends to market its services
on a wholesale basis to other telecommunications companies through a direct
sales effort and through agency agreements when appropriate. The Company intends
to establish strategic relationships with entities that have gateways to
international destinations. The Company recently signed a letter of intent to
establish a joint venture, which would provide, among other things, an extensive
set of wholesale carrier rates to various international destinations that the
Company can resell.

                                       5
<PAGE>
                                   COMPETITION
MEXICO

        The Mexican telecommunications services sector is less mature than that
in the U.S. The Company is currently one of a very small number of
teleconferencing providers based in Mexico; however, the same services are
offered by a number of large U.S.-based carriers. For Mexican customers to
access these services in the U.S., however, it is necessary to originate a call
that travels to the U.S. and then reconnects to Telmex and the various parties
on the call in Mexico.

        The Company holds 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 will allow others to enter this market in 1997 as both a
reseller and network provider. In the former case, the competitors will require
a permit similar to that of the Company, and in the latter, a concession from
the Mexican government.

        Among the Company's principal competitors in the Mexican equipment
market are other Nortel distributors, AT&T and Ericsson, each of which 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 and currently
enjoys a high level of end-user satisfaction as demonstrated by a recent
independent survey on customer satisfaction carried out by Nortel. In the Nortel
survey, the Company ranked first in Mexico. The Company also competes on the
basis that it is one of the few telecommunications providers in Mexico that has
a very broad product and enhanced services offering, which allows the Company to
present essentially a one-stop solution to its customers.

POLAND

        The Polish telecommunications regulations are aimed at the development
and strengthening of the free market enterprise and the opening of the Polish
market to competition. Over 100 licenses have been issued to private operators
to provide local telecom services, competing with the government-owned telecom
company, TPSA. The Polish governments' expansion oriented free-market policies
have attracted the attention of major telecom companies, including, AT&T,
Alcatel, Siemens, Ericsson, Nokia, Sprint, Air-touch, USWest, DSC, Motorola,
Nortel, Panasonic, NEC and Samsung. Most of these companies have significantly
greater financial, technical, manufacturing and marketing resources as well as a
much wider range of products than the Company.

        While there can be no assurance, management believes the Company can
compete in the Polish market based upon its local presence, customer-oriented
training programs, educational seminars, Polish language manuals, strong
customer support services, local research and development ability and local
stock of most spare parts required. Many of the Company's customers like Polar,
Krakow Power Plant, Unimor, Lublin Car Company (now called Daewoo Poland Car
Plant, Lublin) and Cepharm have continued to buy products from DTS/ZWUT.
DTS/ZWUT prices have generally been comparable to international companies'
prices, but are higher than local Polish companies like DGT, Meraster, etc.

INTERNATIONAL LONG DISTANCE

        The international long distance business is intensely competitive and
subject to rapid change. The Company's competitors in this market include large,
facilities based multinational corporations and

                                       6
<PAGE>
PTTs, smaller facilities-based providers in the U.S. that have emerged as a
result of deregulation, switched-based resellers of international long distance
services and international joint ventures and alliances among such companies.
International wholesale switched long distance providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The Company believes that it will compete favorably on the
basis of price, transmission quality and customer service. The Company believes
that competition will continue to increase, placing downward pressure on prices.

                                     PERMIT

        In late 1994, Vextro was issued a license to provide value-added
telecommunications services by the Mexican Secratariat de Comunicaciones y
Transportes ("SCT"), (the equivalent to the Federal Communications Commission
("FCC") in the U.S.). 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 Company'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.

                                    EMPLOYEES

        As of March 1, 1997, the Company had approximately 159 full-time
employees, with 127 residing in Mexico, 11 residing in the U.S. and 21 residing
in Poland. Of the total employees there is 1 in product development, 39 in sales
and marketing, 57 in engineering, 12 in manufacturing and assembly, and 50 in
general and administration. 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, both in Poland and 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. DESCRIPTION OF PROPERTY

        The Company's international headquarters are located in Houston, Texas,
where the Company leases approximately 7,047 square feet of an office building.
The Company leases facilities in Mexico City, Guadalajara and Tijuana, totaling
approximately 22,000 square feet and consisting of office and warehousing
facilities. The Company's leased facilities in Warsaw, Poland occupy
approximately 12,250 square feet and consist of an office building and light
manufacturing facilities.

                                       7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

MARK VANCE V. TELSCAPE INTERNATIONAL, INC.

On or about January 17, 1997, Mark Vance, a former officer of the Company, filed
a lawsuit against the Company, styled Case No. 9-02268; Mark Vance v. Telscape
International, Inc.; in the 295th District Court of Harris County, Texas. The
plaintiff has prayed for relief of $350,000 in damages plus pre-judgment and
post-judgment interest. The plaintiff alleges breach of contract, breach of
fiduciary duty, breach of a duty of good faith and fair dealing and fraud in
connection with the termination of his employment with the Company which
occurred on January 10, 1997. The defendant has answered, denying liability and
discovery has not yet commenced. The Company intends to vigorously defend itself
against these allegations, and believes it has meritorious defenses thereto,
although there can be no assurances as to the successful defense of this matter.
In addition, whether or not the Company were to prevail in litigation, such
litigation is time consuming and costly.

IN RE: THE ESTATE OF NINA JEAN OBEL, DECEASED ET AL V. TELSCAPE INTERNATIONAL,
INC. ET AL

        Telscape is a defendant in a suit filed by the estate of a former
shareholder, Styled Case No. 92-4313-P( c ) In Re: The Estate of Nina Jean Obel,
Deceased; The Estate of Nina Jean Obel, Deceased, by and through Edmund Yates
and Hal Habecker, its Independent Co-Executors; the Nina Jean Obel Revocable
Living Trust, by and through Edmund Yates and Hal Habecker, its Trustees and
Successor Trustees; and the Nina Jean Obel Charitable Trust, by and through
Edmund Yates and Hal Habecker, its Trustees and Successor Trustees, Plaintiffs
vs. Telscape International, Inc., a Texas corporation and W. Dal Berry,
Defendants. The lawsuit is pending in the Probate Court of Dallas County, Texas.
The Plaintiffs originally filed suit on November 8, 1996. In December 1996,
Plaintiffs amended their suit to allege additional counts and added W. Dal
Berry, a former officer and director as a defendant. The Company has answered
and denied the claims and counterclaimed for attorneys' fees and
indemnification.

        The Plaintiffs have prayed for relief in the following ways: 1)
rescission of the Estate's conversion of a $200,000 promissory note into common
stock, which occurred on June 29, 1993, 2) interest at 12% on the note from the
date of conversion, 3) the sum of at least $3,945.21 for past due interest
relating to the time frame prior to conversion, 4) the sum of $504,668 "plus
incidental and consequential damages" for failure to perform under a Warrant
Agreement, 5) 126,167 shares of the Company should be issued for consideration
of $.01 per share and registered in the names of the Plaintiffs, and 6)
Plaintiffs should be entitled to recover other unspecified "special and
consequential damages, attorneys fees', costs, interest and declaratory
judgment." The Company denies these allegations and intends to vigorously defend
itself against these allegations, although there can be no assurances as to the
successful defense of this matter. In addition, whether or not the Company were
to prevail in litigation, such litigation is time consuming and costly.

SA TELECOMMUNICATIONS, INC. F/K /A SA HOLDINGS, INC. V. DICKINSON & CO.,
DICKINSON HOLDING CORP. AND POLISH TELEPHONE AND MICROWAVE CORPORATION

        Telscape is a defendant in a suit filed in the Dallas County District
Court, 298th Judicial District, Case No. 95-0768. SA Telecommunications, Inc.
f/k/a/ SA Holdings, Inc. ("SATI"), filed suit against Dickinson & Co.
("Dickinson"), Dickinson Holding corp. ("Dickinson Holding") and Telscape on May
3, 1996. SATI claims 1)Dickinson and/or Dickinson Holding intentionally
interfered with the agreements and/or business relationship between SATI and
Telscape; 2) Telscape and/or Dickinson Holding intentionally interfered with the
agreements and/or business relationships between

                                       8
<PAGE>
SATI and Dickinson; and 3) Dickinson and/or Telscape made material
misrepresentations to SATI. SATI has additional Deceptive Trade Practices Act
claims and breach of contract claims against Dickinson. SATI is seeking an
undisclosed damage amount plus exemplary damages from Telscape. A nonjury trial
date had been set for March 3, 1997 but has been postponed to a date uncertain.
The Company denies these allegations and intends to vigorously defend itself
against these allegations, although there can be no assurance as to the
successful defense of this matter. In addition whether or not the Company were
to prevail in litigation, such litigation is time consuming and costly.

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

(a)  On November 14, 1996, the Company held an annual shareholders meeting.
(b)  Not applicable.
(c)  The following matters were voted upon at the annual shareholders meeting:

        (1) The election of seven directors for a one-year term and until their
successors are elected and duly qualified.

                                    FOR            AGAINST       WITHHELD
                                    ---            -------       --------
        Gary Panno                  3,324,708      5,120         133,218
        Cristopher H. Efird         3,324,708      5,120         133,218
        Oscar Garcia                3,324,708      5,120         133,218
        Darrell O. Kirkland         3,324,708      5,120         133,218
        Manuel Landa                3,324,708      5,120         133,218
        Ricardo Orea                3,324,708      5,120         133,218
        E. Scott Crist              3,324,708      5,120         133,218

        (2) To approve and adopt an amendment to the Company's Articles of
Incorporation to change the name of the Company to Telscape International, Inc.

                             FOR            AGAINST       ABSTENTIONS
                             ---            -------       -----------
                             3,345,805      91,319        25,922

        (3) To approve and adopt an amendment to the Company's Articles of
Incorporation to increase the number of shares of authorized common stock from
10,000,000 shares of common stock to 25,000,000 shares of common stock.

                             FOR            AGAINST       ABSTENTIONS
                             ---            -------       -----------
                             3,260,514      174,318       28,222

        (4) To approve the adoption of the Polish Telephones and Microwave
Corporation 1996 Stock Option and Appreciation Rights Plan.

                             FOR            AGAINST       ABSTENTIONS
                             ---            -------       -----------
                             3,050,043      367,687       7,600

        (5) To ratify the selection of BDO Seidman, LLP as the Company's
independent public accountants.

                             FOR            AGAINST       ABSTENTIONS
                             ---            -------       -----------
                             3,347,565      86,209        29,272

                                       9
<PAGE>
                                     PART II

ITEM 5. MARKET FOR 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 Stock Market, Inc. for each quarter within the last two fiscal years.

                                               HIGH               LOW
                                               -----             -----
1995
First Quarter .........................        4.688             2.375
Second Quarter ........................        3.000             1.375
Third Quarter .........................        2.375             1.313
Fourth Quarter ........................        2.750             1.438

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

        As of March 14, 1997, there were approximately 108 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 Polish or Mexican governments were to impose restrictions on the Company's
ability to repatriate profits.

        On May 17, 1996, the Company acquired all of the outstanding common
stock of Telereunion, Inc., a privately- owned Delaware corporation
("Telereunion"). Under the terms of the acquisition, the Company issued to the
shareholders of Telereunion 1,605,000 shares of the Company's common Stock;
380,000 shares of Series B Preferred Stock having an aggregate liquidation
preference of $380,000 and warrants to purchase up to 2,595,000 additional
shares of Common Stock at a price of $2.19 per share.

        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 the
outstanding capital stock of Orion Communications, Inc. ("Orion"), a reseller of
long distance and internet services, in exchange for 400,000 shares of Common
Stock.

        For each transaction, the Company issued the securities pursuant to an
exemption available under section 4(2) of the Securities Act of 1933, as
amended.

                                       10
<PAGE>
ITEM 6.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

        Certain statements contained herein are not based on historical facts,
but are forward looking statements that are based upon numerous assumptions
about future conditions that could prove not to be accurate. Actual events,
transaction and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability to
consummate such transactions and achieve such events or results is subject to
certain risks and uncertainties. Such risks and uncertainties include, but are
not limited to, the existence of demand for and acceptance of the Company's
products and services, regulatory approvals and developments, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the Company's
control. 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, 1996, was a year of transition for the
Company as its strategic focus shifted to Mexico, Latin America and an increased
emphasis on service revenues to complement its telecommunications equipment
sales. The Company's strategy is to evolve into a fully-integrated
telecommunications company that provides telecommunications equipment,
value-added services and international long distance, with a particular emphasis
in Latin America. In May 1996, the Company acquired Telereunion which shifted
the focus of the Company to telecommunications sales and service in Mexico. With
the acquisition of Orion, additional capabilities were added and the Company has
broadened its focus to include international long distance. The Company has
begun to generate revenues from its international long distance business but
presently has a relatively few number of customers.

        Future trends for the revenues and profitability of the Company are
difficult to predict. However, management anticipates continued growth in each
of the markets in which the Company competes. The Company expects growth in the
sales of its telecommunications equipment and services in Mexico. To the extent
that the Company is successful in competing in the international long distance
business, management expects to have an increase in revenues as a result
thereof. Management has within the last year taken steps to reduce operating
expenses, including overhead, that should have the effect of increasing
operating margins, provided that the Company's revenues remain level or
increase.

        REVENUES. In addition to the efforts in the international long distance
area, there will be a continuing effort to expand the revenues generated from
the Company's core telecommunications equipment business in both Mexico and
Poland. The Company will continue to focus on increasing the value-added
services component of the Mexican business and will explore the value-added
services opportunities in Poland.

        GROSS MARGIN. As the Company's product mix evolves to include
proportionately more value-added services with proportionately less equipment
sales, management expects the Company's gross margin to improve. To the extent
that management is successful in its strategy of competing in the international
long distance services business, the Company expects its gross margins to
improve in the near to mid-term as a result thereof.

                                       11
<PAGE>
        OPERATING MARGIN. The Company's management team has taken a number of
steps to reduce operating expenses, including the reduction in work force in
Poland as well as international headquarters. Management expects that these
steps will improve the operating margin of the Company. To the extent that
management is successful in its strategy of competing in the international long
distance services business, the Company expects its operating margins to improve
appreciably as a result thereof.

                              RESULTS OF OPERATIONS

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

        REVENUES increased from $1,108,473 in 1995 to $5,705,313 in 1996. This
increase of $4,596,840, or 415%, was due principally to the acquisition of
Telereunion and, to a lesser extent, the merger of Orion. Revenues for the
Polish operations increased only slightly from $1,108,473 in 1995 to $1,142,644
in 1996.

        COST OF REVENUES increased from $619,431 in 1995 to $3,040,919 in 1996,
or $2,421,488. 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 $121,143 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
$1,397,688 in 1995 to $4,422,835 in 1996, or $3,025,147. 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. In addition, the Company had an
increase in certain recurring non-cash expenses, such as approximately $77,000
in depreciation and approximately $140,000 for the amortization of goodwill
associated with the Telereunion acquisition.

        On approximately the same revenues, SG&A for the Polish operations
decreased by $83,701 due principally to a reduction in work force. Overall SG&A
as a percentage of revenues decreased from 126% to 77.5%, or 48.5%. 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.

        OTHER INCOME decreased from $228,948 in 1995 to $113,402 in 1996, or
$115,546. The decrease in other income was due principally to the decrease in
net interest income from $230,799 to $14,425 and the recognition of a $62,500
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.

                                       12
<PAGE>
        PROVISION (BENEFIT) FOR INCOME TAXES increased from a provision of $0 in
1995 to a tax benefit of $53,427 in 1996, resulting primarily from the increase
in deferred tax assets in Vextro.

        NET LOSS increased from a net loss of $673,065 in 1995 to a net loss of
$1,598,008 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.

        Net cash (used) in operating activities was ($2,731,433) and ($817,221)
for the years ended December 31, 1996 and December 31, 1995, respectively. The
decrease in net cash provided by operations in 1996 as compared to 1995 was due
primarily to a decrease in working capital from ($176,532) in 1995 to
($1,739,199) in 1996 and, to a lesser extent, approximately $900,000 in
additional net losses, which were partially offset by an increase of the
non-cash expenses of depreciation and amortization and accrued employee benefits
to $263,758 and $339,340, respectively, in 1996 from $48,494 and $0,
respectively, in 1995. The decrease in the working capital in 1996 was
principally a result of the increase in accounts receivable and inventory.

        Net cash provided by investing activities was $2,489,337 and $444,209
for the years ended December 31, 1996 and December 31, 1995, respectively. The
increase in net cash provided from investing activities was primarily from an
increase in the difference between the purchase of short-term investments and
the redemption of short-term investments to $3,479,811 in 1996 from $556,071 in
1995. This increase was offset partially by 1) an increase in the investment in
property, plant & equipment from $46,274 in 1995 to $440,843 in 1996, 2) the
acquisition of a subsidiary for $353,169 in 1996 compared with no acquisitions
in 1995, and the increase in a joint venture investment from $2,930 in 1995 to
$196,462 in 1996. In addition, the Company purchased a minority interest in 1995
for $62,658 and had no such expenditure in 1996.

        Net cash provided by financing activities was $563,622 and $0 for the
years ended December 31, 1996 and December 31, 1995, respectively. The increase
of $563,622 was generated primarily the issuance of stock in connection with the
Orion merger.

        As of December 31, 1996, the Company had cash and cash equivalents of
$494,781 and positive working capital of $1,813,124. The Company's cash
requirements for fiscal 1997 and beyond will depend primarily upon the cash
generated from its operations to meet its capital expenditures and working
capital requirements. The Company does not have a revolving credit facility or
any other commercial lending relationship. The Company has been successful in
financing the purchase of certain capital expenditures. Subsequent to December
31, 1996, the Company executed an equipment lease in the amount of $325,000
payable at approximately 13.5%, which expires in February, 2000. The Company
intends to finance its growth principally through cash flow from operations and
additional capital lease financing as appropriate; however, there can be no
assurance that this cash flow will be sufficient nor that the Company will be
able to obtain lease financing on commercially reasonable lease terms, if at
all.

                                       13
<PAGE>
        The Company believes that its current cash position, available vendor
financing and cash flow from operations will be sufficient to fund the Company's
capital expenditures and other cash needs for the next twelve months, absent any
acquisitions; however, there can be no assurance that such will be the case.
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 the business
could be materially adversely affected.

                                  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 Vextro does not have a positive net cash flow
from its operations in 1997, 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 Vextro 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 operations in
Eastern Europe as well as 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 Vextro.

        As in any recently de-regulated 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.

        In Poland, the Company faces a number of risks, including the risks
associated with the continuing conversion of the Polish economy from a communist
economy to a market economy, competitive factors, the risks of its customers
being able to obtain financing for their purchases of the Company's products,
risks of the collectibility of accounts receivable generally and the
availability of products that will be approved for use in the Company's foreign
markets. In addition, the Company believes that the markets in which it
participates could be subject to numerous factors that will contribute to the
slow growth of its business in those markets, such as the lack of capital for
the creation of infrastructure, lack of governmental support for the
telecommunication industry and intense competition from other vendors with
substantially greater resources and name recognition than the Company. Also,
many of the products or components of the products manufactured by the Company
are subject to price fluctuations which are beyond the Company's control and can
affect the Company's ability to price its products competitively and, thus, the
overall profitability of the Company. Furthermore, the Company faces the
challenge of maintaining product lines that reflect the rapidly improving and
changing technology of the telecommunications industry.

                                       14
<PAGE>
        The international long distance market, although large and rapidly
growing, is also very competitive. The Company will compete in this market with
companies that have greater experience and substantially greater resources, both
financial and otherwise. In addition, the Company will face 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 carriers. The Company will be
increasingly exposed to these risks to the extent that the Company expands its
presence in this market.

        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 Poland and 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 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 both Poland
and 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. To the extent the Company is successful in entering into the
international long distance services business, the 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. 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.

NEW ACCOUNTING PRONOUNCEMENTS

        On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "EARNINGS PER SHARE" ("SFAS
No. 128"). This pronouncement provides a different method of calculating
earnings per share than is currently used in accordance with APB No. 15,
"EARNINGS PER SHARE". SFAS No. 128 provides for calculation of "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in 1997 and its implementation is not expected to have a
material effect on the consolidated financial statements.

                                       15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        Index to Consolidated Financial Statements and Financial Statement
        Schedules:


                                                                          Page
                                                                          ----
        Reports of Independent Certified Public Accountants.....   F-1 to F-2

        Consolidated Financial Statements:

        Consolidated Balance Sheet as of
        December 31, 1996................................................ F-3

        Consolidated Statements of Loss -
        years ended December 31, 1996 and 1995 .......................... F-4

        Consolidated Statements of Stockholders' Equity -
        years ended December 31, 1996 and 1995 .......................... F-5

        Consolidated Statements of Cash Flows -
        years ended December 31, 1996 and 1995 .......................... F-6

        Notes to Consolidated Financial Statements....................... F-7


                                       16
<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Telscape International, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheet of Telscape
International, Inc. (formerly Polish Telephone and Microwave Corporation) as of
December 31, 1996, and the related consolidated statements of loss,
stockholders' equity, and cash flows for the year 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 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 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 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 financial position of Telscape
International, Inc. at December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.

                                BDO SEIDMAN, LLP
Houston, Texas
March 21, 1997

                                       F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Polish Telephones and Microwave Corporation

We have audited the accompanying consolidated statements of loss, 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 Telephone 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

                                       F-2
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                           CONSOLIDATED BALANCE SHEET

                                                                   December 31,
ASSETS                                                                 1996
                                                                   ------------
CURRENT:
   Cash and cash equivalents .................................     $    494,781
   Accounts receivable, less allowance for doubtful
      accounts of $57,000 ....................................        2,034,728
   Inventories ...............................................        2,045,195
   Prepaid expenses and other ................................           90,216
                                                                   ------------
        Total current assets .................................        4,664,920

PROPERTY AND EQUIPMENT, net of accumulated
   depreciation and amortization (Note 3) ....................          983,102

GOODWILL, net of accumulated amortization (Note 4) ...........        3,173,759

DEFERRED INCOME TAXES (Note 8) ...............................          192,167

OTHER ASSETS (Note 12) .......................................          357,090
                                                                   ------------
                                                                   $  9,371,038
                                                                   ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Accounts payable ..........................................     $  1,756,016
   Accrued expenses ..........................................          317,973
   Customer deposits .........................................          405,859
   Deferred income taxes (Note 8) ............................          371,948
                                                                   ------------
        Total current liabilities ............................        2,851,796
MINORITY INTERESTS ...........................................          754,398
                                                                   ------------
        Total liabilities ....................................        3,606,194
                                                                   ------------

COMMITMENTS AND CONTINGENCIES (Notes 6 and 9)

STOCKHOLDERS' EQUITY (Notes 4, 5, 6, 9, 10 and 11)
   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 .............................             --
   Series B non-voting preferred stock, $.001
     par value, 380,000 shares authorized, issued
     and outstanding .........................................              380
   Common stock, $.001 par value, 25,000,000
     shares authorized; 3,935,969 shares
     issued and outstanding ..................................            3,936
   Additional paid-in capital ................................       11,883,719
   Capital subscriptions receivable ..........................         (600,000)
   Deficit ...................................................       (5,523,191)
                                                                   ------------
        Total stockholders' equity ...........................        5,764,844
                                                                   ------------
                                                                   $  9,371,038
                                                                   ============
                          See accompanying notes to the
                       consolidated financial statements.

                                       F-3
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                         CONSOLIDATED STATEMENTS OF LOSS

                                                      Years Ended December 31,
                                                     --------------------------
                                                        1996           1995
                                                     -----------    -----------
REVENUES .........................................   $ 5,705,313    $ 1,108,473

COST OF REVENUES .................................     3,040,919        619,431
                                                     -----------    -----------
GROSS PROFIT .....................................     2,664,394        489,042

SELLING, GENERAL AND ADMINISTRATIVE ..............     4,422,835      1,397,688
                                                     -----------    -----------
OPERATING LOSS ...................................    (1,758,441)      (908,646)
                                                     -----------    -----------
OTHER INCOME (EXPENSE):
   Interest income ...............................       142,649        232,438
   Interest expense ..............................      (128,224)        (1,639)
   Foreign exchange gain (loss) ..................       161,199         (1,851)
   Other .........................................       (62,222)          --
                                                     -----------    -----------
        Total other income, net ..................       113,402        228,948
                                                     -----------    -----------
LOSS BEFORE INCOME TAX BENEFIT AND
  MINORITY INTERESTS .............................    (1,645,039)      (679,698)

INCOME TAX BENEFIT (Note 8) ......................        53,427           --
                                                     -----------    -----------
NET LOSS BEFORE MINORITY INTERESTS ...............    (1,591,612)      (679,698)

MINORITY INTERESTS IN SUBSIDIARIES ...............        (6,396)         6,633
                                                     -----------    -----------
NET LOSS .........................................   $(1,598,008)   $  (673,065)
                                                     ===========    ===========
NET LOSS PER COMMON SHARE ........................   $      (.51)   $      (.34)
                                                     ===========    ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
  SHARES OUTSTANDING .............................     3,161,238      1,982,214
                                                     ===========    ===========

                          See accompanying notes to the
                       consolidated financial statements.

                                       F-4
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                SERIES B                                         CAPITAL
                               NON-VOTING                          ADDITIONAL      SUB-
                             PREFERRED STOCK    COMMON STOCK         PAID-IN    SCRIPTIONS
                             SHARES   AMOUNT  SHARES     AMOUNT      CAPITAL    RECEIVABLE      DEFICIT         TOTAL
                             -------   ----  ---------   ------    -----------   ---------    -----------    -----------
                                                                                 (Note 10)
<S>                          <C>       <C>   <C>         <C>       <C>           <C>          <C>            <C>
Balance, December 31, 1994      --      $--  1,890,442   $1,890    $ 8,113,238   $(600,000)   $(3,069,399)   $ 4,445,729

Reclassification of
  accumulated losses
  acquired from minority
  interest in subsidiary
  (Note 11) ..............      --      --        --       --             --          --         (182,719)      (182,719)

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

Balance, December 31, 1995      --      --   1,890,442    1,890      8,113,238    (600,000)    (3,925,183)     3,589,945

Issuance of stock in
  acquisition of
  subsidiary (Note 4).....   380,000    380  1,605,000    1,605      2,855,295        --             --        2,857,280

Issuance of stock
  in connection with
  merger (Note 5).........      --      --     400,000      400        525,000        --             --          525,400

Issuance of stock in
  connection with stock
  options exercised ......      --      --      40,527       41         38,181        --             --           38,222

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

Net loss .................      --      --        --       --             --          --       (1,598,008)    (1,598,008)
                             -------   ----  ---------   ------    -----------   ---------    -----------    -----------
Balance, December 31, 1996   380,000   $380  3,935,969   $3,936    $11,883,719   $(600,000)   $(5,523,191)   $ 5,764,844
                             =======   ====  =========   ======    ===========   =========    ===========    ===========
</TABLE>
------------------
Note:   There were no shares issued and outstanding of the preferred stock and
        the Series A preferred stock at December 31, 1996.

        See accompanying notes to the consolidated financial statements.

                                       F-5
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                                  ---------------------------
                                                                     1996           1995
                                                                  -----------    ------------
<S>                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss ...................................................   $(1,598,008)   $   (673,065)

   Adjustments to reconcile net loss to net cash
   used in operating activities:
        Allowance for doubtful accounts .......................         8,640            --
        Depreciation and amortization .........................       263,758          48,494
        Allowance for inventory obsolescence ..................        55,000            --
        Accrued employee benefits and severance ...............       339,340            --
        Deferred income taxes .................................      (111,720)           --
        Interest amortized on discounted short-term investments        (8,196)        (64,526)
        Minority interest in subsidiary's income (losses) .....         6,397          (6,633)
        Decrease in minority interests subscriptions receivable
          for equipment credits utilized ......................        52,555          55,041
        Changes in assets and liabilities:
          Accounts receivable .................................      (952,193)         75,523
          Inventories .........................................      (719,792)         14,564
          Prepaids and other assets ...........................        35,485        (117,308)
          Accounts payable ....................................      (123,939)       (114,447)
          Accrued liabilities .................................        21,240           4,485
          Other liabilities ...................................          --           (39,349)
                                                                  -----------    ------------
Net cash used in operating activities .........................    (2,731,433)       (817,221)
                                                                  -----------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of short-term investments .......................    (4,898,790)    (10,943,692)
     Redemption of short-term investments .....................     8,378,601      11,499,763
     Purchases of property and equipment ......................      (440,843)        (46,274)
     Acquisition of subsidiary, net of cash acquired ..........      (353,169)           --
     Purchase of minority interest ............................          --           (62,658)
     Investment in joint venture ..............................      (196,462)         (2,930)
                                                                  -----------    ------------
Net cash provided by investment activities ....................     2,489,337         444,209
                                                                  -----------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Issuances of common stock ................................       563,622            --
                                                                  -----------    ------------
Net increase (decrease) in cash and cash equivalents ..........       321,526        (373,012)
Cash and cash equivalents at beginning of year ................       173,255         546,267
                                                                  -----------    ------------
Cash and cash equivalents at end of year ......................   $   494,781    $    173,255
                                                                  ===========    ============
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       F-6
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

            Telscape International, Inc. (the "Company"), formerly Polish
Telephones and Microwave Corporation ("PTMC"), was founded in 1992 and is
engaged in the distribution and sale of telecommunications equipment and is a
provider of telecommunication services. Digital Communications Systems / Zaklady
Wytworcze Urzadzen Telefonicznych ("DTS/ZWUT" - a Polish limited liability
company) is a 90% owned subsidiary which manufactures and markets telephone
switching equipment to businesses, municipalities, and other organizations in
Poland.

            On August 10, 1994, the Company completed an initial public offering
whereby 525,000 units each consisting of two shares of common stock and one
redeemable common stock purchase warrant were sold to the public.

            On May 17, 1996, the Company acquired all of the outstanding common
stock of Telereunion, Inc. ("Telereunion"), a Delaware corporation, which had
previously acquired, in April 1996, 97% ownership of Vextro de Mexico, S.A. de
C.V. and Servicios Corporativos Vextro, S.A. de C.V. (collectively, "Vextro" two
Mexican corporations), in a triangular reverse acquisition accounted for as a
purchase (see Note 4). Vextro is engaged in the sales and installation of
telecommunications equipment and related services in Mexico. In late 1994,
Vextro was issued a license to provide value-added telecommunications services
by the Mexican Secratariate de Comunicaciones y Transportes ("SCT" - the
equivalent to the Federal Communications Commission in the United States). 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.

            On September 5, 1996, Telscape USA, Inc. ("Telscape USA" - a Texas
corporation), a wholly-owned subsidiary of the Company, merged with Orion
Communications, Inc. ("Orion" - a Texas corporation) in a pooling transaction
(see Note 5). Orion is a reseller of long-distance telephone services.

            On November 14, 1996, the Company's shareholders ratified the name
change from Polish Telephones and Microwave Corporation to Telscape
International, Inc., and an increase in the authorized common stock of the
Company from ten million to twenty-five million shares.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

            The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries Telscape USA and Telereunion (and 97%
owned subsidiary, Vextro) and its 90% owned subsidiary DTS/ZWUT. All significant
intercompany balances and transactions have been eliminated and minority
interests in the subsidiary are reported separately from stockholders' equity.

REVENUE RECOGNITION

            The Company recognizes revenue when equipment is shipped or services
are performed.

INVENTORIES

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

OTHER ASSETS

            Included in other assets, are the Company's investments in operating
ventures which are accounted for under the cost method (see Note 12).

                                       F-7
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY AND EQUIPMENT

            Property and equipment are stated at cost. Depreciation is
calculated by the straight-line method over the estimated useful lives of the
assets ranging from 3 to 11 years. Amortization of leasehold improvements is
calculated by the straight-line method over the lesser of the life of the lease
or the estimated life of the improvement.

GOODWILL

            Goodwill is amortized on the straight-line method over 15 years. On
a periodic basis, the Company estimates the future undiscounted cash flows of
the business to which goodwill relates in order to ensure that the carrying
value of its goodwill has not been impaired.

STATEMENT OF CASH FLOWS

            For purposes of reporting cash flows, cash and cash equivalents
includes balances held in banks and short-term investment with original
maturities of less than ninety days.

STOCK BASED COMPENSATION

            In October 1995, Statement of Financial Accounting Standards (SFAS)
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" was issued which establishes
financial accounting and reporting standards for stock-based employee
compensation plans, effective for fiscal years beginning after December 15,
1995. Those plans include all arrangements by which employees receive shares of
the employer or the employer incurs liabilities to employees in amounts based on
the price of the employer's stock. The Statement also applies to transactions in
which an entity issues its equity investments to acquire goods or services from
non-employees. As of December 31, 1996, the Company has stock options and stock
warrants outstanding under various stock-based compensation plans (Note 6).

            SFAS No. 123 also requires that equity instruments issued to
non-employees be accounted for based on fair value. The Statement encourages all
entities to adopt the fair value based method for employee stock compensation
plans. However, it allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, ("APB No. 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
Entities electing to remain with the accounting in APB No. 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting had been applied. At December 31, 1996, the Company
has elected to remain with the accounting under APB No. 25 and has made the
required pro forma disclosures in Note 6.

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.

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 disclosure 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 because of
the short maturity of these instruments.

            The estimated fair value of the Company's cost-basis investment in
operating ventures (see Note 12) approximates its carrying value at December 31,
1996.

                                       F-8
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NEW ACCOUNTING PRONOUNCEMENTS

            On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "EARNINGS PER SHARE" ("SFAS
No. 128"). This pronouncement provides a different method of calculating
earnings per share than is currently used in accordance with APB No. 15,
"EARNINGS PER SHARE". SFAS No. 128 provides for calculation of "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in 1997 and its implementation is not expected to have a
material effect on the consolidated financial statements.

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.

FOREIGN CURRENCY TRANSLATION

VEXTRO AND DTS/ZWUT

            Although Vextro maintains its books and records in the local
currency (i.e., the Mexican Peso), its transactions are principally conducted in
U.S. dollars, and consequently, the U.S. dollar represents Vextro's functional
currency.

            Most of DTS/ZWUT's sales contracts are denominated in U.S. dollars
and are responsive, on a short-term basis, to changes in the U.S. dollar
exchange rates. Significant material and other costs, on a continuing basis, are
derived from payments in U.S. dollars. Additionally, there are a high volume of
intercompany transactions and extensive interrelationships between the
operations of DTS/ZWUT and the Company, which measurement unit is the U.S.
dollar. For these and other reasons, the U.S. dollar is considered to be
DTS/ZWUT's functional currency.

            Accordingly, Vextro's and DTS/ZWUT's (the "Foreign Entities") assets
and liabilities have been remeasured at year-end and period-end exchange rates,
except inventories, equipment and stockholders' equity accounts which have been
remeasured at historical rates. Their statements of operations have been
remeasured at average rates of exchange for the year, except cost of sales and
depreciation which have been remeasured at historical rates.

            For reporting in U.S. dollars, remeasurement of the Foreign
Entities' financial statements was required. Monetary assets and liabilities are
translated at year end exchange rates and nonmonetary assets and liabilities are
translated at the average exchange rates during the year, except for those items
stated in U.S. dollars which are maintained in U.S. dollars. Effects on
inflation adjustments to fixed assets as required under Polish generally
accepted accounting principles have been eliminated in the U.S. dollar
statements. The effects of such translation adjustments is included as a
separate component in the statement of operations.

                                       F-9
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

WARRANTIES

            All sales contracts include commitments for warranty equipment
repair for periods ranging from fifteen to eighteen months after initiation of
service. The Company has an offsetting equipment warranty from Cotrtelco for
twelve months and for locally produced parts there is testing and repair
capability. Experience indicates that most equipment failures will occur prior
to , or in the first months after, initiation of service. This is well within
the manufacturer warranty period. No material liability for warranty service is
anticipated or accrued by the Company.

NET LOSS PER SHARE

            The net loss per common and common equivalent share is based on the
weighted average number of shares of common stock outstanding. The common
equivalent shares include stock options and warrants only when the effect would
be dilutive, as if they were outstanding for the entire year, calculated by the
treasury stock method in accordance with Securities and Exchange Commission
Staff Accounting Bulletin requirements.

NOTE 2 - FOREIGN OPERATIONS

            The consolidated financial statements include amounts for DTS/ZWUT
(Poland), and Telereunion's 97% owned subsidiary, Vextro (Mexico), as follows:

<TABLE>
<CAPTION>
                                                                                                          Adjustments
                                                 United                                                       and
                                                 States          Mexico         Poland      Eliminations  Consolidated
                                             --------------   -------------   -----------    ---------    -----------
<S>                                          <C>              <C>             <C>            <C>          <C>
Year ended December 31, 1996:
    Revenues .............................   $    1,212,583   $   3,469,290   $ 1,142,644    $(119,204)   $ 5,705,313
                                             ==============   =============   ===========    =========    ===========

    Operating income (loss) ..............   $   (1,933,134)  $     249,148   $    44,749    $(119,204)   $(1,758,441)
                                             ==============   =============   ===========    =========    ===========
    Other income, net ....................                                                                    113,402
                                                                                                          -----------
    Loss before income tax benefit
      and minority interest ..............                                                                $(1,645,039)
                                                                                                          ===========

    Identifiable assets ..................   $      573,523   $   4,164,550   $ 1,070,184    $    --      $ 5,808,257
                                             ==============   =============   ===========    =========    ===========
    Corporate assets .....................                                                                  3,562,781
                                                                                                          -----------

    Total assets .........................                                                                $ 9,371,038
                                                                                                          ===========

    Year ended December 31, 1995:
        Revenues .........................   $         --     $        --     $ 1,108,473    $    --      $ 1,108,473
                                             ==============   =============   ===========    =========    ===========

        Operating loss ...................   $     (832,252)  $        --     $   (76,394)   $    --      $  (908,646)
                                             ==============   =============   ===========    =========    ===========
        Other income, net ................                                                                    228,948
                                                                                                          -----------
        Loss before income taxes and minority
          interest .......................                                                                $  (679,698)
                                                                                                          ===========
</TABLE>

            U. S. revenues include equipment export sales to unrelated companies
in Mexico totalling $570,752 for the year ended December 31, 1996.

            Identifiable assets are those assets of the Company that are
identifiable with the operations in each geographic area. Corporate assets
include cash and cash equivalents, goodwill and deferred acquisition costs at
December 31, 1996.

                                      F-10
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONCENTRATION OF RISK - MEXICO

ECONOMIC CONDITIONS

            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 Vextro'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 downturns in the Mexican economy could result in an
adverse effect on Vextro's operations.

SIGNIFICANT CUSTOMERS AND SUPPLIERS

            Vextro makes substantially all of its sales to customers located in
Mexico. Mexican sales are entered into using Vextro's established price list,
which is primarily stated in U.S. dollars, converted to Mexican pesos at the
then prevailing exchange rate. 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. However, from time
to time, Vextro transacts in the local currency and thus faces foreign currency
risk with respect to these transactions.

            During the years ended December 31, 1996 and 1995, Vextro derived
revenues from a single customer representing 12% and 22% of total revenues,
respectively. Likewise, during the years ended December 31, 1996 and 1995,
Vextro made purchases from two suppliers representing 52% and 11% in 1996 and
75% and 17% in 1995. On a consolidated Company basis, no customer individually
exceeded 10% of revenues in 1996 or 1995, and Vextro made purchases from one
supplier representing 30% of total Company purchases in 1996.

MEXICAN LAWS - LABOR AND TAXES

            Under Mexican Law, employees with fifteen or more years of service
are entitled to receive seniority premiums in the event their employment is
terminated. Mexican Law also requires companies to provide severance and
indemnity compensation to employees in the event of dismissal, based on certain
length of service requirements. These obligations are charged to expense as
incurred and for the years ended December 31, 1996 and 1995, such amounts were
not significant.

            Under Mexican Law, a company is required to make an annual transfer
of 5% of its net income after taxes from retained earnings, subsequent to the
year earned, to a legal reserve until such reserve is at least equal to 20% of
the company's capital stock.

                                      F-11
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONCENTRATION OF RISK - POLAND

            The Polish government has exercised and continues to exercise
substantial influence over Poland's economy, which has been characterized by
recessionary and inflationary conditions, and rising unemployment. Uncertainties
exist with respect to the future governance of, and economic policies in,
Poland. Any political or economic instability, including popular unrest, or any
governmental policies that make Poland less hospitable to privately owned or
foreign companies, excluding expropriation, confiscatory taxation, foreign
exchange restrictions or nationalization, could have a material adverse effect
on the Company.

            DTS/ZWUT makes substantially all of its sales to customers in
Poland. During the years ended December 31, 1996 and 1995, DTS/ZWUT derived
revenues from three customers representing 62% and two customers representing
44%, respectively. On a consolidated Company basis, none of these customers
exceeded 10% individually in 1996. In 1995, two customers represented 44% of
revenues on a consolidated basis. Likewise, one related party supplier
represented 43% of both consolidated Company and DTS/ZWUT purchases in 1995;
there were no suppliers whereby the Company had purchases greater than 10% on
either basis in 1996.

NOTE 3 - PROPERTY AND EQUIPMENT

            At December 31, 1996, major classes of property and equipment
consist of:

                                                              Amount
                                                           -----------
         Data processing equipment .....................   $   314,079
         Demonstration equipment .......................       152,924
         Machinery and equipment .......................        42,684
         Telephone equipment ...........................       314,002
         Furniture and fixtures ........................       149,588
         Leasehold improvements ........................       196,344
         Office equipment ..............................        78,245
         Automobiles ...................................       157,207
                                                           -----------
                                                             1,405,073
         Less, accumulated depreciation and amortization      (421,971)
                                                           -----------
                                                           $   983,102
                                                           ===========

NOTE 4 - TELEREUNION / VEXTRO ACQUISITION

            On May 17, 1996, the Company acquired all of the outstanding common
stock of Telereunion. 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 would vest and become exercisable only upon the combined
companies meeting certain specified financial objectives and would expire seven
years after closing. 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.

                                      F-12
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            The purchase price of approximately $3,210,000, net of cash received
of approximately $132,000 included the issuance of common stock valued at
$2,722,000 and 216,618 stock options valued at $135,000 and $15,000 in cash and
transactional costs totalling $470,000. 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. The estimated fair value of assets acquired and
liabilities assumed are summarized as follows:

                Fair value of assets acquired .....   $2,722,000
                Less liabilities assumed ..........    2,692,000
                                                      ----------
                Net assets acquired ...............       30,000
                Purchase price ....................    3,342,000
                                                      ----------
                Goodwill ..........................   $3,312,000
                                                      ==========

            The unaudited consolidated results of loss on a pro forma basis as
though Telereunion had been acquired as of January 1, 1995 are as follows:

                                               December 31,
                                        --------------------------
                                           1996           1995
                                        -----------    -----------
            Revenues ................   $ 7,993,000    $ 6,293,000
            Net loss ................   $(1,781,000)   $  (975,306)
            Net loss per share ......   $      (.47)   $      (.27)

            The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had Telereunion's acquisition
been consummated as of the above date, nor are they indicative of future
operating results.

NOTE 5 - 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 in exchange for 400,000 shares of its common
stock. This transaction has been accounted for under the pooling-of-interests
method and accordingly, the accompanying consolidated statements of loss 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.

                                      F-13
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            Revenue, net loss and net loss per share of the individual entities
and combined for the year ended December 31, 1996 are as follows:

                            Telscape          Telscape
                            International,      USA
                                 INC.         (ORION)       COMBINED
                             -----------    -----------    -----------
        Revenue ..........   $ 5,063,482    $   641,831    $ 5,705,313
        Net loss .........   $(1,151,032)   $  (446,976)   $(1,598,008)
        Net loss per share   $      (.37)   $      (.14)   $      (.51)

            No restatement of prior years is necessary since Telscape USA
(formerly known as Orion Communications) was formed and merged with Telscape
International, Inc. in 1996.

NOTE 6 - STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

            At December 31, 1996, the Company had the following fixed stock
option plans:

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 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 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 exercisable within ten
years of the date of grant.

TELEREUNION 1995 STOCK OPTION PLAN

            As stated in Note 3, the Company assumed Telereunion's Stock Option
Plan in connection with the acquisition of Telereunion.

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 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.

                                      F-14
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


            1996                        1993       1994       1995       1996
                                        PLAN       PLAN       PLAN       PLAN
                                      --------    -------    -------   ---------
Options outstanding at January 1, .    217,558     20,000       --          --
Options granted ...................       --       10,000    216,618   1,225,000
Options exercised .................    (36,527)      --         --          --
Options cancelled .................     (4,000)   (10,000)      --          --
                                      --------    -------    -------   ---------
Options outstanding and exercisable
  at December 31, .................    177,031     20,000    216,618   1,225,000
                                      ========    =======    =======   =========

            1995                        1993      1994
                                        PLAN       PLAN
                                      --------    -------
Options outstanding at January 1 ..    159,558       --
Options granted ...................     58,000     30,000
Options exercised .................       --         --
Options cancelled .................       --      (10,000)
                                      --------    -------
Options outstanding and exercisable
  at December 31 ..................    217,558     20,000
                                      ========    =======

            A summary of the status of the Company's four fixed option plans on
a combined basis, together with the weighted average exercise price, as of
December 31, 1996 and 1995, and changes during the years ending on those dates
is presented below:

<TABLE>
<CAPTION>
                                                     1996                    1995
                                           ------------------------   --------------------
                                                          Weighted               Weighted
                                                          Average                Average
                                                          Exercise               Exercise
                                             SHARES        PRICE      SHARES      PRICE
                                           ----------    ----------   -------   ----------
<S>                                         <C>          <C>          <C>       <C>
Outstanding at January 1 ...............      237,558    $     1.97   159,558   $     1.90
Granted / acquired .....................    1,451,618          4.19    88,000         2.23
Exercised ..............................      (36,527)         0.80      --           --
Forfeited ..............................      (14,000)         1.89   (10,000)        3.06
                                           ----------    ----------   -------   ----------
<S>                                         <C>          <C>          <C>       <C>
Outstanding at December 31 .............    1,638,649    $     3.96   237,558   $     1.97
                                           ==========    ==========   =======   ==========
Options exercisable at December 31 .....      728,649    $     3.16   237,558   $     1.97
                                           ==========    ==========   =======   ==========
Options price range at December 31 .....         --      $.80-$6.42      --     $.80-$6.42
                                           ==========    ==========   =======   ==========
</TABLE>

                                      F-15
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


            The following table summarizes the information about the various
fixed option plans as of December 31, 1996:

                                 Weighted
                                  Average
                      Number    Remaining     Weighted        Number    Weighted
     Range of    Outstanding  Contractual      Average   Exercisable     Average
     Exercise             at         Life     Exercise            at    Exercise
        PRICE   DECEMBER 31,       (YEARS)       PRICE  DECEMBER 31,       PRICE
-------------  ------------- ------------   ---------- -------------  ----------
$        0.80         91,867            7   $     0.80        91,867  $     0.80
  2.25 - 6.42         85,164            8         3.78        85,164        3.78
  1.35 - 5.13        316,618            9         2.41       316,618        2.41
 3.875 - 5.00      1,145,000           10         4.66       235,000        4.88
               -------------                           -------------
                   1,638,649                                 728,649
               =============                           =============

            SFAS No. 123 requires the Company to provide pro forma information
regarding net loss applicable to common stockholders and 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 1996 and 1995 as follows: dividend yield of 0%
for all years; expected volatility ranging from 20% to 85%; risk-free interest
rates ranging from 5.92% to 6.79%; and expected lives ranging from 1.33 to 10
years.

            Under the accounting provisions of SFAS No. 123, the Company's net
loss applicable to common stockholders and loss per share would have been
increased to the pro forma amounts indicated below:

                                                    1996             1995
                                                -------------    -------------
  Net loss applicable to common stockholders:
    As reported .............................   $  (1,598,008)   $    (673,065)
    Pro forma ...............................   $  (4,099,308)   $    (738,285)

  Loss per share:
    As reported .............................   $        (.51)   $        (.34)
    Pro forma ...............................   $       (1.30)   $        (.38)

                                      F-16
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

WARRANTS

            As of December 31, 1996, the Company has the following warrants
outstanding:

                                                                       Number of
                                                                        Warrants
                                                                        --------
Warrants issued in connection with the Company's initial public
  offering ("IPO") on August 10, 1994:
    Registered warrants (NASDAQ) exercisable
      at any time at $8 prior to expiration
      on August 10, 1998 ..........................................     525,000

    Warrants (unregistered) issued to IPO
      underwriters exercisable at any time
      at $8.10 prior to expiration on August
      10, 1998 ....................................................     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/Vextro
  on May 17, 1996:
    Series A warrants exercisable at stated percentages only upon
      the Company achieving targeted earnings per share, or full
      vesting upon the Company maintaining a $12 share price for
      90 days; expiration date of May 16, 2003 ....................   2,579,191
    Series B warrants exercisable only upon the
      Company achieving a $5 million increase in shareholders'
      equity within 18 months of merger or if the Company's stock
      price
      exceeds $12 for 90 days .....................................      95,000
                                                                      ---------
                                                                      3,454,191

            The Company's warrants issued in connection with the acquisition of
Telereunion, except for 79,191 warrants issued to a consultant (at a market
value below the exercise price) are exercisable only upon the achievement of
specified operating performance measurements. Such performance criteria have not
been achieved as of December 31, 1996 and, accordingly, none of such warrants
are exercisable.

            The 150,000 warrants issued to a former Company officer under a
severance agreement have been recorded as compensation expense in the amount of
$352,000, which is classified under selling, general and administrative expenses
in the accompanying 1996 consolidated statements of loss.

            No value has been attributed to the other outstanding warrants at
December 31, 1996, based on the contingent terms of their exercisability.

                                      F-17
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - RELATED PARTY TRANSACTIONS

            Cortelco, a 10% minority interest owner in DTS/ZWUT, is the
principal supplier of telephone switching components assembled and marketed by
DTS/ZWUT. The components are purchased in the United States by Telscape
International, Inc. for shipment to DTS/ZWUT. During the years ended December
31, 1996 and 1995, purchases from Cortelco totalled $269,005 and $198,641,
respectively, of which $52,555 in 1996 and $55,041 in 1995 were credited against
Cortelco's stock subscription as disclosed in Note 13. At December 31, 1996,
$99,000 was owed to Cortelco for unpaid purchases.

NOTE 8 - 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.

            Significant components of the Company's deferred tax liabilities and
assets at December 31, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>
                                               1996                      1995
                                     ------------------------    ---------------------
                                       United                     United
                                       States        Foreign      States       Foreign
                                     -----------    ---------    ---------    --------
<S>                                  <C>            <C>          <C>          <C>
Allowance for doubtful accounts ..   $    13,264    $   6,032    $    --      $   --
Customer prepayments .............          --        137,992         --          --
Accrued wages ....................          --           --         13,260        --
                                     -----------    ---------    ---------    --------
                                          13,264      144,024       13,260        --
Differences in basis of inventory           --       (515,972)        --          --
                                     -----------    ---------    ---------    --------
                                          13,264     (371,948)      13,260        --
Valuation allowance ..............       (13,264)        --        (13,260)       --
                                     -----------    ---------    ---------    --------
Net current deferred tax liability   $      --      $ 371,948    $    --      $   --
                                     ===========    =========    =========    ========

Net operating loss carryforward ..   $ 1,079,024    $  14,918    $ 560,319    $ 18,244
Fixed assets .....................        17,577       13,622       23,283        --
Accrued employee benefits ........       119,682        6,663         --          --
Tax on assets recoverable ........          --        156,964         --          --
                                     -----------    ---------    ---------    --------
                                       1,216,282      192,167      583,602      18,244
Valuation allowance ..............    (1,216,282)        --       (583,602)    (18,244)
                                     -----------    ---------    ---------    --------
Net long-term deferred tax asset .   $      --      $ 192,167    $    --      $   --
                                     ===========    =========    =========    ========
</TABLE>

            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 in the future in
the event a company begins paying taxes on income.

            The Company has recorded a valuation allowance equal to its deferred
tax assets at December 31, 1996, based upon judgments as to the future
realization of deferred tax benefits supported by demonstrated trends in the
Company's operating results.

                                      F-18
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            Significant components of the provision for income taxes are as
follows:

                                                            1996         1995
                                                          --------    ----------
Current:
  Federal .............................................   $   --      $     --
  Foreign .............................................     58,293          --
                                                          --------    ----------
    Total current .....................................     58,293          --

Deferred:
  Federal .............................................       --            --
  Foreign .............................................   (111,720)         --
                                                          --------    ----------
    Total income tax benefit ..........................   $(53,427)   $     --
                                                          ========    ==========

            The following is a reconciliation of income taxes calculated at the
United States federal statutory rate to the income tax benefit:

                                                           1996           1995
                                                           ----           ----
Provision for income taxes at
  U.S. statutory rate ............................          (34%)          (34%)
Effect of net operating loss
  carryforward and valuation
  allowance ......................................           31%            34%
Non-deductible amortization of
  intangible assets ..............................            3%           --
Foreign income taxes .............................           (3%)          --
                                                           ----           ----
                                                           $ (3%)         $--
                                                           ====           ====

            At December 31, 1996, the Company had available for US federal
income tax purposes unused net operating loss carryforwards of approximately
$3,173,600, which may provide future tax benefits and which will expire in years
2005 through 2011. These net operating loss carryforwards may be subject to
certain limitations on annual utilization in the event of certain changes in
ownership of the Company. These limitations could significantly reduce the
amount of the net operating loss available to the Company in the future.

            DTS/ZWUT utilized Polish operating loss carryforwards to offset its
current income tax liability equal to $28,051 for the year ended December 31,
1995. Operating loss carryforwards must be utilized one-third per year over
three years and the portion available each year expires if not used. At December
31, 1996, DTS/ZWUT had available unused operating loss carryforwards of
approximately $45,610, which may provide future tax benefits and which will
expire in 1997.

            In accordance with Mexican income tax law, Vextro may carryforward
an income tax loss for ten years. At December 31, 1996, the Company had
available operating loss carryforwards of approximately $44,000 which will
expire in 2004.

                                      F-19
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - COMMITMENTS AND CONTINGENCIES

COMMITMENTS

            Telscape International entered into a sublease agreement with lease
term commencing on March 1, 1996 and ending on August 31, 1998. The lease
payments were $1,050 per month until August 31, 1996, and then increased to
$1,130 per month until August 31, 1997, and will increase to $1,210 per month
until August 31, 1998.

            The plant facilities of DTS/ZWUT are leased for five years from the
date of building occupancy and calls for monthly payments of $5,000. Normal
maintenance, security and operating expenses are to be covered by DTS/ZWUT. The
agreement required building renovations of $100,000 to be completed by DTS/ZWUT
and transferred to the property owners. In return DTS/ZWUT received twenty
months of prepaid rent from initial occupancy. The required renovation work was
substantially completed by year end 1995, and the leased property has been
occupied. DTS/ZWUT has recorded prepaid rent in the amount of the leasehold
improvements.

            Vextro leases its office building and warehouse facilities under
operating leases that expire through 1999. Under the terms of these leases,
Vextro is obligated to make minimum rental payments totalling $118,000 in 1997
and 1998, and $89,000 in 1999.

            Future minimum lease payments under noncancelable leases as of
December 31, 1996 are as follows:

                                                                         Amount
                                                                        --------
1997 ................................................                   $215,000
1998 ................................................                    124,000
1999 ................................................                     13,000
2000 ................................................                      2,000
                                                                        --------
                                                                        $354,000
                                                                        ========

            Total rent expense under leases was $131,000 and $125,000,
respectively, for the years ended December 31, 1996 and 1995.


            At December 31, 1996, the Company has employment agreements with
five officers which expire in 1999. The Company has also executed a two-year
consulting agreement with a former officer. Future minimum commitments under
these agreements, excluding incentive bonuses or stock options, as of December
31, 1996, are as follows:

            YEAR ENDED DECEMBER 31,                                AMOUNT
            -----------------------                             --------------
                    1997.....................................    $    385,000
                    1998.....................................         343,000
                    1999.....................................         146,000
                                                                --------------
                                                                 $    874,000
                                                                ==============

            Subsequent to December 31, 1996, the Company executed an employment
agreement, effective through the year 2000, with an officer, under which he was
granted an option to purchase 250,000 shares of the Company's common stock at a
price per share ranging from $3.25 to $4.00.

                                      F-20
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            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.

CONTINGENCIES

            On January 17, 1997, a former officer filed a lawsuit against the
Company alleging breach of contract, breach of a duty of good faith and fair
dealing and fraud in connection with his termination of employment. The
plaintiff is seeking damages of $350,000 plus pre-judgment and post-judgment
interest. The Company denies liability and intends to vigorously defend itself
against these allegations. The Company believes it will be successful in
defending itself against the allegations, however there can be no assurance as
to the successful defense of this matter.

            On November 8, 1996, the estate of a former shareholder filed suit
against the Company alleging, among other charges, that the Company failed to
perform under a Warrant Agreement. The plaintiff is seeking the following: 1)
rescission of the estate's conversion of a $200,000 promissory note into common
stock, plus interest at 12% from the date of conversion; 2) the sum of $504,668
plus incidental and consequential damages; 3) the issuance of 126,167 shares of
the Company's common stock for consideration of $.01 per share; and other
damages. The case is currently set for trial on September 9, 1997. The Company
denies these allegations and intends to vigorously defend itself against these
allegations, although there can be no assurance as to the successful defense of
this matter. Accordingly, no amount has been accrued in the accompanying
consolidated balance sheet at December 31, 1996.

            The Company has another pending litigation in which damages have not
been assessed. As of this date, the Company cannot predict with reasonable
certainty the outcome of this pending litigation; however, it does not believe
there will be any material adverse impact on the accompanying consolidated
financial statements upon its resolution.

            The Company and Cortelco have entered into an agreement ("Cortelco
Agreement") pursuant to which the Company has been granted the right to assemble
and market certain telecommunications products designed by Cortelco exclusively
in Poland and on a non-exclusive basis in the remainder of Eastern Europe. The
Cortelco Agreement requires, among other things, that the Company purchase at
least $1 million per year (before discounts) of products in components from
Cortelco. Although the Company has not been meeting its obligation to purchase
$1 million per year, the Agreement has not been canceled by Cortelco. The
Company believes that it is in compliance with all other material terms of the
Cortelco Agreement, which expires May 1999.

NOTE 10 - CAPITAL SUBSCRIPTIONS RECEIVABLE

            On December 15, 1993, the Company executed stock purchase agreements
with two individuals and a company which 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 are 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. No additional payments have been made by
the holders and the 300,000 shares held in escrow with a book value of $600,000
are classified as capital subscriptions receivable in the accompanying
consolidated balance sheet at December 31, 1996.

                                      F-21
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - PRIOR PERIOD ACQUISITION OF DTS/ZWUT

            The Company acquired a 70% ownership interest in DTS/ZWUT in 1992,
and increased its ownership to 80% in 1994. On December 4, 1995, the Company
acquired an additional 10% ownership interest for consideration of $62,658,
which increased its ownership to 90%. The minority interest acquired in 1995 was
accounted for by a charge to accumulated deficit in the amount of $182,719 which
represented a reclassification of accumulated losses acquired from minority
interests in the subsidiary which is reflected in the accompanying consolidated
statements of stockholders' equity at December 31, 1995.

NOTE 12 - 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. As of this date, the Company has a tentative agreement to sell
its interest in this venture at a selling price which approximates its carrying
value.

            During 1995, the Company made an investment of $2,930 in a Polish
joint venture "TELINFO". The joint venture was formed to provide
telecommunication services in a rural area of Poland. The Company has a 34%
interest in the joint venture and has no continuing obligation to fund or
guarantee the liabilities of the joint venture. Currently, the joint venture has
no significant operations, but is seeking a telephone operator's license for the
Suwalki, Poland area.

NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION

            Supplemental cash flow information for the years ended December 31,
1996 and 1995 is as follows:

                                                               December 31,
                                                         -----------------------
                                                            1996         1995
                                                         ----------   ----------
Interest paid ........................................   $  176,410   $    1,639
                                                         ==========   ==========
Income taxes paid ....................................   $   80,063   $     --
                                                         ==========   ==========
NON-CASH TRANSACTIONS:

   On May 17, 1996, the Company acquired all
     of the outstanding common stock of
     Telereunion for $3,210,000, net of cash
     received of $132,000. A summary of the
     purchase price allocation is as follows:
                                                            Amount
                                                         -----------
        Fair value of assets acquired:
          Accounts receivable ........................   $   986,284
          Inventories ................................       969,403
          Prepaid expenses and other .................       102,957
          Deferred taxes .............................        17,842
          Fixed assets ...............................       514,230
          Goodwill ...................................     3,311,748
          Accounts payable ...........................    (1,706,941)
          Accrued expenses ...........................      (675,731)
          Deferred taxes .............................      (309,343)
                                                         -----------
                                                           3,210,449
          Less, issuance of common stock, preferred
             stock and common stock warrants and
             options .................................   (2,857,280)
                                                        -----------
                                                            353,169
          Cash received ..............................      132,038
                                                        -----------
                                                        $   485,207
                                                        ===========
   Issuance of common stock warrants in
     connection with employee severance
     agreement ......................................   $  352,005   $     --
                                                        ==========   ==========

                                      F-22
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                              December 31,
                                                       -------------------------
                                                          1996          1995
                                                       -----------   -----------
Reduction of subsidiary stock subscription
  receivable in exchange for credits on equipment:
    Cost of revenues ...............................   $    52,555   $    55,041
                                                       ===========   ===========
    Minority interest ..............................   $    52,555   $    55,041
                                                       ===========   ===========

Acquisition of minority interest in
  subsidiary in exchange for reduction
  in equipment credits:
    Accumulated deficit ............................   $      --     $   182,719
                                                       ===========   ===========

    Minority interest ..............................   $      --     $   182,719
                                                       ===========   ===========

Increase in carrying value of short-
  term investment for amortization
  of discount
    Short-term investments .........................   $      --     $    64,526
                                                       ===========   ===========

    Interest income ................................   $      --     $    64,526
                                                       ===========   ===========

                                      F-23
<PAGE>
ITEM 8.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
was in the best interests of the Company. At the November 14, 1996, annual
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 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A)OF THE EXCHANGE ACT

                 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

        The following tables set forth certain information with respect to the
directors and executive officers of the Company.

<TABLE>
<CAPTION>
Name                       Age   Period With Company        Position
----                       ---   -------------------        --------
<S>                        <C>   <C>                        <C>
E. Scott Crist (1)         32    August 1996 to Present     Director; President and CEO

Manuel Landa (1)           36    May 1996 to Present        Chairman of the Board; Director
                                                            and EVP of Operations;
                                                            President and CEO of
                                                            Telereunion and of Vextro

Oscar Garcia (2)           36    May 1996 to Present        Director; VP of Telereunion; VP
                                                            of Operations of Vextro

Ricardo Orea               36    May 1996 to Present        Director; VP of Telereunion; VP
                                                            of Sales and Marketing of Vextro

Todd M. Binet (2)          32    January 1997 to Present    Director; EVP, Secretary,
                                                            Treasurer and Chief Financial
                                                            Officer

Mamal Khorouzan (3)        67    September 1996 to Present  President of DTS/ZWUT

Darrel O. Kirkland (1)(2)  57    March 1996 to Present      Director
</TABLE>
-----------------
        (1) Member of the Compensation Committee of the Board of Directors.
        (2) Member of the Audit Committee of the Board of Directors.
        (3) Mr. Khorouzan is retiring at the end of March.

                                       17
<PAGE>
                               BUSINESS EXPERIENCE

        E. SCOTT CRIST has served as President and CEO of the Company since
August 1996. Mr. Crist served as President of Orion Communications, Inc., a
reseller of long distance and internet access services, from June 1996 to
September 1996. He was President and CEO for Matrix Telecom, a long-distance
reseller, from September 1995 through June 1996. He also was a founder of DNS
Communications, a long-distance reseller, in May 1993 and served as its CEO from
inception through September 1995. He was formerly Vice President of Acquisitions
for Trammell Crow Group from March 1991 to January 1993 with specific focus on
U.S. capital market transactions. Prior to joining Trammell Crow, Mr. Crist
worked in acquisitions for AMLI Corporation of Chicago, an investment company,
from August 1990 to March 1993 and was responsible for sourcing and underwriting
income-producing assets on behalf of the firm's institutional clients. Prior to
that, he worked from June 1987 to September 1988 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 has been a member of the Board of Directors of the Company
since May 1996. Mr. Landa is a co-founder of Telereunion and has been President
of Vextro since 1989, and has also been President, CEO 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 (1984-1986), Mr. Landa was in charge of the Insulating
Materials Division as Plant Manager. Prior to that (1983-1984), 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.
From 1981 to 1983, Mr. Landa occupied the position of Project Engineer for
IPESA, a Mexican construction and engineering firm, with projects in the
petrochemical, industrial and touristic sectors of Mexico. Manuel Landa received
an undergraduate degree in Electronic and Communications Engineering (1984) from
La Salle University in Mexico City, and has a diploma in Total Quality
management from the Instituto Tecnologico de Estudios Superiores Monterrey
(1986).

        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. From January 1986 to May 1987 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. From January 1983 until April 1986 Mr. Garcia 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 (1984) from La Salle University in Mexico City, a
diploma in Marketing form La Salle University (1986) 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

                                       18
<PAGE>
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 (1984) form La Salle University in Mexico City and
has a diploma in Business Administration from Berkley University in Mexico City
(1994).

        TODD M. BINET has been Executive Vice President and CFO 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. Just prior to joining the
Company, 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.
Prior to his involvement with St. James, 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. He also received an 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.

        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 holds
degrees from the University of Texas (BBA) and the University of Houston (MS,
Industrial Engineering).

        MAMAL KHOROUZAN has been President of DTS/ZWUT from September 1996 to
the present. Mr. Khorouzan was Vice President of Manufacturing of DTS/ZWUT from
May 1992 to the present. From January 1987 to January 1992, Mr. Khorouzan was
general manager and executive vice president of Cal Power, a custom power
systems company in California. Mr. Khorouzan received a B.S. in Engineering from
the University of Tucson in 1961 and an M.B.A. from the State University of
California in 1971. Mr. Khorouzan is based in Warsaw, Poland.

        To the best of the Company's knowledge, there are no material
proceedings to which any current director, officer or affiliate of the Company,
any owner of record or beneficially of more than five percent of any class of
voting securities of the Company or any associate of any such director, officer,
affiliate of the Company or security holder is a party adverse to the Company or
any of its subsidiaries or has a material interest adverse to the Company or any
of its subsidiaries.

             SECTION 16(A) 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

                                       19
<PAGE>
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, 1996, except that Forms 5 for Manuel Landa, Oscar Garcia and Ricardo Orea,
although subsequently filed, were not filed on a timely basis. Each of Messrs.
Landa, Garcia and Orea had two transactions that were not timely reported.

ITEM 10.  EXECUTIVE COMPENSATION

                           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 who served as such during the 1996 fiscal
year.

<TABLE>
<CAPTION>
                                                       -----------------------------------------
                                                                     Long-Term Compensation
                   -----------------------------------------------------------------------------
                          Annual Compensation(1)                Awards              Payouts
   --------------------------------------------------- -----------------------------------------
                                              Other
                                              Annual   Restricted Securities            All
      Name and                                Compen-     Stock   Underlying   LTIP    Other
      Principal            Salary    Bonus    Sation     Awards    Options/   Payouts  Compen-
      Position      Year     ($)      ($)      ($)       ($)(2)    Sars (#)     (#)   Sation ($)
   ---------------------------------------------------------------------------------------------
<S>                 <C>    <C>       <C>         <C>       <C>     <C>          <C>   <C>
   Scott Crist,CEO
   (8/96 to
   Present)         1996   14,423      -         -         -       350,000       -       -
   ---------------------------------------------------------------------------------------------
   Gary Panno,CEO
   (3/96 to 8/96)   1996   55,000      -         -         -        50,000(3)    -     5,000(3)
   ---------------------------------------------------------------------------------------------
                    1996   24,000      -         -         -           -         -    87,384(4)
   Kris Murthy,CEO  1995   96,000      -         -         -        50,000       -       -
   (6/95 to 2/96)   1994   76,000    40,000      -         -           -         -       -
   ===================================================================================----------

   Dal Berry,CEO    1995   33,000      -         -         -           -         -       -
   (until 6/95)     1994   68,000      -         -         -           -         -       -
   ===================================================================================----------
</TABLE>
-----------------------
        (1) Each of the Company's chief executive 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 chief executive officers for each of the reported years.

        (2) The number and value of aggregate restricted stock holdings for
Messrs. Crist, Panno, Murthy and Berry at the end of the last fiscal year, based
on the closing price of the Common Stock on NASDAQ on December 31, 1996, were 0,
0, 49,859 and 132,440 shares, respectively with a value of $0, $0, $155,809 and
$413,875, respectively (without giving effect to the consideration paid by the
named executive officer).

        (3) See discussion of Employment Agreements below. Also, in connection
with the Company's obligations under Mr. Panno's employment agreement described
below, the Company paid Mr. Panno $5,000 for the time period between his
resignation as Chief Executive Officer and the end of fiscal year 1996.

                                       20
<PAGE>
        (4) In connection with the severance agreement and consulting agreement
between the Company and Mr. Murthy, both as described below, the Company paid a
lump sum of $50,000 and $37,348 (over several months), respectively, to Mr.
Murthy.

        The following table sets forth certain information with respect to
options granted during the last fiscal year to each Chief Executive Officer
named in the above Summary Compensation Table.

OPTION/SAR GRANTS IN LAST FISCAL YEAR (1996)

--------------- ---------------- --------------- ---------------- -------------
                   Number of       % of Total
                  Securities      Options/SARs
                  Underlying       Granted to      Exercise or
                 Options/SARs     Employees in     Base Price      Expiration
     Name         Granted (#)     Fiscal Year        ($/SH)            Date
--------------- ---------------- --------------- ---------------- -------------
Scott Crist         350,000           29.9            4.50           8/1/2006
--------------- ---------------- --------------- ---------------- -------------
Gary Panno          50,000            4.3             3.00          3/21/2002
--------------- ---------------- --------------- ---------------- -------------
Kris Murthy            -               -                -               -
--------------- ---------------- --------------- ---------------- -------------
Dal Berry              -               -                -               -
--------------- ---------------- --------------- ---------------- -------------

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 1996 by each Chief Executive Officer named in
the Summary Compensation Table, and with respect to unexercised options held by
such persons at the end of fiscal 1996.

--------------------------------------------------------------------------------
                                      Number of Securities  Value of Unexercised
                                     Underlying Unexercised     in the Money
                                          Options/SARs        Options/SARs at
               Shares                     at FY-End (#)          FY-End ($)
            Acquired on      Value        Exercisable/        (1) Exercisable/
   Name     Exercise (#)  Realized($)     Unexercisable        Unexercisable
--------------------------------------------------------------------------------
Scott Crist       0            0           0/350,000                 0/0
--------------------------------------------------------------------------------
Gary Panno        0            0            50,000/0             6,250/0
--------------------------------------------------------------------------------
Kris Murthy       0            0            66,205/0            81,427/0
--------------------------------------------------------------------------------
Dal Berry         0            0            16,205/0            37,677/0
--------------------------------------------------------------------------------
-------------------
        (1) The calculations of the value of unexercised options are based on
the difference between the closing price of $3.125 per share on NASDAQ of the
Common Stock on December 31, 1996, and the exercise price of each option,
multiplied by the number of shares covered by the option.

                            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.

                                       21
<PAGE>
                              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 sooner terminated. 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, as set forth above. In addition, Mr. Crist
will be entitled to a bonus determined by the board of directors based on
individual and Company performance.

        The Company entered into an employment agreement with Mr. Gary Panno,
effective as of April 1, 1996, which agreement provided that Mr. Panno would
serve as President and Chief Executive Officer or other executive position. Upon
the hiring of Mr. Crist, Mr. Panno stepped down as President and Chief Executive
Officer; however, he remained as Chairman of the Board and the agreement
remained in effect. Under the terms of the agreement, termination occurs on
March 31, 1998, unless earlier terminated by the Company for cause. The
agreement provides that Mr. Panno will be entitled to receive annual
compensation of $60,000 and an option to purchase 80,000 shares of Common Stock
at $5.125 per share. As of March 3, 1997, the Company reached a mutual agreement
with Mr. Panno to terminate his employment agreement. As part of this mutual
agreement the Company paid Mr. Panno through December 31, 1996.
Contemporaneously with this mutual termination, Mr. Panno stepped down as a
member of the Board of Directors of the Company. On or about March 20, 1997, the
Company and Mr. Panno reached an agreement whereby Mr. Panno agreed to reduce
his options to 50,000 shares in return for the Company reducing the strike price
to $3.00 per share.

                       SEVERANCE AND CONSULTING AGREEMENTS

        In connection with the resignation by Mr. Murthy as Chairman and CEO of
the Company, the Company and Mr. Murthy entered into a severance agreement and
an agreement for consulting services each dated February 29, 1996. In connection
with the severance agreement, Mr. Murthy was granted a warrant for the purchase
of 150,000 shares of Common Stock at a purchase price of $2.94 per share and was
paid the sum of $50,000 in cash.

        The consulting agreement with Mr. Murthy was effective March 1, 1996,
and continues for a period of two years until and including February 28, 1998.
In consideration for the services rendered by Mr. Murthy, the Company has agreed
to pay him $4,166.67 per month for the term of the agreement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth certain information, as of March 14,
1997, with respect to the beneficial ownership of Common Stock by each director,
each executive officer included in the Summary Compensation Table, the directors
and executive officers as a group and each

                                       22
<PAGE>
shareholder 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. In addition to the Common Stock
set forth below, Manuel Landa, Oscar Garcia and Ricardo Orea beneficially own
126,666, 126,667, and 126,667 shares of Series B Non-Voting, Non-Participating
Preferred Stock, respectively.


Name and                                   Number of Shares      Percentage
Address                                   Beneficially Owned  Beneficially Owned
-------                                   ------------------  ------------------

Gary Panno ..............................     104,758(1)            2.3%
2944 Parr Lane
Grapevine, TX 76051

E. Scott Crist ..........................     563,500(2)           12.4%
4635 Southwest Freeway, Suite 800
Houston, Texas 77027

Manuel Landa ............................     460,000(3)(4)        10.1%
c/o Telereunion, Inc., Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F

Oscar Garcia ............................     460,000(4)(5)        10.1%
c/o Telereunion, Inc., Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F

Darrel Kirkland .........................      10,000(6)              *
803 Forest View
Austin, TX 78746

Ricardo Orea ............................     460,000(4)(7)        10.1%
c/o Telereunion, Inc., Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F

S.P. Krishna Murthy .....................     266,063(8)            5.8%
4604 Cresthaven
Colleyville, TX 76034

W. Dal Berry ............................     158,645(9)(10)        3.5%
7623 Queens Garden
Dallas, TX 75248

Todd M. Binet ...........................      79,000(11)           1.7%
4635 Southwest Freeway, Suite 800
Houston, Texas 77027

All directors and executive
officers as a group (10 persons) ........   2,578,793(12)          56.6%

----------
*       Less than 1%

                                       23
<PAGE>
        (1) A portion of such shares and options have been deposited into
escrow. See "Escrow Agreement." Includes options to purchase 50,000 shares of
Common Stock at $3.00 per share all of which are presently exercisable.

        (2) Excludes shares of Common Stock issuable upon exercise of a Series A
Common Stock Warrant representing the right to purchase 12,500 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 300,000 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,
upon the Company meeting certain fiscal year earnings per share targets,
computed in accordance with the terms of the Series A Common Stock Warrant as
follows: (i) the Warrant will vest and become fully exercisable as to 40% of the
shares of Common Stock upon the Company's fiscal year earnings equal to at least
$.315 per share; (ii) the Warrant will vest and become fully exercisable as to
an additional 40% of the shares of Common Stock upon the Company's fiscal year
earnings equal to at least $.458 per share; and (iii) the Warrant will vest and
become fully exercisable as to an additional 20% of the shares of Common Stock
upon the Company's fiscal year earnings equal to at least $.75 per share.
Notwithstanding the foregoing, the 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, excluded
are the shares of Common Stock issuable upon exercise of a Series B Common Stock
Warrant representing the right to purchase 65,000 shares of Common Stock at
$2.19 per share held by Mr. Crist. The Series B Common Stock Warrant will vest
and become exercisable, if at all, upon (i) the Company achieving an increase in
net shareholders equity of the Company of at least $5,000,000, computed in
accordance with the terms of the Series B Common Stock Warrant; or (ii) if for
any ninety (90) consecutive trading days, the closing price for a share of
Common Stock equals or exceeds $12.00. The Series B Common Stock Warrant will
expire on and no longer be exercisable if the condition for vesting is not
satisfied within 18 months following the acquisition of Telereunion and, in any
event, will expire on May 16, 2003. Excludes options to purchase 350,000 shares
of Common Stock at $4.50 per share as such options are not exercisable within
sixty (60) days of this table. Reference is also made to the Schedule 13D filed
with the Securities and Exchange Commission by Mr. Crist on or about February 4,
1997.

        (3) Excludes shares of Common Stock issuable upon exercise of a Series A
Common Stock Warrant representing the right to purchase 241,208 shares of Common
Stock at $2.19 per share. Also, excluded are shares of Common Stock issuable
upon exercise of a Series A Common Stock Warrant representing the right of
Willowtree Developments, Ltd., a British Virgin Island entity, ("Willowtree") to
purchase 447,958 shares of Common Stock at $2.19 per share. Mr. Landa is the
beneficial owner of Willowtree. 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 2 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.

        (4) 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.

        (5) Excludes shares of Common Stock issuable upon exercise of a Series A
Common Stock Warrant representing the right to purchase 241,208 shares of Common
Stock at $2.19 per share. Also, excluded are shares of Common Stock issuable
upon exercise of a Series A Common Stock Warrant representing the right of
Trafford Park Holdings, Ltd., a British Virgin Island entity, ("Trafford Park")
to purchase 447,959 shares of Common Stock at $2.19 per share. Mr. Garcia is the
beneficial owner of Trafford Park. 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 2 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.

        (6) Includes options to purchase 10,000 shares of Common Stock initially
priced at $4.25 per share, all of which options are presently exercisable. On
March 21, 1997, the Board of Directors reduced the exercise price of Mr.
Kirkland's options from $4.25 to $3.75 per share.

                                       24
<PAGE>
        (7) Excludes shares of Common Stock issuable upon exercise of a Series A
Common Stock Warrant representing the right to purchase 241,208 shares of Common
Stock at $2.19 per share. Also, excluded are shares of Common Stock issuable
upon exercise of a Series A Common Stock Warrant representing the right of
Bollington Developments, Ltd., a British Virgin Island entity, ("Bollington") to
purchase 447,959 shares of Common Stock at $2.19 per share. Mr. Orea is the
beneficial owner of Bollington. 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 2 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.

        (8) Includes options to purchase 50,000 shares of Common Stock at $2.25
per share, options to purchase 16,204 shares of Common Stock at $0.80 per share
and a Warrant to purchase 150,000 shares of Common Stock at $2.94 per share, all
of which are presently exercisable. Excludes 5,240 shares of Common Stock held
by Mr. Murthy's adult child of which shares Mr. Murthy disclaims beneficial
ownership. A portion of such shares and options have been deposited into escrow.
See "Escrow Agreement."

        (9) Includes options to purchase 16,205 shares of Common Stock at $0.80
per share, all of which options are presently exercisable. A portion of such
shares and options have been deposited into escrow. See "Escrow Agreement."

        (10) Includes warrants to purchase 10,000 shares of Common Stock at
$8.00 per share, all of which warrants are presently exercisable.

        (11) Excludes shares of Common Stock issuable upon exercise of a Series
A Common Stock Warrant representing the right to purchase 26,250 shares of
Common Stock at $2.19 per share. Also, excluded are shares of Common Stock
issuable upon exercise of a Series B Common Stock Warrant representing the right
to purchase 30,000 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 and no
longer be exercisable after May 16, 2003. For the discussion of vesting
provisions for the Series A Common Stock Warrant and the Series B Common Stock
Warrant, please see footnote 2 above. Excludes options to purchase 83,333 shares
of Common Stock at $3.25 per share and 166,667 shares of Common Stock at $4.00
per share as such options are not exercisable within sixty (60) days of this
table.

        (12) Includes options and warrants to purchase 618,238 shares of Common
Stock, all of which are exercisable within 60 days of the date of this table.

                                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, 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 initial public offering. The Escrow Agreement
provides that a total of 415,503 shares of Common Stock and 55,779 shares of
Common Stock issuable upon the exercise of 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 held in escrow may be released
provided that the Company attain certain levels of earnings per share during any
two or five consecutive fiscal year periods. In addition, the Escrow Agreement
permits the unconditional release of twenty (20%) percent of the escrowed shares
upon the sixth anniversary of the Escrow Agreement and twenty (20%) percent
every year

                                       25
<PAGE>
thereafter until the tenth anniversary of the Escrow Agreement. As of the date
hereof, no shares have been released pursuant to the Escrow Agreement. The
shareholders retain the right to vote the securities and to transfer the
securities among themselves and to related individuals who must become parties
to the agreement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                 SHARE ISSUANCES

        In May 1996, the Company issued 1,605,000 shares of Common Stock in
accordance with the terms of the Merger and Acquisition Agreement relating to
the Company's acquisition of Telereunion. Common Stock issued pursuant to the
agreement was (i) 126,000 shares to Mr. Manuel Landa and 234,000 shares to
Willowtree, an affiliate of Mr. Landa's, (ii) 126,000 shares to Mr. Ricardo Orea
and 234,000 shares to Bollington, an affiliate of Mr. Orea's and (iii) 126,000
shares to Mr. Oscar Garcia and 234,000 shares to Trafford Park, an affiliate of
Mr. Garcia's, (iv) 459,375 shares to Benchmark Equity Group, Inc. and (v) 65,625
shares to Benchmark Equity Group, Inc. for the account of Mr. Christopher Efird,
a then director of the Company.

        In September 1996, the Company issued 400,000 shares of Common Stock in
accordance with the Agreement and Plan of Merger relating to the Company's
acquisition of Orion. Common Stock issued pursuant to the agreement was 130,000
shares to Mr. Scott Crist and 270,000 shares in the aggregate to 22 other
individuals.

                              EMPLOYMENT AGREEMENTS

        In connection with the acquisition of Telereunion, the Company entered
into employment agreements with each of Messrs. Landa, Garcia and Orea,
effective as of May 14, 1996. The 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 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 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 CFO of the Company. The employment
agreement terminates on January 13, 2000, unless terminated earlier for cause.
Mr. Binet is entitled to an annual compensation of $70,000 under the agreement
and a bonus based on Company and personal performance. As part of the employment
agreement, Mr. Binet was granted an option to purchase 250,000 shares of Common
Stock. 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.

                                       26
<PAGE>
         PURCHASE OF BENCHMARK STOCK AND EFIRD STOCK BY CRIST AND BINET

        On or about January 22, 1997, certain members of management, including
Messrs. Crist and Binet purchased certain of the Company's securities from
Benchmark Equity Group, Inc. ("Benchmark") and Christopher Efird ("Efird"), a
principal of Benchmark and a member of the Company's Board of Directors at the
time of the sale.

        Mr. Crist purchased 371,875 and 53,125 shares of Common Stock from
Benchmark and Efird, respectively, for a purchase price of $2.25 per share. Mr.
Crist also purchased, through an affiliate, Series A Warrants from Benchmark and
Efird which give Mr. Crist the right to acquire 262,500 and 37,500 shares of
Common Stock, respectively, provided certain Company performance conditions are
met. The Series A Warrants were purchased for $0.05 per share. In addition, Mr.
Crist purchased Series B Warrants from Benchmark and Efird which gives Mr. Crist
the right to acquire 56,875 and 8,125 shares of Common Stock, respectively,
provided certain Company performance conditions are met. The Series B Warrants
were purchased for $0.04 per share.

        Mr. Binet purchased 65,625 and 9,375 shares of Common Stock from
Benchmark and Efird, respectively, for a purchase price of $2.25 per share. Mr.
Binet also purchased Series B Warrants from Benchmark and Efird which gives Mr.
Binet the right to acquire 26,250 and 3,750 shares of Common Stock,
respectively, provided certain Company performance conditions are met. The
Series B Warrants were purchased for $0.04 per share.

                               CORTELCO AGREEMENT

        The Company and Cortelco have entered into an agreement (the "Cortelco
Agreement") pursuant to which the Company has been granted the right to assemble
and market certain telecommunications products designed by Cortelco exclusively
in Poland and on a non-exclusive basis in the remainder of Eastern Europe. The
Cortelco Agreement requires, among other things, that the Company purchase at
least $1 million per year (before discounts) of products in components from
Cortelco. Although the Company has not been meeting its obligation to purchase
$1 million per year, the Agreement has not been canceled by Cortelco. The
Company believes that it is in compliance with all other material terms of the
Cortelco Agreement, which expires in May 1999.

        Under the Cortelco Agreement, amounts owed by the Company to Cortelco
for equipment reduce amounts owed by Cortelco for its investment in DTS/ZWUT.
During the years ended December 31, 1996, 1995, 1994, 1993 and 1992, purchases
from Cortelco totaled $269,005, $198,641, $431,207, $600,936 and $804,702,
respectively, of which $52,555, $55,041 in 1995, $113,289 in 1994, $90,459 in
1993 and $414,787 in 1992 were credited against Cortelco's stock payment
obligation. At December 31, 1995, $76,251 was owed to Cortelco by the Company
for unpaid equipment purchases. On April 20, 1994, Cortelco agreed to reduce
their ownership of DTS/ZWUT from 20 to 10 percent, in exchange for an $800,000
reduction of equipment credits owed by Cortelco to the Company.

                                       27
<PAGE>
                               FUTURE TRANSACTIONS

        Although the Company intends that the terms of any future transactions
and agreements between the Company and its directors, officers, principal
shareholders or other affiliates will be no less favorable than could be
obtained from unaffiliated third parties, no assurances can be given in this
regard. Any such future transactions that are material to the Company and are
not in the ordinary course of business will be approved by a majority of the
Company's independent and disinterested directors.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits. See Index to Exhibits on page 30. Each of the following
exhibits described on the index to exhibits is a management contract or
compensatory plan or arrangement: 10.1, 10.2, 10.5, 10.6, 10.12, 10.13,
10.16,10.17, 10.21, 10.22, 10.26, 10.27, 10.28, 10.29.

        (b)    Reports on Form 8-K.

        On October 28, 1996, the Company filed Form 8-K (subsequently amended by
Form 8-KA #1, dated November 6, 1996) reporting the Company's determination not
to retain the firm of Hoffman, McBryde & Co., P.C., as the Company's independent
accountants for the fiscal year ended December 31, 1996. The Board of Directors
of the Company has engaged BDO Seidman, LLP, as the Company's independent
accountants with respect to the fiscal year ended December 31, 1996.

                                       28
<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)

March 31, 1997                              /S/ E. SCOTT CRIST
                                                E. Scott Crist
                                                President and Principal
                                                Executive Officer

March 31, 1997                              /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             March 31, 1997
E. Scott Crist

/S/ MANUEL LANDA                            Director             March 31, 1997
Manuel Landa

/S/ OSCAR GARCIA                            Director             March 31, 1997
Oscar Garcia

/S/ RICARDO OREA                            Director             March 31, 1997
Ricardo Orea

/S/ TODD M. BINET                           Director             March 31, 1997
Todd M. Binet

/S/ DARREL O. KIRKLAND                      Director             March 31, 1997
Darrel O. Kirkland

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                                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,
         non-participating 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  - Agreement dated January 10, 1992 between Solid State Systems Division
         of Cortelco and PAV Corporation (formerly, ARNICA, Inc.)

 10.4  - Agreement dated April 20, 1994 between the Registrant and Cortelco
         (filed as Exhibit 10.4 to the Company's Registration Statement No.
         33-80542-D and incorporated herein by reference)

 10.5  - Employment Agreement between the Company and W. Dal Berry (filed as
         Exhibit 10.5 to the Company's Registration Statement No. 33-80542-D and
         incorporated herein by reference)

 10.6  - Employment Agreement between the Company and S.P. Krishna Murthy (filed
         as Exhibit 10.6 to the Company's Registration Statement No. 33-80542-D
         and incorporated herein by reference)

 10.7  - Agreement and Plan of Merger between the Company and PAV Corporation
         dated June 7, 1994 (filed as Exhibit 10.7 to the Company's Registration
         Statement No. 33-80542-D and incorporated herein by reference)

 10.8  - 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)

 10.9  - Agreement dated September 28, 1992 between the Registrant and Microwave
         Network Incorporated (filed as Exhibit 10.9 to the Company's
         Registration Statement No. 33-80542-D and incorporated herein by
         reference)

 10.10 - Form of letter agreement between the Registrant and Cortelco (filed as
         Exhibit 10.10 to the Company's Registration Statement No. 33-80542-D
         and incorporated herein by reference)

 10.11 - 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)

 10.12 - Severance Agreement between the Company and S.P. Krishna Murthy
         (filed as Exhibit 10.12 to the Company's Report on Form 10-KSB for the
         year ended December 31, 1995 and incorporated herein by reference)

 10.13 - 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)

 10.14 - 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)

 10.15 - 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)

 10.16 - Employment Agreement between the Company and Gary Panno (filed as
         Exhibit 10.1 to the Company's Report on Form 10-QSB for the quarter
         ended March 31, 1996 and incorporated herein by reference)

 10.17 - Consulting Agreement between the Company and Roy A. Varghese (filed
         as Exhibit 10.2 to the Company's Report on Form 10-QSB for the quarter
         ended March 31, 1996 and incorporated herein by reference)

 10.18 - 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)

 10.19 - 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)

 10.20 - 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)

 10.21 - 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)

 10.22 - 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)

 10.23 - Form of Warrant for Robert Chamberlain dated May 17, 1996 (filed as
         Exhibit 10.8 to the Company's Report on Form 10-QSB for the quarter
         ended March 31, 1996 and incorporated herein by reference)

 10.24 - 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)

 10.25 - 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)

 10.26 - 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)

 10.27 - Employment Agreement for Mark Vance (filed as Exhibit 10.2 to the
         Company's Report on Form 10-QSB for the quarter ended September 30,
         1996 and incorporated herein by reference)

 10.28 - Consulting Agreement between Company and Richard H. Langley (filed as
         exhibit 10.1 to the Company's Form S-8 Registration statement (No.
         333-13249) incorporated herein by reference)

*10.29 - Employment Agreement for Todd Binet

*11.1  - Statement regarding computation of per share earnings

 12.1  - Distribution agreement dated May 2, 1995 between the Registrant and
         DSC International Corporation (filed as Exhibit 12.1 to the Company's
         Report on Form 10-KSBA2 for the year ended December 31, 1995 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
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* Filed herewith