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

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

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                         COMMISSION FILE NUMBER 0-24622

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

                     TEXAS                                  75-2433637
            (State or other jurisdiction of              (I.R.S. employer
            incorporation or organization)               identification no.)

           2700 POST OAK BLVD., SUITE 1000
                  HOUSTON, TEXAS                                        77056
      (Address of principal executive offices)                       (Zip Code)

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

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

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

                   REDEEMABLE COMMON STOCK PURCHASE WARRANT
                                (TITLE OF CLASS)


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

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

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

The aggregate market value of common stock held by non-affiliates of the
registrant (based on the closing price as reported on the NASDAQ National Market
System on March 11, 1999, was approximately $30,700,000. Shares of common stock
held by each executive officer and director and by each stockholder affiliated
with a director have been excluded from this calculation because such persons
may be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes. The number of
outstanding shares of the registrant's Common Stock as of March 11, 1999 was
6,069,378.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement relating to the Annual Meeting of Stockholders
to be held on June 21, 1999 are incorporated by reference into Part III of this
report.
<PAGE>
                          TELSCAPE INTERNATIONAL, INC.
                                TABLE OF CONTENTS
                                FORM 10-K REPORT
                                DECEMBER 31, 1998

                                                                            PAGE
                                                                            ----
Part I

      Item 1.           Business.                                              1

      Item 2.           Properties.                                           18

      Item 3.           Legal Proceedings.                                    19

      Item 4.           Submission of Matters to a Vote of Security Holders.  19

Part II

      Item 5.           Market for Registrant's Common Equity and Related
                  Stockholder Matters.                                        20

      Item 6.           Selected Financial Data.                              21

      Item 7.           Management's Discussion and Analysis of
                  Financial Condition and Results of Operations.              22

      Item 7A.          Quantitative and Qualitative
                  Disclosures about Market Risk                               32

      Item 8.           Financial Statements and Supplementary Data.          34

      Item 9.           Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure.                     60

Part III

      Item 10.          Directors and Executive Officers of the Registrant.   60

      Item 11.          Executive Compensation.                               60

      Item 12.          Security Ownership of Certain
                  Beneficial Owners and Management.                           60

      Item 13.          Certain Relationships and Related Transactions.       60


Part IV

      Item 14.          Exhibits, Financial Statement Schedules and Reports
                  on Form 8-K.                                                60
<PAGE>
      The statements contained in this Annual Report on Form 10-K that are not
historical facts are "forward-looking statements" (as such term is defined in
the Private Securities Litigation Reform Act of 1995), which can be identified
by the use of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Such statements include, but are not limited to, statements under the
captions "Business", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report on Form
10-K as to the Company's plans to implement its growth strategy, improve its
financial performance, expand its infrastructure, develop new products and
services, expand its sales force, expand its customer base and enter
international markets. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Furthermore, such forward-looking statements may be included in, but
are not limited to, various filings made by the Company with the Securities and
Exchange Commission (the "Commission"), or press releases or oral statements
made by or with the approval of an authorized executive officer of the Company.

      Management wishes to caution the reader that the forward-looking
statements referred to above and contained in this Annual Report on Form 10-K
regarding matters that are not historical facts involve and are based on
numerous assumptions and predictions about future conditions that could prove
not to be accurate. No assurance can be given that the future results will be
achieved; actual events, transactions or results may differ materially as a
result of risks facing the Company. Such risks include, but are not limited to,
the effectiveness of management's strategies and decisions, changes in business
conditions, changes in the telecommunications industry and the general economy,
competition, changes in service offerings and risks associated with the
Company's limited operating history, entry into developing markets, managing
rapid growth, international operations, dependence on effective information
systems, ability to consummate acquisitions or enter into joint ventures with
companies on terms acceptable to the Company and development of its network, as
well as regulatory developments any of which could cause actual results to vary
materially from the future results indicated, expressed or implied, in such
forward-looking statements. No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the
forward-looking statements. Statements with respect to acquisitions and
continued trends are forward-looking and involve risks and uncertainties.
Furthermore, the Company has significant operations in Mexico, subjecting the
Company to certain political and commercial risk. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect future events or circumstances.

                                     PART I

ITEM 1.     BUSINESS.
                                     GENERAL

      Telscape International, Inc. (collectively, with its subsidiaries, the
"Company" or "Telscape") is an emerging, fully integrated telecommunications
company. The Company was founded in 1992 as Polish Telephones and Microwave. In
November 1996, the Company's name was changed to Telscape International, Inc. to
more accurately reflect the Company's overall strategy. The Company, based in
the U.S., supplies international voice, video and data services, via switched
and dedicated networks, principally to and from Latin America. In addition, the
Company provides a full range of systems integration and value-added
telecommunications services in Mexico to major public and private sector
customers. Telereunion, a Telscape subsidiary, is one of only sixteen companies
that has been granted a facilities-based long distance concession by the Mexican
government. In addition, the Company provides satellite teleport services to
customers in the U.S. and Latin America.

      The Company believes that it is well-positioned to capitalize on the
opportunities presented by the large and growing international
telecommunications services market. Telscape intends to significantly expand its
facilities-based telecommunications operations over the next 12 months and to
broaden its service offerings in markets where it has established, or expects to
establish, a significant presence. The Company, through certain of its Mexican
subsidiaries, has been authorized to provide data and other value-added services
in Mexico. In addition, in June 1998, Telereunion S.A. de C.V. ("Telereunion
S.A."), an affiliate of the Company, received a 30-year, facilities-based
carrier license from the Mexican government allowing it to construct and operate
a network over which the Company plans to carry long distance traffic in Mexico
(the "Mexican Concession"). The Company owns approximately 65% of the economic
interests and 49% of the voting interests of Telereunion, S.A. In addition,
three Mexican directors of the Company own an additional 18% of the voting
interests and 2% of the economic interests in Telereunion S.A., resulting in the
Company and such directors together controlling 67% of the economic interests
and voting interests of Telereunion S.A. Under Mexican law, foreign investors
may own more than a majority of the economic interests in a concessionaire but
may not own more than 49% of the voting ownership of any concessionaire. To
deliver its services, the Company, through Telereunion S.A., intends to
construct a network in 

                                       1
<PAGE>
Mexico, which will consist of a combined fiber-optic and microwave long distance
network, connecting the United States, the Gulf region of Mexico and targeted
Mexican cities (the "Mexican Network"). The Company believes that the Mexican
Network will allow it to enhance service offerings to business customers in
Mexico while reducing its cost of terminating international traffic in Mexico.

      Telscape intends to capitalize on the growth in the Latin American
telecommunications market by providing international long distance services to
and from targeted Latin American countries. The Company also intends to position
itself as an integrated telecommunications provider in Mexico by providing
domestic and international long distance services over the Mexican Network. The
Company believes that expanding its owned and leased transmission facilities in
Mexico and Latin America will allow it to increase the percentage of minutes of
traffic carried on-net, which the Company believes will enable it to increase
margins and profitability and ensure quality of service on both international
and domestic long distance traffic. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations.

      The Company is one of only 16 concession holders in Mexico. The Company
believes that its planned Mexican Network, when complete, will link 47 cities
and towns and cover, including interconnection agreements, approximately 90% of
the population in Mexico. The Mexican Network will provide the Company with the
backbone for its strategy to be an integrated telecommunications service
provider for the Mexican market. The Mexican Network will provide the Company
with significant, carrier-class, cost-effective capacity from which it can grow
its existing retail and wholesale international long distance and value-added
services businesses on both sides of the U.S.-Mexico border. The Company expects
to begin the construction of the Mexican Network in the second quarter of 1999.

      The Company has selected Lucent Technologies Inc. ("Lucent") to engineer,
furnish and install the Mexican Network. In addition, the Company received a
commitment from Lucent to provide the Company with up to $40 million of long
term financing, which includes $34 million towards the purchase of Lucent
products and services (including construction of the Mexican Network) and $6
million for repayment of the Company's current obligations (the "Lucent
Facility").

      In May 1998, the Company acquired California Microwave Services Division,
Inc. ("CMSD"), a subsidiary of California Microwave, Inc., for $8.8 million in
cash. As part of the acquisition, the Company formed INTERLINK Communications,
Inc. ("INTERLINK"), to acquire CMSD. The primary asset of INTERLINK is a
teleport facility in Mountain View, California. The Company believes that
INTERLINK enhances its position as an integrated telecommunications provider and
helps assure satellite capacity in its targeted markets in Latin America.

      In May 1998, the Company issued $4.0 million in Deere Park Convertible
Debentures (as defined) and $5.0 million in Gordon Brothers Convertible
Debentures (as defined). In June 1998, the Company issued an additional $1.0
million in Deere Park Convertible Debentures. The proceeds from the Deere Park
Convertible Debentures and the Gordon Brothers Convertible Debentures were used
primarily in connection with the acquisition of INTERLINK, and the remainder was
used for capital investments and general working capital purposes.

      In March 1998, the Company acquired a license and access code from the
government of El Salvador to provide inbound and outbound international long
distance and certain other telecommunications services.

      In January 1998, Telscape acquired MSN Communications, Inc. ("MSN), a
leading provider of prepaid calling cards ("Prepaid Cards") that are marketed
under the TELEFIESTA(R) brand name primarily to Hispanic consumers residing in
the United States. The acquisition enhances Telscape's long distance business
profile by establishing a retail platform for its international long distance
services and enhancing its ability to market additional products and services to
Hispanic customers.

                                           INDUSTRY BACKGROUND AND MARKET DEMAND

OVERVIEW

      The international telecommunications industry is undergoing a period of
fundamental change that has resulted, and is expected to continue to result, in
significant growth in international telecommunications traffic and revenues.
According to the World Telecommunication Development Report 1996/97 published by
the International Telecommunications Union ("ITU") on February 20, 1997 (the
"ITU Report"), the 1998 revenue of the global telecommunications industry is
projected to exceed $1 trillion. According to TeleGeography 1999, revenues
generated from the provision of international long distance services increased
to $65.9 billion in 1997 from $26.8 

                                       2
<PAGE>
billion in 1988, a compound annual growth rate of 10.6%. Management believes
that Latin American traffic, including traffic between the United States and
Latin America, will continue to grow faster than the international
telecommunications market as a whole as a result of (i) underlying economic
growth within Latin America, (ii) growth of regional trade as a result of free
trade initiatives such as NAFTA, Mercosur and the Andean Pact, (iii)
deregulation and privatization of telecommunications carriers in the region,
(iv) projected regional increases in telephone density and (v) increasing demand
for bandwidth-intensive applications.

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

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

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

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

      Recent legislation and the World Trade Organization agreement ("WTO
Agreement") among numerous countries are expected to lead to increased
liberalization of the majority of the world's telecommunication markets.
Specifically, the WTO Agreement created a framework under which 69 countries
committed to liberalize their telecommunications laws to permit increased
competition and, in most cases, foreign ownership in their telecommunications
markets, beginning in 1998. The Telecommunications Act of 1996 established a
framework for increasing competition in the U.S. telecommunications services
market and the European Union's Services Directive abolished exclusive rights
for the provision of voice telephony services throughout the European Union
("EU") and the local Public Switched Telephone Network ("PSTN") of any member
country of the EU by January 1, 1998.

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


                                       3
<PAGE>
LATIN AMERICA

      The telecommunications market in Latin America is undergoing a period of
deregulation, privatization, increased competition and rapid growth. According
to TeleGeography 1999, growth in the demand for telecommunications services
across Latin America in 1996-1997 increased at a rate of 7.6%.

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

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

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

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

MEXICO

      The market for telecommunications services in Mexico is undergoing rapid
expansion. According to TeleGeography 1999, the volume of telecommunication
traffic to Mexico increased 16.2% in 1996 and 58% in 1997. The 1997 traffic
along the U.S.-Mexico route accounted for 12.1% of the U.S. international market
and 88.6% of the Mexican international telecommunications market. According to a
report issued by the Federal Communications Commission's ("FCC") Common Carrier
Bureau in November 1998, revenues for sales on the U.S.-Mexico route exceeded
$1.1 billion in 1997.

      As a result of legislation enacted in 1995, Mexico began the process of
opening its telecommunications market to competition. National and international
long distance services were opened to competition in August 1996, subject to the
issuance of individual concessions. Pure switched international resale is not
allowed in Mexico to date. Value-added services are fully open to competition
and subject to a simple registration process.

      The Company believes that it is well-positioned to take advantage of the
growing demand for telecommunications services between the United States and
Mexico. The Company currently provides a full range of systems integration and
value-added services to major public and private customers. Additionally, in
June 1998, 

                                       4
<PAGE>
Telereunion S.A. received the Mexican Concession from the Secretaria de
Comunicaciones de Telecomunicaciones ("SCT"), allowing it to originate and
terminate domestic and international long distance services in Mexico.

OTHER LATIN AMERICAN MARKETS

      The Company intends to focus on the opportunities created by deregulation
of telecommunications services in other telecommunications markets in Latin
America. Latin American markets have undergone rapid expansion as a result of
regional and global deregulation.

      Countries within Latin America have different national regulatory schemes
and are in varying stages of deregulation. The requirements for the Company to
obtain the necessary approvals to offer value-added services and various other
telecommunications services, including voice telephony, vary from country to
country. The Company has recently obtained the authority to provide inbound and
outbound international long distance as well as certain other telecommunications
services in El Salvador.

STRATEGY

      The Company's objective is to become a leading provider of high quality,
competitively priced, international long distance services between the United
States and Latin America, and a leading provider of international long distance
services, domestic long distance services and integrated value-added services to
customers in Mexico and other targeted countries in Latin America. The key
elements of the Company's strategy are to:

o     EXPAND NETWORK SERVICES. The Company intends to expand its network by
      acquiring switching and transmission facilities and additional fiber optic
      and satellite transmission capacity for the provision of international and
      domestic voice, video and data services. The Company's objectives in
      making these investments are to: (i) provide on-net capacity to allow
      growth in its long distance services business; (ii) increase profitability
      for switched services by reducing the amount of the Company's traffic
      terminated by other long distance carriers pursuant to resale
      arrangements; and (iii) use the expanded network as a platform to support
      advanced, bandwidth-intensive data and media applications.

o     PROVIDE AN INTEGRATED SUITE OF SERVICE OFFERINGS. The Company seeks to
      provide its commercial customers in Mexico with a comprehensive suite of
      telecommunications services, including international and domestic long
      distance services, systems integration, call centers, conference calling,
      Internet access and other broadband data services. The Company believes
      that providing multiple service offerings improves customer retention and
      the profitability of individual customer relationships. Management
      believes that Telscape is one of the few companies to offer a wide array
      of high quality and competitively priced telecommunications services to
      commercial customers in Mexico, and expects to pursue opportunities to
      provide similar services as it expands into other Latin American markets.

o     EXPAND SCALE AND SCOPE OF RETAIL BUSINESS. Management believes that its
      TELEFIESTA(R) Prepaid Cards position the Company for expanded growth in
      the retail sector of the international telecommunications market. The
      Company has signed operating agreements with concessionaires in Mexico
      which provide for significant additional carrier quality and
      cost-effective termination capacity to Mexico in the short-term. The
      Company believes that these agreements together with the Mexican Network
      will provide it with the necessary capacity to allow for the anticipated
      growth in this rapidly expanding market.

o     PURSUE STRATEGIC ALLIANCES, JOINT VENTURES AND ACQUISITIONS. The Company
      continues to pursue strategic alliances, joint ventures and acquisitions
      to expand its business, increase its customer base, add network and
      circuit capacity, enter additional markets and develop new products and
      services. The Company seeks to acquire interests in companies that have
      network facilities, service offerings or technologies that complement
      those of the Company. Since 1996, the Company has completed six
      acquisitions, including a U.S.-based provider of satellite
      telecommunications services with access to satellites covering Central and
      South America, a U.S.-based Prepaid Card provider focused on Hispanic
      consumers in the United States and Latin American markets, three data and
      systems integration businesses in Mexico and a U.S.-based reseller of long
      distance services.

o     BUILD BRAND AWARENESS. The Company seeks to build brand awareness of its
      TELEFIESTA(R) and Telereunion brands. Management believes that it will be
      able to continue building customer awareness of its TELEFIESTA(R) brand
      name through sales of TELEFIESTA(R) services to its U.S. customers as it
      opens new international long distance markets throughout Latin America. In
      addition, the Company intends to distribute TELEFIESTA(R) services in
      targeted Latin American countries as continued deregulation and market
      conditions permit. Management 

                                       5
<PAGE>
      also intends to continue building customer awareness of its systems
      integration and value-added services through the Telereunion brand name,
      which it plans to leverage as it commences international and domestic long
      distance services in Mexico.

o     EXPAND LATIN AMERICAN PRESENCE. The Company seeks to expand its Latin
      American presence in order to capitalize on the relatively high growth of
      traffic between the United States and Latin America. The Company believes
      that management's international telecommunications expertise, combined
      with Telscape's established reputation and extensive operations in Mexico,
      will enable the Company to identify and capitalize on the increasing
      deregulation in targeted Latin American markets.

                                    SERVICES

      Telscape currently operates principally three lines of business:
value-added services, international long distance and satellite teleport
services. All three business lines will be significantly enhanced by the Mexican
Network, which is scheduled to initiate operations during the fourth quarter of
1999. The Company's business lines are designed to serve its targeted customers,
commercial customers and consumers. The Company's current network operations
support its services to these customers with the Mexican Network focusing on
unifying Mexican traffic onto its own network. Financial information about the
Company's business segments for each of the three years ended December 31, 1996,
1997 and 1998 are disclosed in Footnote 9 in the Notes to the Consolidated
Financial Statements.

VALUE-ADDED SERVICES

      The Company provides a full range of systems integration solutions to
major public and private customers in Mexico. The Company also provides
outsourced network services in Mexico to the U.S. Embassy, the Mexican Stock
Exchange and other large public agencies and private businesses.

SYSTEMS INTEGRATION

      Telscape is one of the two largest systems integrators in Mexico,
providing customized and turn-key solutions to corporations and institutions
under the same management team since 1986. Services include developing,
building, installing and servicing corporate voice, video and data networks.
Post-sales support consists of maintenance contracts, outsourcing, network
management and monitoring services. Although the Company expects that systems
integration revenues will not increase as rapidly as those from the Company's
other lines of business, it will remain an important part of the Company's
strategy to introduce commercial customers to the Company's other
telecommunications services and essential in its strategy to provide its
customers with a comprehensive suite of telecommunications services.

      Since 1992, the Company has been one of five distributors in Mexico of
Nortel telecommunications equipment. The Company also distributes voice and
teleconferencing products manufactured by Polycom, Centigram and VTEL and
distributes, installs and maintains data and networking equipment manufactured
by 3Com Corporation, Nortel, Newbridge Networks, ADC Kentrox and Cisco. The
Company is the largest Nortel and 3Com distributor in Mexico and is consistently
recognized as the industry leader in systems integration. Among its many honors,
the Company recently was awarded the BEST ADVANCED SOLUTION PARTNER IN LATIN
AMERICA by 3Com in 1998.

      The Company anticipates that traditional long distance and local exchange
services will increasingly involve sophisticated, application-oriented services
such as audio, data and video conferencing, enhanced facsimile, telemarketing,
interactive voice response ("IVR"), help-desk, advanced Internet and other
content and service intensive value-added services. The Company has provided
value-added services in Mexico since 1995, giving it both technical and
marketing experience needed to compete in the value-added services market.

      The Company's sales and technical personnel are organized as teams that
combine strong sales capabilities with specialized technical expertise in
cutting-edge, product-specific areas such as ATM and Frame Relay networks,
virtual private networks and telemedicine - distance learning, help desks and
teleconferencing solutions. For example, Telscape was the first company in
Mexico to offer conference call services. Telscape's systems integration
business also provides a natural channel to introduce, with a high degree of
credibility, commercial customers to the Company's other products and services,
further broadening the Company's relationships with its customers. For example,
the Company now offers its Mexican clients the opportunity to take advantage of
advanced bandwidth-on-demand and disaster recovery services through the
Company's teleport in Mountain View, California. Telscape believes that much of
the expertise developed in Mexico can be replicated in other Latin American
countries.

                                       6
<PAGE>
OUTSOURCED NETWORK SERVICES

      As traditional telecommunications services become more of a commodity,
Telscape believes that value-added services will become an increasingly
important component of the Company's service offerings. The Company has
leveraged its systems integration expertise to provide outsourced network
services, including help desk support and network management services. Customers
in Mexico include the U.S. Embassy, the Mexican Ministry of Foreign Affairs, the
Mexican Stock Exchange, Pepsico (Frito Lay), Hewlett Packard, ICA (the largest
construction company in Latin America) and Mabe (a GE joint venture).

      The Company's expanding presence in value-added telecommunications
services resulted in an outsourcing contract, signed in the third quarter of
1997, with the U.S. Embassy in Mexico City. The contract is a one year contract
and the U.S. government has the option to renew the contract for up to four
additional one-year terms. This contract has been renewed for the first
additional year through the fourth quarter of 1999. The system is designed to
automate the delivery of visa applications and enables callers to request visa
information from either a live operator or from an automated touch-tone system.
Revenues from this contract for the year ended December 31, 1998 totaled $2.7
million. In connection with this contract, the Company established a call center
in Mexico City, which the Company believes will serve as a platform for
additional growth. In the fourth quarter of fiscal 1998, the Company received
approval from the Mexican Ministry of Foreign Affairs to provide passport
information and other information to the Mexican public via its help desk
operations. With this approval, the Company entered into a contract with a trust
formed by the Ministry of Foreign Affairs to provide these services on a
non-exclusive basis for an indefinite term.

      The Company had fiscal 1998 revenues of approximately $32.9 million from
value-added services, representing 24.9% of the Company's consolidated revenues.

INTERNATIONAL LONG DISTANCE

PREPAID CARDS & ENHANCED SERVICES

      Telscape provides national and international long distance services to
consumers in the U.S., primarily first and second generation Hispanic
individuals, through Prepaid Cards under the Company's TELEFIESTA(R) brand name.
The Company believes that Prepaid Cards are the most effective vehicle to
provide long distance and other telecommunications services to its targeted
Hispanic residential customer segment, as well as benefiting customers by
enabling them to purchase the card anonymously and in various fixed dollar
amounts. Telscape recently added dual-country capabilities to its Prepaid Cards,
offering usage in both the U.S. and Mexico, and, plans to add other countries
throughout Latin America. Additionally, the Company is developing other enhanced
services such as mailbox-on-demand (international voice-mail), virtual telephone
and money transfer services. The Company believes that TELEFIESTA(R) is one of
the most widely recognized brand names for Prepaid Card services among the 30
million Hispanics in the U.S. and that it currently enjoys a market share of
approximately 10% of the total U.S. Prepaid Card market to Latin America.

      The Company's TELEFIESTA(R) cards, which provide service to more than 200
countries and territories, are sold through distributors to independent retail
outlets across the United States. The cards are marketed primarily to Hispanic
communities in the U.S., specifically Chicago, Los Angeles, Miami, New York and
the border states (particularly Texas), that generate high levels of
international traffic to targeted Latin American countries. Since its inception,
the Company has focused on building a substantial network of wholesale
distributors that sell either to sub-distributors or directly to retail outlets.
The Company intends to expand its internal sales department in order to sell
directly to large retail chains, department stores, the tourist industry,
airport and hotel gift shops, gas stations and other retail outlets owned or
franchised by larger companies.

      To capitalize on its knowledge of the local markets and its success in the
U.S., the Company recently developed a Prepaid Card service focusing primarily
on Mexican residents with U.S. calling needs. The Prepaid Card service is being
offered in the U.S. and Mexico through separate marketing and interconnection
agreements with selected Mexican operators. These agreements provide a
significant two-fold increase in capacity for Prepaid Card services for the
Company at cost-effective, carrier-class quality. The Company believes that this
uniquely designed service will be able to fill a substantial, unsatisfied demand
in Mexico for economically priced Mexico - U.S. calling services. Customers will
be able to purchase the Prepaid Card, with certain enhanced features, in the
U.S., and it intends to offer these cards in Mexico in the future. The cards
have the capabilities to call from the U.S. to Mexico and from Mexico to U.S. As
a result, for example, Mexicans residing in the U.S. are able to purchase


                                       7
<PAGE>
minutes for friends and relatives residing in Mexico in order to make Mexico -
U.S. calls. The Company believes that this northbound traffic represents a
unique opportunity for Prepaid Card services which is currently under-served.

WHOLESALE SERVICES

      The Company provides its wholesale carrier services to first and
second-tier carriers in the U.S. to complement its retail traffic pattern.
Providing both retail and wholesale services on its network enables the Company
to maximize efficiency and better utilize its network. In addition, the Company
has negotiated advantageous rates in its targeted Latin American countries by
leveraging its extensive relationships with local carriers. The Company markets
its wholesale capacity through a direct sales effort and has 15 wholesale
carrier customers.

      The Company believes that its business model will enable it to take
advantage of the rapidly growing wholesale international long distance market on
a more permanent basis than would be possible by relying on temporary,
regulatory-driven pricing distortions and arbitrage opportunities. The Company
will establish this position by effectively "pulling" valuable proportionate
return related traffic out of Latin America. The "pulling" is accomplished by
utilizing the Company's extensive Prepaid Card distribution system in the U.S.
to effectively transfer the higher purchasing power of the immigrants in the
U.S. to their relatives in Latin America. For example, a person buying the
TELEFIESTA(R) Prepaid Card in the U.S. will be able to share it with their
relatives in Mexico by giving them the Mexican local access number and the PIN
(personal identification number), or simply by mailing the card itself.
Furthermore, for every minute of outbound use, the Company will generate
valuable proportionate return traffic, which can also be used to supplement the
wholesale business.

      The Company had fiscal 1998 revenues of $93.2 million from its
international long distance business, representing 70.5% of the Company's
consolidated revenues.

SATELLITE TELEPORT SERVICES

      The Company through its subsidiary, INTERLINK, owns and operates a
satellite teleport facility in Mountain View, California. INTERLINK provides
voice, video and data transport services including fractional and full T-1 data
broadcast, dedicated circuits and private line up-link and down-link services to
Latin America and other parts of the world. INTERLINK's satellite teleport has
been operational for more than a decade and the Company believes it is among the
most reliable in the U.S. INTERLINK's satellite teleport services both the
Company's network needs for its international long distance customers as well as
INTERLINK's customers mainly in the telecommunications, broadcasting and weather
service industries. In addition, INTERLINK has introduced Bandwidth-on-Demand,
Integrated Services Digital Network ("ISDN") videoconferencing and
Internet-through-satellite services and also serves as an Internet backbone
provider to Internet service providers ("ISPs") in remote areas where access to
high speed fiber optics is limited, as is the case in most Latin American
countries. The Company believes that INTERLINK enjoys an excellent reputation
within the industry for its reliability and services and has positioned itself
as a natural "conduit" to provide services from and to the United States with an
emphasis on Latin America. The Company believes that INTERLINK has the ability
to significantly expand its services and future revenue. Currently, INTERLINK
utilizes less than 15% of the satellite teleport's capacity and the new Satmex V
satellite provides robust installed up-link capacity and additional bandwidth.
INTERLINK also produces radar detectors, VSATs (Very Small Aperture Terminals)
and telecommunications amplifiers, which represent less than one third of
INTERLINK's projected revenues for 1999.

      The Company intends to utilize INTERLINK's satellite teleport capabilities
to target, as part of its Mexican Network, low density population towns in
Mexico which historically have not been targeted by concessionaires and
currently are only served by Telefonos de Mexico S.A. de C.V. ("Telmex"). The
Company's market analysis has determined that certain of these towns are high
volume users of TELEFIESTA(R) Prepaid Cards. By utilizing INTERLINK's satellite
teleport capabilities and installing smaller satellite receiving and
transmitting facilities in these towns, the Company can expand the Mexican
Network to these under-served cities which are current consumers of its services
in a cost-effective manner.

      INTERLINK had revenues for fiscal 1998 of $6.0 million, accounting for
4.6% of consolidated revenues and representing seven months of revenue since it
was acquired by the Company effective June 1, 1998.

                                     NETWORK

      The Company currently manages its own telecommunications network and also
utilizes the transmission capacity of several carriers. The Company believes
that increasing the percentage of traffic it carries on-net will enable it to
increase margins and profitability and ensure quality. In addition, the
Company's use of multiple carriers 

                                       8
<PAGE>
increases cost efficiencies by establishing additional routing capability and
enabling the Company to obtain sufficient capacity to support its rapid growth.

                                NETWORK STRATEGY

      The Company's network is comprised of leased, partitioned and owned
switches, fixed cost point-to-point fiber optic cable leases and leased
satellite capacity to provide connectivity for many Central and South American
cities. The Company intends to expand its network primarily by using traditional
circuit-based technology, acquiring additional satellite and fiber optic
transmission capacity and installing switching equipment in targeted U.S. and
Latin American markets. In countries in which the Company currently operates
without a switch and in each new market the Company enters, the Company intends
to install switching facilities and integrate them into its network to improve
the Company's overall cost structure. The Company expects that it will be able
to realize significant cost savings by routing an increasing portion of its
Mexican domestic long distance and international traffic on-net.

      The Company intends to market certain domestic long distance services
directly to customers in the Gulf region of Mexico primarily through the
development of the Mexican Network. The Company's Mexican Network will support
multiple lines of international and domestic national telephone services in
Mexico, as well as provide Telscape with an essential element for its plan to
become a significant market force in Mexico by securing for the Company control
over its bandwidth and transmission quality requirements. The Company has
targeted the Gulf region of Mexico for these services because (i) the region
currently lacks extensive telecommunications infrastructure, (ii) other major
competitors of the Company have not targeted the region for development, (iii)
there is a developed business community with a high potential for long distance
usage in the region, (iv) the region is sufficiently populated to permit the
efficient use of new infrastructure, and (v) the region is in close proximity to
the United States.

      The Company expects to complete the Mexican Network by the end of the
fiscal year 1999. (See discussion at International Origination and Termination
Facilities-The Mexican Network). The Company believes that the Mexican Network,
when complete, will link 47 cities and towns and cover, including
interconnection agreements, approximately 90% of the population in Mexico. The
Mexican Network will provide the Company with the backbone for its strategy to
be a complete telecommunications service provider for the Latin American market,
beginning with Mexico. With the Mexican Network, the Company will be one of few
companies with a significant presence on both sides of the U.S.- Mexico border.
The Mexican Network will provide the Company with significant, carrier-class,
cost-effective capacity from which it can grow its existing retail and wholesale
international long distance and value-added services businesses.

              INTERNATIONAL ORIGINATION AND TERMINATION FACILITIES

SWITCHING FACILITIES

      The Company owns and operates a Nortel DMS-250, state-of-the-art digital
switch in Houston, Texas. The Company currently operates additional switching
platforms in Mexico. The Company also currently partitions a switch in New York
and has an outsourcing arrangement in Texas for a Prepaid Card platform, which
has interconnection with the DMS-250 switch in Houston.

      As part of the Company's strategy to expand its Prepaid Card operations,
it plans to install or purchase additional Prepaid Card switching platforms in
selected cities in North America. These switches will be capable of managing
local and 800 Prepaid Card traffic in high-volume gateway cities such as
Houston, New York, Chicago, San Francisco and Los Angeles.

SATELLITE FACILITIES

      In connection with the acquisition of INTERLINK, the Company acquired a
teleport facility in Mountain View, California. The Company believes that this
acquisition enhances its position as an integrated telecommunications provider,
and helps assure satellite capacity to its targeted markets in Latin America. As
part of the Mexican Network, the Company intends to implement satellite
facilities in certain towns in Mexico which will link to its teleport facility
in Mountain View, California.

NETWORK CAPACITY

      The Company purchases transmission services on a per minute basis and
leases transmission capacity on a fixed cost basis from a variety of local and
long distance carriers. The Company is currently expanding its leased on-net


                                       9
<PAGE>
capacity in an attempt to lower costs in its largest distribution areas. The
Company obtains private line capacity from local domestic and international
carriers. The Company's agreements with these carriers fix the private line cost
for a minimum of one year. The Company's agreements with its carriers provide
that some international per minute rates may fluctuate with rate change notice
periods varying from five days to one month. The variable nature of the cost of
services and many of the Company's contracts and agreements subject the Company
to the possibility of unanticipated cost increases and the loss of
cost-effective routing alternatives.

      The Company has signed a contract with a third party for the third party
vendor to provide telecommunications services to the Company including the
origination of inbound 800 dialed phone calls for its Prepaid Cards, and the
termination of U.S. domestic long distance and international long distance. The
contract term is through June 1, 2001, and provides for a minimum monthly
purchase commitment of $360,000 and a total purchase commitment of $12,660,000.
The Company can cancel the minimum monthly purchase commitment with 30 days
notice upon meeting its total minimum purchase commitment. The Company estimates
that total purchases from this third party exceeded $6.5 million as of March 31,
1999.

TELECOMMUNICATIONS NETWORK MANAGEMENT AND INFORMATION SYSTEMS

      The Company's network management and information systems enable it to (i)
economically and efficiently route traffic over the Company's network and the
networks of other carriers, (ii) offer reliable services with high call
completion rates and voice quality and (iii) manage an advanced voice, data and
video multi-service platform. The Company believes that these systems,
particularly their ability to provide flexible, high quality service to
international destinations, provide it with a competitive advantage relative to
many other providers of telecommunications services. The Company monitors its
network and initiates changes to its overall switch network and traffic routing
where appropriate to optimize routing and minimize costs. Because a substantial
portion of the traffic carried by the Company terminates internationally and
call completions vary by carrier, the Company monitors the call completion
efficiencies of its suppliers. The Company intends to continue configuring large
portions of its network with Common Channel Signaling System 7 ("SS7"). SS7
reduces voice call setup and connect time delays and provides additional
technical capabilities and efficiencies for call routing and network
engineering.

NETWORK OPERATIONS CENTER

      The Company has a network operations center ("NOC") in Mexico City,
Mexico, which the Company will use to monitor and control all switches and other
transmission equipment used in its network. The NOC operates seven days a week,
24 hours per day, 365 days a year.

THE MEXICAN NETWORK

      The Company's network philosophy is to invest in network facilities only
after it has developed a customer base and to the extent such an investment can
improve its network cost structure and services provided to its customers. The
Company has developed a substantial presence in Mexico over the last 13 years,
and, in June 1998, Telereunion S.A., an affiliate of the Company in which the
Company owns a 65% economic and 49% voting interest, received the Mexican
Concession, a 30-year, facilities-based carrier license from the Mexican
government. Telereunion S.A. is one of only 16 concession holders in Mexico. The
Mexican Concession enables the Company to construct and operate a network over
which the Company can carry telecommunications traffic, including voice, video
and data transport services, throughout Mexico. To deliver its services, the
Company intends to construct the Mexican Network, a combined fiber-optic and
microwave long distance network, connecting the United States, the Gulf region
of Mexico and targeted international gateway cities.

      The Company's objectives in constructing the Mexican Network are to: (i)
provide capacity to allow growth in its long distance services business; (ii)
increase profitability and significantly lower its costs by bringing traffic
on-net; (iii) use the expanded network to provide long distance services to
domestic corporate and prepaid customers not currently served; and (iv) support
advanced, packet-based, bandwidth-intensive data and multimedia networking
applications to its large Mexican systems integration customer base.

      The Company plans to develop the first stage of its Mexican Network,
consisting of 650 km of fiber optic cable and microwave, circuit switched type
of transmission and switching facilities, in the Gulf region of Mexico. The
Mexican Network will provide connectivity from Mexico City to Puebla, and from
Puebla to Veracruz and Poza Rica. The Company intends to lease and swap capacity
from other long distance providers to connect with the central (Mexico City,
Guanajuato and Guadalajara) and northeast (Monterrey) regions of Mexico, and to
install switching facilities in Mexico City and Monterrey. The Company believes
that more than half of the domestic long 

                                       10
<PAGE>
distance traffic and nearly half of the domestic residential long distance
traffic originates in the region that will be serviced by the Mexican Network.
The Mexican Network will also be located near PEMEX, the largest and most
bandwidth-intensive user of telecommunications services in Mexico and a current
customer of the Company. The Company is currently negotiating interconnection
agreements with other concessionaires. The Company's planned Mexican Network,
when complete, will link 47 cities and towns and cover, including
interconnection agreements, an estimated 90% of the population in Mexico.

      The Company intends to utilize INTERLINK's teleport capabilities to
target, as part of its Mexican Network, low density population towns in Mexico
which historically have not been targeted by concessionaires and currently are
only served by Telmex. The Company's market analysis has determined that certain
of these towns are high volume users of TELEFIESTA(R) Prepaid Cards. By
utilizing INTERLINK's teleport capabilities and installing smaller satellite
receiving and transmitting facilities in these towns, the Company can expand the
Mexican Network to these under-served cities which are current consumers of its
services in a cost-effective manner.

      The Company has selected Lucent to engineer, furnish and install the
Mexican Network. In addition, the Company received a commitment from Lucent to
provide the Company with up to $40 million of long term financing, which
includes $34 million towards the purchase of Lucent products and services
(including construction of the Mexican Network) and $6 million for repayment of
the Company's current obligations. See discussion in Liquidity and Capital
Resources.

      The Company expects to begin the construction of the Mexican Network in
the second quarter of 1999. The Company believes that the Mexican Network can be
fully operational by the end of 1999.

                        SALES, MARKETING AND DISTRIBUTION

VALUE-ADDED SERVICES

      To serve the complex needs of its customers, the Company has formed a team
of sales and technical personnel that combines strong sales capabilities with
specialized technical expertise in product-specific areas such as Private Branch
Exchange ("PBX"), voice processing, Internet, video conferencing and ATM and
Frame Relay networks. Management believes that this sales approach allows the
Company to provide innovative solutions to complex systems integration projects.

      In Mexico, the Company promotes its value-added services through a
combination of advertising, trade shows, direct mail and telemarketing. The
Company has historically utilized its own direct sales force but has recently
developed a dealer network to broaden its distribution channel. The Company's
product managers focus on cultivating relationships with one or more vendors and
with coordinating sales efforts for their specific product lines.

      The Company markets its value-added telecommunications services through
advertising in trade magazines, telemarketing, direct mail and attending trade
shows. The Company believes that its systems integration service base provides
an excellent platform for the follow-up sales of advanced telecommunications
services, since many of the Company's customers have developed confidence in the
Company's ability to implement complex projects.

      The Company's direct sales effort begins with understanding the customer's
business. Sales personnel then identify potential areas where the Company's
value-added services could improve the customer's business, suggesting specific
services, customizing those services to meet the customer's specific needs,
implementing value-added solutions and monitoring the results and potential
changes in the customer's needs.

LONG DISTANCE SERVICES

PREPAID CARDS

      The Company markets its Prepaid Cards under the TELEFIESTA(R) brand name.
The Company's TELEFIESTA(R) Prepaid Cards are sold through distributors to
independent retail outlets throughout the United States. The Company has focused
on building a substantial network of wholesale distributors that sell to
sub-distributors and directly to retail outlets. The sub-distributors generally
sell only to retail outlets.

      The Company targets heavily populated metropolitan areas in the United
States with substantial Hispanic populations that generate significant
international calling volume. Many of the Company's distributors are members of
such ethnic communities or otherwise have personal or business relationships in
such communities. In developing relationships with distributors, the Company
also focuses on expansion into new geographic and metropolitan areas

                                       11
<PAGE>
with substantial Hispanic populations. The Company believes that the success of
its Prepaid Cards has created significant brand loyalty and encourages
distributors and retail outlets to actively market the Company's products. The
Company regularly provides distributors and retail outlets with point of
purchase advertising and explanatory materials. The Company frequently adds new
Prepaid Card products to its service offerings, and adjusts its pricing for
particular traffic segments in order to target certain customer groups, respond
to competitive pressures and otherwise increase market share.

INTERNATIONAL WHOLESALE SERVICES

      The Company's carrier resale department markets its international outbound
switched and dedicated services on a wholesale basis to other telecommunications
companies through a direct sales effort. At March 15, 1999, the Company had
approximately 15 wholesale carrier agreements in place. To provide a more
complete package of international rates to its customers, the Company intends to
establish strategic relationships with entities that have gateways to
international destinations. When appropriate, the Company may establish
in-country relationships for the termination of international long distance.

SATELLITE TELEPORT SERVICES

      The Company's satellite teleport services business markets its satellite
teleport services to other telecommunications companies through a direct sales
effort. Its service offerings include voice, video and data transport services
including fractional and full T-1 data broadcast, dedicated circuits and private
line up-link and down-link services to Latin America and other parts of the
world. The Company has also introduced Bandwidth-on-Demand, ISDN
videoconferencing and Internet-through-satellite services and also serves as an
Internet backbone provider to ISPs in remote areas where access to high speed
fiber optics is limited, as is the case in most Latin American countries. The
Company has also began cross-selling its teleport services through its
value-added sales force in Mexico and its international long distance wholesale
carrier sales force in the U.S.

                                    CUSTOMERS

VALUE-ADDED SERVICES

      The Company performs substantially all of its value-added services for
business customers located in Mexico. During the year ended December 31, 1998,
no single value-added services customer represented more than 10% of the
Company's overall revenues.

LONG DISTANCE SERVICES

PREPAID CARDS

      The Company markets its Prepaid Cards primarily to Hispanic communities in
the United States that generate high levels of international traffic to targeted
Latin American countries where the Company has favorable termination agreements.
The Company sells its Prepaid Cards through a network of distributors, who
distribute the Prepaid Cards to independent retail outlets in 100 cities
throughout the United States. During the year ended December 31, 1998, no single
distributor represented more than 10% of the Company's overall revenues.

INTERNATIONAL WHOLESALE SERVICES

      The Company's wholesale customers are primarily other international
carriers that seek termination services in one or more Latin American countries.
During the year ended December 31, 1998, no single wholesale carrier customer
represented more than 10% of the Company's consolidated revenues.

SATELLITE TELEPORT SERVICES

      The Company's satellite teleport services customers include other
international carriers both in the U.S. and in Latin America which utilize its
services as a low cost, dependable and high speed alternative to fiber optic
connectivity between the U.S. and Latin America; private and public corporate
companies which utilize its private line, dedicated circuits and bandwidth on
demand services; and Latin American ISPs which utilize its services as a source
for high-speed connectivity to Tier I Internet backbone providers in the U.S.
During the year ended December 31, 1998, no single satellite teleport services
customer represented more than 10% of the Company's consolidated revenues.

                                       12
<PAGE>
                          CUSTOMER SUPPORT AND BILLING

      Telscape believes that reliable, sophisticated and flexible billing and
information systems are essential to its ability to remain competitive in the
global telecommunications market. Accordingly, the Company has invested
substantial resources in an IBM AS-400 platform for rating and billing services.

      The Company's billing system enables the Company to (i) accurately analyze
its network traffic, revenues and margins by customer and by route on a daily
basis, (ii) validate carrier settlements, and (iii) monitor least cost routing
of customer traffic. These reports produce efficiencies by reducing the need for
monitoring by the Company's employees. The Company believes that the accuracy
and efficiency of its management information systems provide it with a
significant strategic advantage over other emerging carriers.

                                   COMPETITION

      The international and national telecommunications industry is highly
competitive, is subject to rapid change precipitated by advances in technology
and deregulation and is significantly influenced by the pricing and marketing
decisions of larger industry participants. The Company's success depends upon
its ability to compete with a variety of other telecommunications providers in
each of its markets, including the respective PTT in each country in which the
Company operates. Other competitors of the Company include large,
facilities-based, multinational carriers and smaller facilities-based wholesale
long distance service providers in the United States and overseas that have
emerged as a result of deregulation, switched-based resellers of international
long distance services, providers of systems integration and/or value-added
services, Prepaid Card providers and global alliances among some of the world's
largest telecommunications carriers. The Company anticipates that it will
encounter additional competition as a result of the formation of global
alliances among large telecommunications providers. Recent examples of such
alliances include AT&T's alliance with Unisource, known as "Uniworld", Cable &
Wireless Plc's recent alliance with Italy's STET/Telecom Italia to serve
international customers with a primary focus on the Latin American and European
regions, WorldCom's merger with MCI, the alliance between MCI WorldCom and
Telefonica de Espana, and Sprint's alliance with Deutsche Telekom and France
Telecom, known as "Global One", and the joint venture between Sprint and Telmex.
Consolidation in the telecommunications industry may create even larger
competitors with greater financial and other resources. The effect of the
aforementioned or other similar mergers and alliances could create increased
competition in the telecommunications services market and potentially reduce the
number of customers that purchase wholesale international long distance services
from the Company. In the Prepaid Card business, the Company currently competes
with all of the first tier telecommunications carriers as well as emerging
multinational carriers such as Star Telecommunications, Inc., RSL
Communications, Ltd. and IDT Corporation, many of which have greater financial
resources than the Company. Because certain of the Company's current competitors
also are or could be the Company's customers, the Company's business would be
materially adversely affected to the extent that a significant number of such
customers limit or cease doing business with the Company for competitive or
other reasons.

      International telecommunications providers such as the Company compete on
the basis of price, customer service, transmission quality, breadth of service
offerings and value-added services, and the Company's carrier and Prepaid Card
customers are especially price sensitive. In addition, many of the Company's
competitors enjoy economies of scale that can result in a lower cost structure
for termination and network costs, which could cause significant pricing
pressures within the international communications industry. In recent years,
prices for international and other telecommunications services have decreased
substantially, and are expected to continue to decrease, in most of the markets
in which the Company currently competes or intends to compete. The intensity of
such competition has recently increased, and the Company expects that such
competition will continue to intensify as the number of new entrants increases
as a result of the new competitive opportunities created by the 1996
Telecommunications Act, implementation by the FCC of the U.S. commitment to the
WTO and privatization, deregulation and changes in legislation and regulation in
various of the Company's foreign target markets. There can be no assurance that
the Company will be able to compete successfully in the future, or that such
intense competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.

      Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Company. Additionally,
many competitors have strong name recognition and "brand" loyalty, long-standing
relationships with the Company's target customers and economies of scale that
can result in a lower relative cost structure for transmission and related
costs. These competitors include, among others, AT&T, MCI WorldCom and Sprint
which provide long distance services in the U.S., Telmex, concessionaires and
other registered value-added services providers in Mexico, as well as PTTs and
emerging competitors in other Latin American markets where the Company seeks to
compete. In 

                                       13
<PAGE>
Mexico, the regulatory authorities have granted concessions to 16 companies,
including Telmex and Telereunion S.A., to construct and operate public, long
distance telecommunications networks in Mexico. Some of these new competitive
entrants have as their partners major U.S. telecommunications providers,
including AT&T (Alestra), MCI WorldCom (Avantel) and Bell Atlantic (Iusatel). In
addition, the regulatory authorities in Mexico have granted concessions to
several competitive local exchange providers, such as Telinor, Megacable,
Amaritel, Unitel, MetroNet, and Red de Servicios and several of Mexico's long
distance concessionaires. With regard to the provision of services in Mexico,
the Company competes or will compete in Mexico with numerous other systems
integration, value-added services and voice and data services providers, some of
which focus their efforts on the same customers targeted by the Company. In
addition to these competitors, recent and pending deregulation in Mexico and
various other Latin American countries may encourage new entrants. Moreover,
while the WTO Agreement could create opportunities for the Company to enter new
foreign markets, implementation of the accord by the United States and other
countries could result in new competition from PTTs previously banned or limited
from providing services in the United States. For example, the joint venture
between Sprint and Telmex was granted by the FCC for authority to enter the U.S.
market and to provide resold international switched services between the United
States and Mexico, subject to various conditions. Increased competition in such
countries as a result of the foregoing, and other competitive developments,
including entry by ISPs into the long-distance market, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

      The Company believes that PTTs generally have certain competitive
advantages due to their control over local connectivity and close ties with
national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
PTT. If a PTT were to successfully pressure national regulators to prevent the
Company from providing its services, the Company could be denied regulatory
approval in certain jurisdictions in which its services would otherwise be
permitted, thereby requiring the Company to seek judicial or other legal
enforcement of its right to provide services or to abandon its proposed market
entry. Any delay in obtaining approval, or failure to obtain approval, could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the Company encounters anti-competitive behavior
in countries in which it operates or intends to operate or if the PTT in any
country in which the Company operates uses its competitive advantages to the
fullest extent, the Company's business, financial condition and results of
operations could be materially adversely affected.

                              GOVERNMENT REGULATION

GENERAL

      The global telecommunications industry is subject to international
treaties and agreements, and to laws and regulations which vary from country to
country. Enforcement and interpretation of these treaties, agreements, laws and
regulations can be unpredictable and are often subject to informal views of
government officials and ministries that regulate telecommunications in each
country. In certain countries, including certain of the Company's target Latin
American markets, such government officials and ministries may be subject to
influence by the local PTT.

      The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes to be permissible under
applicable laws and regulations. To the extent that the interpretation or
enforcement of applicable laws and regulations is uncertain or unclear, the
Company's aggressive strategy may result in the Company (i) providing services
or using transmission methods that are found to violate the laws or regulations
of those countries where it operates or plans to operate or (ii) failing to
obtain approvals or make filings subsequently found to be required under such
laws or regulations. If the Company's interpretation of applicable laws and
regulations proves incorrect, it could lose, or be unable to obtain, regulatory
approvals necessary to provide certain of its services or to use certain of its
transmission methods, or to lose its investments in that country. There can be
no assurance that the Company will not be subject to fines, penalties or other
sanctions, including being denied the ability to offer its products and
services, as a result of violations regardless of whether such violations are
knowing or willful and regardless of whether such violations are corrected. To
the Company's knowledge, it is not currently subject to any material regulatory
inquiry or investigation.

      In numerous countries where the Company operates or plans to operate,
local laws or regulations limit the ability of telecommunication companies to
provide telecommunications services in competition with state-owned or
state-sanctioned monopoly carriers. There can be no assurance that future
regulatory, judicial, legislative or political considerations will permit the
Company to offer all or any of its products and services in such countries, that
regulators or third parties will not raise material issues regarding the
Company's compliance with applicable laws or regulations, or that such
regulatory, judicial, legislative or political decisions will not have a
material adverse effect on the Company. If the Company is unable to provide the
services that it presently provides or intends to provide or 

                                       14
<PAGE>
to use its existing or contemplated transmission methods due to its inability to
obtain or retain the requisite governmental approvals for such services or
transmission methods or because it is subjected to adverse regulatory inquiry,
investigation or action, or for any other reason related to regulatory
compliance or lack thereof, such developments could have a material adverse
effect on the Company's business, financial condition and results of operations.

      On February 15, 1997, the United States and 68 other countries signed the
WTO Agreement, agreeing to open their respective telecommunications markets to
competition and foreign ownership and to adopt regulatory measures to protect
market entrants against anticompetitive behavior by dominant telephone
companies. FCC rules implementing the WTO Agreement became effective in February
1998. The FCC also adopted streamlined license granting procedures for carriers
from WTO Agreement signatory countries, pursuant to which the FCC granted more
than 200 international applications in the first 90 days after the streamlined
procedures became effective. The FCC adopted additional streamlining measures on
March 18, 1999. Although the Company believes that the WTO Agreement could
provide the Company with significant opportunities to compete in markets that
were not previously accessible, reduce its costs and provide more reliable
services, it could also provide similar opportunities to the Company's
competitors. There can be no assurance that the pro-competitive effects of the
WTO Agreement will not have a material adverse effect on the Company's business,
financial condition and results of operations or that members of the WTO will
implement the terms of the WTO Agreement.

UNITED STATES

      In the United States, to the extent that the Company offers services as a
carrier, the provision of the Company's services is subject to the provisions of
the Communications Act of 1934, as amended, the Telecommunications Act of 1996
and the regulations of the FCC thereunder. There can be no assurance that future
regulatory, judicial and legislative changes will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, to the extent that the interpretation or enforcement of applicable
laws and regulations is uncertain or unclear, the Company's aggressive strategy
may result in the Company (i) providing services or using transmission methods
that are found to violate the Communications Act, the Telecommunications Act of
1996 or FCC regulations or (ii) failing to obtain approvals or make filings
subsequently found to be required under such laws or regulations. If the
Company's interpretation of applicable laws and regulations proves incorrect, it
could lose, or be unable to obtain, regulatory approvals necessary to provide
certain of its services or to use certain of its transmission methods. There can
be no assurance that the Company will not be subject to fines, penalties or
other sanctions as a result of violations regardless of whether such violations
are knowing or willful and regardless of whether such violations are corrected.
There can be no assurance that if the Company's interpretation of applicable
laws and regulations proves incorrect and/or if the Company is subject to fines,
penalties or other sanctions as a result, that these events will not have a
material adverse effect on the Company's business, financial condition and
results of operations.

U.S. INTERNATIONAL LONG DISTANCE SERVICES

      To the extent the Company offers services as a carrier, it is subject to
FCC rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points, as well as to FCC rules that also regulate the manner in which
the Company's international services may be provided, including the
circumstances under which the Company may provide international switched
services by using private lines or routing traffic through third countries. FCC
rules also require prior authorization before transferring control of or
assigning FCC authorizations, and impose various reporting and filing
requirements on companies providing international services under an FCC
authorization. In order to offer international long distance services, the
Company is also required to file and has filed with the FCC a tariff containing
the rates, terms and conditions applicable to its international
telecommunications services. MSN has filed a tariff with respect to
international services. The Company has a continuing obligation to ensure that
the tariffs accurately reflect the terms and conditions associated with its
service offerings. The Company is also required to file certain carrier to
carrier agreements with the FCC. The FCC also requires carriers such as the
Company to report any affiliations, as defined by the FCC, with foreign
carriers. The FCC may also impose restrictions on affiliations with certain
foreign telecommunications companies. Failure to comply with the FCC's rules
could result in fines, penalties or forfeiture of the Company's FCC
authorizations, each of which could have a material adverse effect on the
Company business, financial condition and results of operations.


                                       15
<PAGE>
THE FCC'S PRIVATE LINE RESALE POLICY

      The FCC's private line resale policy currently prohibits a carrier from
reselling international private leased circuits to provide switched services
(known as "ISR") to or from a country unless the FCC has designated that country
as one that affords U.S. carriers equivalent opportunities to engage in similar
activities in that country or that the country is a member of the WTO and the
local PTT offers U.S. carriers settlement rates at or below the FCC-prescribed
benchmark for terminating the U.S. carriers' traffic. There can be no assurance,
however, that the FCC or any other country's regulatory authority will change
their policies in a way that would have a beneficial impact on the Company or
that would not have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, it is possible,
although the Company believes not likely, that the FCC could take the view that
certain arrangements by which the Company provides international services do not
comply with the existing Private Line Resale Policy. If the FCC, on its own
motion or in response to a challenge filed by a third party, determines that
such arrangements do not comply with FCC rules, among other measures, it may
issue a cease and desist order, impose fines on the Company or, in extreme
circumstances, revoke or suspend its FCC authorizations.

INTERNATIONAL SETTLEMENTS POLICY

      The International Settlements Policy (the "Policy") establishes the
framework governing U.S. carriers' relationships with their foreign
correspondents. Specifically, the Policy governs the exchange of traffic and
settlements between U.S. carriers and their foreign correspondents of the cost
of terminating traffic over each other's networks and prevents foreign carriers
from discriminating among U.S. carriers in bilateral accounting rate
negotiations. The Policy requires: (1) the equal division of accounting rates;
(2) non-discriminatory treatment of U.S. carriers; and (3) proportionate return
of inbound traffic. The FCC enacted certain changes in its rules designed to
permit alternative or flexible arrangements outside of its Policy as a means of
encouraging competition and achieving lower, cost-based accounting rates as
foreign markets deregulate. Specifically, the FCC allows U.S. carriers, subject
to certain competitive safeguards, to propose methods to pay for international
call termination that deviate from traditional bilateral accounting rates and
the Policy. The FCC has also established lower ceilings ("benchmarks") for the
rates that U.S. carriers can pay foreign carriers for the termination of
international services. Moreover, the FCC has changed its rules to implement the
WTO Agreement, in part by adopting a rebuttable presumption that flexibility is
permitted for WTO member countries, and by allowing U.S. carriers, under certain
circumstances, to accept special concessions from foreign carriers. While these
rule changes provide the Company with more flexibility to respond more rapidly
to changes in the global telecommunications market, they also provide similar
flexibility to the Company's competitors.

U.S. DOMESTIC LONG DISTANCE SERVICES

      The Company's ability to provide domestic long distance service in the
United States is subject to regulation by the FCC and relevant state Public
Utility Commissions ("PUC") that regulate the offering of interstate and
intrastate telecommunications services, respectively. No formal authority is
required for the offering of interstate services. The Company, however, is
required by the FCC to file tariffs listing the rates, terms and conditions of
domestic long distance services provided.

      Prior to the initiation of intrastate service, depending on the state, the
Company generally must obtain certification from or register with the relevant
state PUC. Providers of intrastate services may also be required to file tariffs
or rate schedules, and may be subject to certain reporting obligations with the
relevant PUC. Telscape USA has obtained the authorizations or has registered
with state regulatory authorities in 40 states. MSN has certification in eight
states. The Company has not yet filed tariffs in the states that require tariffs
to be filed, because the Company is not currently offering intrastate
interexchange service in any state. For the same reason, the Company has not
filed any reports with state PUCs. Failure to comply with state law and/or the
rules, regulations and policies of the PUCs may result in challenges by third
parties, and/or actions by the PUCs including conditioning, modifying or
revoking state authorization to provide telecommunications services within the
respective state and/or subject the provider to fines and penalties.

      In addition, the FCC has adopted certain measures to implement the 1996
Telecommunications Act that will impose new regulatory requirements, including
the requirement that the Company contribute some portion of its
telecommunications revenues to a "universal service fund" designated to fund
affordable telephone service for consumers, schools, libraries and rural health
care providers. These contributions became payable beginning in 1998 for all
interexchange carriers. The contribution percentages vary quarterly, and the
factors for the first and second quarters of 1999 equal approximately 3.18% and
3.05%, respectively, of interstate and international gross end user
telecommunications revenues for the high cost and low income fund, and
approximately 0.58% and 0.57%, 

                                       16
<PAGE>
respectively, of intrastate, interstate and international gross end user
telecommunications revenues for the schools, libraries and health care fund. The
Company cannot predict the amount of universal service fund contributions for
the remaining quarters of 1999, or thereafter, until the FCC issues contribution
factors for such periods.

MEXICO

      In June 1998, Telereunion S.A. received a 30-year facilities-based carrier
license from the SCT, allowing it to originate and terminate long distance
services and to provide data and other value-added services in Mexico. The
Foreign Investment Law and Telecom Law ("FTL") opened the local and long
distance telecommunications service markets to competition and imposed varying
levels of regulation on Mexican telecommunications providers. Pursuant to the
FTL, the SCT and the Comision Federal de Telecomunicaciones ("COFETEL")
implement the provisions of the FTL. The FTL imposes regulations on public
carriers. Facilities-based public carriers, those that use the radio spectrum,
satellite links or any form of land-based cables to provide telecommunications
services, must obtain concessions prior to providing service. Concessionaires
may also resell the facilities and services of other concessionaires. Vendors
(resellers) of telecommunications services may not own their own facilities but
need only obtain a permit to provide service. Although the FTL provides for the
existence of resellers, the Mexican government has not issued the implementing
rules and regulations to allow their entry into the market. Consequently,
Mexican law does not currently permit pure switched international resale.
Carriers wishing to offer value-added services need only register with the
COFETEL's Telecommunications Registry.

      In addition to the FTL, the Mexican Long Distance International Rules (the
"International Rules") establish the specific regulatory framework that governs
international long distance services. Among other matters, the International
Rules (i) mandate uniform accounting rate and proportionate return for three
years for all international traffic; (ii) require concessionaires to obtain
additional specific authorization to install and operate international gateways;
(iii) implicitly prohibit ISR for three years; and (iv) regulate international
correspondent agreements, which must reflect the uniform accounting rate and
proportionate return rules. The International Rules prohibit all
telecommunications operators, except those concessionaires that have obtained
the specific authorization from the COFETEL, to install and operate
international gateway switches. Those concessionaires that have not received
such specific authorization, as well as any other companies that provide
telecommunications services, such as providers of value-added services, cellular
concessionaires and paging service providers cannot directly transmit
international switched traffic. To date, the SCT and the COFETEL have granted 16
companies, including Telmex and Telereunion S.A., concessions for the
installation, operation and exploitation of long distance public
telecommunications networks, of which eight have received authorization to
install and operate international gateway facilities. In addition, the SCT and
the COFETEL have granted eight concessions for local switched services as well
as numerous registrations for value-added services.

      Pursuant to the FTL, concessions for public telecommunication networks may
only be granted to Mexican citizens or Mexican companies. Foreign investors may
own minority interests in concessionaires, but may not own more than 49% of the
voting ownership interest of the company except for companies that provide
cellular service. NAFTA removed certain Mexican restrictions on foreign
investment and U.S. companies may now maintain 100% ownership interests in
companies that provide value-added services in Mexico. Pursuant to Mexican law,
only Mexican citizens or companies incorporated and domiciled in Mexico can
register as providers of value-added services.

OTHER LATIN AMERICAN MARKETS

      The Company's provision of services elsewhere in Latin America are subject
to the developing laws and regulations governing the competitive provision of
telecommunications services in each Latin American country in which it provides
or seeks to provide services. Each such Latin American country in which the
Company currently conducts or intends to conduct business has a different
national regulatory scheme. Historically, Latin American countries have
prohibited voice telephony except by the PTT. The available opportunities and
the requirements for the Company to obtain necessary approvals to offer
value-added services, systems integration or the full range of
telecommunications services, including voice telephony, vary considerably from
country to country. The Company currently plans to provide a limited range of
services in certain Latin American countries, as permitted by regulatory
conditions in those markets, and to expand its operations as these markets
implement liberalization to permit competition in the full range of
telecommunications services. The nature, extent and timing of the opportunity
for the Company to compete in these markets will be determined, in part, by the
actions taken by the governments in these countries to implement competition and
the response of incumbent carriers to these efforts. There can be no assurance
that any of these countries will implement competition in the near future or at
all, that the Company will be able to take advantage of any such liberalization
in a timely manner, or that the Company's operations in any such country will be
successful. There can be no assurance that the Company has received all
necessary approvals, filed 

                                       17
<PAGE>
applications for such approvals, received comfort letters or obtained all
necessary licenses from the applicable regulatory authorities to offer
telecommunications services in the Latin American countries where it currently
provides services or those in which it seeks to provide services in the future,
or that it will do so in the future. The Company's failure to obtain, or retain
necessary approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.

      Liberalization in Latin America is proceeding rapidly and the Company
seeks to keep pace with competition even where PTTs retain a legally mandated
monopoly on voice telephony. The Company is currently offering or plans to offer
certain systems integration, enhanced services, or value-added services in a
number of Latin America countries where the PTT retains the legally mandated
monopoly on voice telephony. While the Company believes that it will not be
found to be offering voice telephony in these countries prior to the expiration
of the PTT's monopoly on such services, the Company has received no assurance
from the respective PTTs or from the respective regulating authorities that this
will be the case. It is possible that the Company could be fined, or that the
Company's facilities or equipment could be confiscated, or that the Company
would not be allowed to provide specific services in these countries, among
other sanctions, if the Company were found to be providing voice telephony
before the date in which the PTT's monopoly on Voice Telephony ceases. Any of
such actions could have a material adverse impact on the Company's business,
financial condition and results of operations.

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

INTELLECTUAL PROPERTY

      The Company uses the names "Telscape International," "Telscape" and "TSCP
International" as its primary business names, and has filed for federal
trademark protection for the "Telscape" name and distinctive logo. These filings
are pending, and the Company has no assurance that they will be granted. The
Company owns a federal trademark registration for the "TELEFIESTA"(R) Prepaid
Cards. Telereunion S.A. has a national trademark registration in Mexico for
"TELEREUNION." The Company regards its trademarks, servicemarks, tradenames and
logos as valuable assets and believes they have value in the marketing of its
products and services. The Company intends to protect and defend its name,
servicemarks and trademarks in the United States and internationally.

EMPLOYEES

      As of March 15, 1999, the Company had 403 full-time employees, with 311
residing in Mexico and 92 residing in the United States. Of the total employees,
there are 64 in sales and marketing, 96 in general and administrative and 243 in
operations, engineering, manufacturing and assembly. None of the Company's
employees are 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.

ITEM 2.     PROPERTIES.

      The Company's international headquarters are located in Houston, Texas,
where the Company leases approximately 7,940 square feet of an office building.
The Company also leases additional facilities in Houston, Texas totaling
approximately 9,873 square feet relating to its Prepaid Card operations and to
house telecommunications equipment relating to its long distance services
operations. The Company leases facilities in Mexico City, Guadalajara and
Tijuana, totaling approximately 34,000 square feet and consisting of office and
warehousing facilities. The Company leases facilities in Sunnyvale and Mountain
View, California totaling 80,492 square feet.

                                       18
<PAGE>
ITEM 3.     LEGAL PROCEEDINGS.

      No material litigation outstanding.

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

      There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.

                                       19
<PAGE>
                                     PART II

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

      The Company's Common Stock traded on the NASDAQ Small Cap Market under the
symbol "PTMC" from August 10, 1994 until June 28, 1996, when it began trading
under the symbol "TSCP." The Company's Common Stock began trading on the NASDAQ
National Market System ("NASDAQ NMS") on July 31, 1998. The following table sets
forth the range of the quarterly high and low sales prices for the Common Stock,
as reported by the NASDAQ Small Cap Market and the NASDAQ NMS for each quarter
within the last two fiscal years.

                                                   HIGH            Low
                       1997
                       First Quarter            $ 3.750        $ 2.000
                       Second Quarter             4.250          2.625
                       Third Quarter              10.75          3.688
                       Fourth Quarter             15.25          7.500

                       1998
                       First Quarter           $ 17.625         $ 8.25
                       Second Quarter            23.1875         14.125
                       Third Quarter             16.375           7.00
                       Fourth Quarter            10.250          6.688


      As of March 15, 1999, there were approximately 88 holders of record of the
Company's Common Stock.

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

                                       20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

      The following table sets forth certain historical financial data relating
to the Company. The information set forth below is not necessarily indicative of
the results of future operations and should be read in conjunction with "Item 7
- Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included in Item 8 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
                                                                               For the Year Ended December 31,
                                                         --------------------------------------------------------------------------
                                                             1994           1995           1996            1997             1998
                                                         -----------    -----------    -----------    ------------    -------------
<S>                                                      <C>            <C>            <C>            <C>             <C>          
STATEMENT OF OPERATIONS DATA
      Revenues ........................................  $   972,000    $ 1,108,000    $ 5,705,000    $ 36,154,000    $ 132,179,000
      Cost of revenues ................................      439,000        619,000      3,041,000      24,396,000      111,892,000
                                                         -----------    -----------    -----------    ------------    -------------
      Gross profit ....................................      533,000        489,000      2,664,000      11,758,000       20,287,000
      Selling, general and administrative
        expenses ......................................    1,032,000      1,349,000      4,159,000       8,154,000       13,774,000
                                                         -----------    -----------    -----------    ------------    -------------
      Operating income (loss) before
         depreciation and amortization and
        impairment loss ...............................     (499,000)      (860,000)    (1,495,000)      3,604,000        6,513,000
      Depreciation and amortization ...................       36,000         49,000        264,000         622,000        3,316,000
                                                         -----------    -----------    -----------    ------------    -------------
      Operating income (loss) before
        impairment loss ...............................     (535,000)      (909,000)    (1,759,000)      2,982,000        3,197,000

      Impairment loss on long-lived assets ............         --             --             --              --          1,026,000

                                                         -----------    -----------    -----------    ------------    -------------
      Operating income (loss) .........................     (535,000)      (909,000)    (1,759,000)      2,982,000        2,171,000
      Other income (expense), net .....................        5,000        229,000        114,000        (232,000)      (2,413,000)
                                                         -----------    -----------    -----------    ------------    -------------
      Income (loss) before income
         taxes and minority interests .................     (530,000)      (680,000)    (1,645,000)      2,750,000         (242,000)
      Income tax benefit (expense) ....................         --             --           53,000         (84,000)        (822,000)
                                                         -----------    -----------    -----------    ------------    -------------

      Income (loss) before minority interests .........     (530,000)      (680,000)    (1,592,000)      2,666,000       (1,064,000)
      Minority interests ..............................      (19,000)         7,000         (6,000)          6,000           34,000
                                                         -----------    -----------    -----------    ------------    -------------
                                                         ===========    ===========    ===========    ============    =============
      Net income (loss) ...............................  $  (549,000)   $  (673,000)   $(1,598,000)   $  2,672,000    $  (1,030,000)
                                                         ===========    ===========    ===========    ============    =============

     Net income (loss) per share-Basic ................  $     (0.44)   $     (0.36)   $     (0.52)   $       0.68    $       (0.20)
     Weighted average shares
         outstanding ..................................    1,254,689      1,890,442      3,046,594       3,903,470        5,052,096
     Net income (loss) per share- .....................                                                                        
         Diluted (1) ..................................          n/a            n/a            n/a    $       0.53              n/a
     Diluted weighted average shares
         outstanding (1) ..............................          n/a            n/a            n/a       5,152,211              n/a

<CAPTION>
                                                                                       At December 31,
                                                            1994            1995           1996           1997             1998
                                                         -----------    -----------    -----------    ------------    -------------
BALANCE SHEET DATA
    Cash, cash equivalents and short
        term investments ............................... $ 4,509,000    $ 3,645,000    $   495,000    $  4,734,000    $   9,631,000
    Current assets .....................................   5,179,000      4,294,000      4,665,000      18,506,000       32,746,000
    Property and equipment, net ........................     156,000        154,000        983,000       2,679,000       14,576,000

    Goodwill and other intangibles, net ................        --             --        3,246,000      17,674,000       31,416,000
    Total assets .......................................   5,335,000      4,498,000      9,371,000      39,635,000       80,331,000
    Notes payable and capital lease
        obligations ....................................        --             --             --         3,184,000       13,133,000
   Stockholders' equity ................................ $ 4,446,000    $ 3,590,000    $ 5,764,000    $ 22,088,000    $  34,926,000

</TABLE>

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

                                       21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                                    OVERVIEW

      Telscape International, Inc., is an emerging, fully integrated
telecommunications company. The Company, based in the U.S., supplies
international voice, video and data services, via switched and dedicated
networks, principally to and from Latin America. In addition, the Company
provides a full range of systems integration and value-added telecommunications
services in Mexico to major public and private sector customers. Telereunion, a
Telscape subsidiary, is one of only sixteen companies that has been granted a
facilities-based long distance concession by the Mexican government. In
addition, the Company provides satellite teleport services to customers in the
U.S. and Latin America.

      Telscape intends to significantly expand its facilities-based
telecommunications and to broaden its service offerings in markets where it has
established, or expects to establish, a significant presence. In June 1998,
Telereunion S.A., a Mexican corporation and an affiliate of the Company, was
granted the Mexican Concession from the Mexican government. The Mexican
Concession is a 30-year, facilities-based carrier license which allows it to
construct and operate a network over which the Company can carry long distance
traffic in Mexico. The Company, through Telereunion S.A., intends to construct
the Mexican Network, a combined fiber-optic and microwave long distance network,
connecting the United States, the Gulf region of Mexico and targeted Mexican
cities.

      In May 1996, Telscape began to focus on providing telecommunication
services to and in Latin America. The Company acquired all of the stock of
Telereunion, Inc., the owner of 97.0% of Vextro de Mexico S.A. de C.V.
("Vextro"). Vextro is a Mexico-based systems integration company, with an
emphasis on voice solutions. In September 1996, the Company expanded its
operations to include international long distance by acquiring Orion
Communications, Inc., a U.S.-based reseller of long distance services ("Orion").
In 1997, the Company expanded its systems integration service offerings by
acquiring Integracion de Redes, S.A. de C.V. ("Integracion") and N.S.I., S.A. de
C.V. ("N.S.I."), both focused on data services and based in Mexico City, Mexico.
In 1998, Integracion was renamed as Telscape de Mexico, S.A. de C.V.

      In January 1998, Telscape acquired MSN, a leading provider of Prepaid
Cards that are marketed under the TELEFIESTA(R) brand name to Hispanic consumers
residing in the United States. The MSN acquisition enhances Telscape's
international long distance business by providing a retail platform, enhancing
its ability to market additional products and services to Hispanic customers and
increasing its ability to generate significant returns of U.S.-outbound traffic
to Latin America. The Company plans to leverage the TELEFIESTA(R) brand
recognition in other Latin American countries after obtaining the required
licenses.

      Effective June 1, 1998, the Company through its newly-formed subsidiary
INTERLINK Communications, Inc. ("INTERLINK") acquired California Microwave
Services Division, Inc. for $8.8 million in cash. INTERLINK provides the Company
with a teleport facility in California, thereby enhancing the Company's position
as an integrated telecommunications provider and contributing to the Company's
ability to provide satellite capacity to its targeted markets in Latin America.

      Telscape intends to capitalize on the deregulating markets of Latin
America by providing international long distance services to and from targeted
Latin American countries. The Company also intends to position itself as an
integrated telecommunications provider in Mexico through the construction of the
Mexican Network under its recently granted Mexican Concession. The Company
believes that owning a long distance network in Mexico, combined with an
expanding international telecommunications network, will increase the percentage
of minutes of traffic it carries on-net, enable it to increase margins and
profitability and ensure quality of service on both international and domestic
long distance traffic.

      The Company believes that the Mexican Network, when complete, will link 47
cities and towns and cover, including interconnection agreements, approximately
90% of the population in Mexico. The Mexican Network will provide the Company
with the backbone for its strategy to be a complete telecommunications service
provider for the Latin American market, beginning with Mexico. The Mexican
Network will provide the Company with significant, carrier-class, cost-effective
capacity from which it can grow its existing retail and wholesale international
long distance and value-added services businesses on both sides of the
U.S.-Mexico border. The Company expects to begin the construction of the Mexican
Network in the second quarter of 1999. The Company believes that the Mexican
Network can be fully operational by the end of 1999.


                                       22
<PAGE>
      The Company has selected Lucent to engineer, furnish and install the
Mexican Network. In addition, the Company received a commitment from Lucent to
provide the Company with up to $40 million of long term financing, which
includes $34 million towards the purchase of Lucent products and services
(including construction of the Mexican Network) and $6 million for repayment of
the Company's current obligations.

                                    REVENUES

      During 1997, the Company derived its revenues principally from the
provision of value-added and systems integration services in Mexico and from the
sale of U.S. outbound international long distance services to Latin America. In
1998, with the addition of Prepaid Card revenues generated by MSN, the Company's
revenue mix changed. The Company expects that these products will contribute an
increasing proportion of its revenues.

      The Company provides value-added and systems integration services to
private and public sector customers in Mexico. Revenues are derived from
providing value-added services and the sale of equipment. Revenues from this
business have grown significantly through both internal growth and strategic
acquisitions in 1996, 1997 and 1998. The revenues in this line of business are
subject to economic conditions in Mexico. Revenues in 1999 are expected to
soften as a result of weakening economic conditions in Mexico and due to the
Company's decision to reduce sales of lower margin equipment sales to other
distributors and increase efforts on higher margin value-added services.

      The Company provides international long distance services on both a
wholesale and retail basis. Wholesale long distance services are provided mainly
to other carriers. Revenues are derived from the number of minutes of use (or
fraction thereof) billed by the Company and are recorded upon completion of
calls.

      Retail domestic and international long distance services are provided
through the sale of Prepaid Cards. The Company has in the past entered into
arrangements with third parties whereby these parties provided, at a fixed cost
to the Company, the long distance telecommunications services for the Prepaid
Cards that the Company sells. The Company recognized revenues from the sale of
Prepaid Cards under these agreements at the time of shipment. In other cases,
the Company has entered into arrangements whereby third parties provide certain
telecommunications services for the Prepaid Cards and bills the Company for such
services based on customer usage. The Company recognizes revenues from the sale
of Prepaid Cards under these agreements at the time of customer usage.

      The Company discontinued the fixed cost arrangement with third parties. As
a result, revenues were recognized in the second half of 1998 on the Prepaid
Cards at the time of customer usage.

      With its acquisition of INTERLINK in the second quarter of 1998, the
Company also provides satellite teleport services including voice, video and
data transport services including fractional and full T-1 data broadcast,
dedicated circuits and private line up-link and down-link services
Bandwidth-on-Demand, ISDN videoconferencing and Internet-through-satellite
services to the U.S. and Latin America.

                                  GROSS PROFIT

      During 1998, the Company's gross profit as a percentage of revenues
declined. This decline was due largely to the incremental revenues associated
with the Prepaid Cards, a decline in price per minute in the wholesale long
distance business and certain one time events in the second and fourth quarters.

      In May 1998, one of the Company's wholesale long distance customers filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code.
Additionally, an affiliate of this customer provided switching services and the
Prepaid Card platform and arranged for other carriers to provide
telecommunications services for the Prepaid Cards. The Company had paid the
affiliate of this customer for these services at the time the Prepaid Cards were
activated. Because the Company continued to provide services to its Prepaid Card
customers by working directly with the underlying service providers, this
resulted in the Company paying for certain of the telecommunications services on
the Prepaid Cards a second time. The overall impact of the bankruptcy filing to
the Company's earnings, including additional Prepaid Card services costs, the
write-off of uncollectible receivables and the lost margin contribution from the
loss of a wholesale customer, resulted in a reduction of operating income of
approximately $2.0 million in the second quarter of 1998.

      In the fourth quarter of 1998, the Company was negatively affected by the
disconnection of certain microwave links, which were owned and operated by other
carriers with which the Company had operating agreements to terminate traffic in
Mexico. These microwave links were alleged to not be in compliance with Mexican
telecommunications regulations. The Company determined that it was best to
ensure that these microwave links were in complete compliance before continuing
to provide services through these microwave links. This resulted in 

                                       23
<PAGE>
the Company having reduced cost effective capacity for the telecommunication
services it provides to Mexico in the fourth quarter and negatively impacted the
Company's revenues and cost of sales for the fourth quarter.

      The Company's strategy to improve gross margins in the international long
distance business segment is to (i) increase its efforts in the retail market
where it can provide product identification and differentiation as the wholesale
market has become increasingly competitive, (ii) decrease its dependency on
third party service providers and (iii) increase the amount of traffic it
processes over its own network, under direct operating agreements it establishes
with other carriers, and eventually, over the Mexican Network.

      In the fourth quarter of 1998, the Company began selling Prepaid Cards
which utilize the switching and processing platforms the Company owns. The
origination and termination telecommunication services for these Prepaid Cards
are provided under operating agreements the Company has negotiated directly with
other carriers in each of the United States, Mexico and other international
destinations. The Company expects that the vast majority of the Prepaid Cards it
sells in 1999 will be under this structure and it will be less dependent on
third parties to provide switching and processing facilities and to arrange for
origination and termination services. Consequently, the Company expects
significant improvement in the gross profit as a percentage of revenues derived
from its sale of Prepaid Cards in 1999.

      During 1998, the Company expended substantial capital resources in
switching and processing facilities. During the first quarter of 1999, the
Company has continued these efforts and expended additional capital resources in
an effort to increase its switching and processing platforms to provide the
capacity necessary for the Prepaid Card and wholesale international long
distance services the Company provides. The Company has also entered into new
operating agreements with carriers in Mexico and in the U.S. to provide it with
additional, cost effective origination and termination capacity for its Prepaid
Cards beginning in fiscal year 1999. In addition, as the Mexican Network is
constructed, the Company intends to terminate an increasing amount of traffic
over its own network and further reduce the reliance on other carriers and the
cost to provide these services.

      The Company expects that gross profits from equipment sales to decline
over time as the market becomes more competitive. The Company's strategy to
maintain the gross profits it has enjoyed from this business line in the past is
to enter into additional outsourcing contracts and other value-added services
which have historically provided higher gross profits as a percentage of
revenues. In addition, the Company's call center operations have historically
provided higher gross profits as a percentage of revenues. The Company is
evolving the value-added services business in Mexico to have a greater
proportion of higher margin services and a lesser proportion of lower margin
equipment sales.

      The Company expects that gross profits as a percentage of revenues as well
as actual gross profit will increase in 1999.

                              RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                           PERCENTAGE OF REVENUES
                                                           YEAR ENDED DECEMBER 31,
                                                          --------------------------
                                                           1996      1997      1998
                                                          ------    ------    ------
<S>                                                       <C>       <C>       <C>    
Revenues ..............................................   100.0 %   100.0 %   100.0 %
Cost of revenues ......................................     53.3      67.5      84.7
                                                          ------    ------    ------
Gross profit ..........................................     46.7      32.5      15.3
Selling, general and administrative expense ...........     72.9      22.6      10.4
Depreciation and amortization .........................      4.6       1.7       2.5
                                                          ------    ------    ------
Operating income (loss) before impairment loss ........    (30.8)      8.2       2.4
Impairment loss on fixed assets .......................     --        --         0.8
                                                          ------    ------    ------
Operating income (loss) ...............................    (30.8)      8.2       1.6
Other income (expense) ................................      2.0      (0.6)     (1.8)
                                                          ------    ------    ------
Income (loss) before income taxes and minority interest    (28.8)      7.6      (0.2)
Income tax benefit (expense) ..........................      0.9      (0.2)     (0.6)
                                                          ------    ------    ------
Income (loss) before minority interests ...............    (27.9)      7.4      (0.8)
Minority interest in subsidiaries .....................     (0.1)      0.0       0.0
                                                          ======    ======    ======
Net income (loss) .....................................    (28.0)      7.4      (0.8)
                                                          ======    ======    ======
</TABLE>

                                       24
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

      REVENUES increased from $36.2 million in 1997 to $132.2 million in 1998.
This increase of $96.0 million, or 266%, was due principally to the acquisition
of MSN completed in the first quarter of 1998, which provided revenues of $60.1
million for the year ended December 31, 1998. Wholesale international long
distance revenues increased $15.7 million from $17.4 million for 1997 to $33.1
million for 1998. In addition, revenues from value-added services increased
$14.2 million from $18.8 million for 1997 to $33.0 million for 1998. This
increase in value-added services revenues is due to the acquisitions of
Integracion de Redes, S.A. de C.V. ("Integracion") and N.S.I., S.A. de C.V.
("NSI"), the overall growth in demand for these services and the growth in
revenues from the call center operations. Services provided by INTERLINK,
following the Company's acquisition of INTERLINK, generated an additional $6.0
million in revenues.

      COST OF REVENUES increased from $24.4 million in 1997 to $111.9 million in
1998, or $87.5 million. The 359% increase in cost of revenues was due
principally to the incremental cost of revenues associated with the acquisition
of MSN, the increase in the sale of wholesale international long distance
services and value-added services and, to a lesser extent, the incremental cost
of revenues attributable to the acquisition of INTERLINK. The cost of revenues
as a percentage of revenues increased from 67.5% to 84.7%, or 17.2%, due
principally to the higher cost of revenues as a percentage of revenues
associated with the sale of Prepaid Cards and the higher cost of revenues on
wholesale international long distance services.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $8.2
million in 1997 to $13.8 million in 1998, or $5.6 million. The 69% increase in
SG&A was due principally to the incremental SG&A related to the operations of
the acquisitions of MSN and INTERLINK and increased staffing at existing
operations of the value-added services business and the wholesale international
long distance business to meet the additional resource requirements associated
with the growth of these operations.

      In addition, SG&A was negatively impacted by the write off of receivables,
of approximately $541,000, due from a customer who filed for bankruptcy as
discussed above. Included in SG&A are approximately $115,000 associated with
pre-operating costs on Telereunion S.A., the Company's subsidiary which has been
granted the long distance concession in Mexico.

      Overall SG&A as a percentage of revenues decreased from 22.6% to 10.4%, or
12.2%. This decrease was due principally to the lower SG&A expenses as a
percentage of revenues associated with MSN and to the growth in overall revenues
rapidly outpacing the growth in SG&A expenses. This improvement was partially
offset by the write off of receivables from the customer, which filed for
bankruptcy as discussed above, and the pre-operating expenses with the Mexican
Network.

      DEPRECIATION AND AMORTIZATION increased from $622,000 in 1997 to $3.3
million in 1998, or $2.7 million. This increase is due to an increase in
goodwill amortization primarily due to the vesting of performance based warrants
issued in connection with the Telereunion acquisition, which resulted in
additional goodwill being recognized on December 31, 1997 and in the fourth
quarter of 1998 and goodwill recognized on the MSN and INTERLINK acquisitions.
In addition, depreciation increased as a result of the Company's continuing
expansion of its international wholesale long distance network which includes
purchases of switches and other telecommunications equipment and facilities. The
Company expects depreciation expense to increase as it continues to expand its
telecommunications network.

      IMPAIRMENT LOSS ON LONG-LIVED ASSETS. During the year ended December 31,
1998, the Company determined that the carrying value of certain equipment and
other long-lived assets deployed under certain operating arrangements in Latin
America were impaired, resulting in a charge to operating costs of approximately
$1.0 million.

      INTEREST INCOME (EXPENSE), NET increased from ($95,000) in 1997 to ($1.6)
million in 1998, or ($1.5) million. This increase was mainly due to an increase
in the Company's level of borrowings, including notes issued in connection with
the Integracion and MSN acquisitions, and the Deere Park Convertible Debentures
and Gordon Brothers Convertible Debentures issued in connection with the
INTERLINK acquisition.

      The Gordon Brothers Convertible Debentures provide for an "exit fee" which
is payable if the obligation is settled in a cash payment rather than converted
into Common Stock. Included in interest expense for the year ended December 31,
1998, is an accrual of approximately $470,000 related to exit fees the Company
expects to pay once the Gordon Brothers Convertible Debentures are paid in
fiscal year 1999.

                                       25
<PAGE>
      OTHER INCOME (EXPENSE) increased from ($137,000) in 1997 to ($812,000) in
1998, or ($675,000). This increase is primarily due to foreign exchange
translation losses of $639,000 resulting from the translation of financial
statements of the Company's Mexican operations. The Mexican peso experienced a
22.1% devaluation in the exchange rate to the U.S. dollar during 1998.

      INCOME TAX BENEFIT (EXPENSE) increased from ($84,000) in 1997 to
($822,000) in 1998. Income tax expense in 1997 was lower than income tax expense
in 1998 as a result of the Company's utilization of its loss carryforwards to
offset taxable income and the recognition of a portion of the deferred tax
benefits related to the Company's tax loss carryforward. The effective tax rate
for 1998 is higher than the U.S. and Mexico statutory rate of 34% due to
permanent differences, the most significant of which is the nondeductible nature
of goodwill amortization.

      NET INCOME. The Company experienced net income of $2.7 million in 1997 as
compared to a net loss of ($1.0) million in 1998 due to a combination of the
factors discussed above.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

      REVENUES increased from $5.7 million in 1996 to $36.2 million in 1997.
This increase of $30.5 million, or 535%, was due principally to the significant
growth in the Company's international long distance business and, to a lesser
extent, the acquisitions of Telereunion, Integracion and NSI. The Company's
revenues from international long distance services grew $16.8 million from
$640,000 in 1996 to $17.4 million in 1997, or 2,625%. Revenues from value-added
services increased $13.7 million from $5.1 million to $18.8 million in 1997, or
269%. Although some of the growth is attributable to the effect of including
Telereunion for a full year in 1997, Telereunion also experienced growth in
revenues in 1997.

      COST OF REVENUES increased from $3.0 million in 1996 to $24.4 million in
1997, or $21.4 million. The increase in cost of revenues was due principally to
the incremental cost of revenues associated with the significant growth in the
international long distance business and, to a lesser extent, the incremental
cost of revenues associated with the acquisitions of Telereunion, Integracion
and NSI. The cost of revenues as a percentage of revenues increased from 53.3%
to 67.5%, or 14.2%. The increase in cost of revenues as a percentage of revenues
was due principally to a significant change in the Company's product mix. During
1997, the Company's decline in the margins earned in the value-added services
businesses in Mexico and Poland were offset by higher margins earned in the
international long distance services business.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $4.2
million in 1996 to $8.2 million in 1997. The increase in SG&A was due
principally to the incremental SG&A associated with the acquisitions of
Telereunion, Integracion and NSI and to a lesser extent, the additional
administrative staff added to handle the significant growth in the international
long distance business. In 1996, the Company also incurred certain non-recurring
expenses of approximately $350,000 relating to non-cash compensation expense
that was recorded in 1996 in compliance with "FAS 123: Accounting for
Stock-Based Compensation," approximately $100,000 in fees associated with the
Company's merger with Orion (which, upon consummation of the merger, was renamed
Telscape USA) (the "Telscape USA Acquisition"), and approximately $146,000 in
consulting fees. These consulting fees were paid under agreements which have
been terminated.

      Overall SG&A as a percentage of revenues decreased from 72.9% to 22.6%, or
50.3%. This decrease was due principally to the significant growth in revenues
in each of the Company's core businesses while containing costs.

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

      INTEREST INCOME (EXPENSE),NET dEcreased from $15,000 in 1996 to ($95,000)
in 1997, or ($110,000). This decrease was mainly attributable to interest
expense relating to notes issued in connection with the Integracion acquisition.

      OTHER INCOME (EXPENSE),NET decreased from $99,000 in 1996 to ($137,000) in
1997, or ($236,000). The decrease in other income was due principally to the
Company recognizing a foreign exchange loss of ($126,000), primarily as a result
of translation of the financial statements of the Polish operations as compared
to a foreign exchange gain of $161,000, primarily as a result of translation of
the financial statements of the Mexican operations, 

                                       26
<PAGE>
in 1996. The Company also wrote off its investment in a joint venture in Poland,
realizing a loss of $196,000 and incurring certain litigation settlement
expenses of $128,000.

      INCOME TAX BENEFIT (EXPENSE) decreased from a benefit of $53,000 in 1996
to ($84,000) in 1997. This decrease is primarily due to tax expense from the
Company's Mexican operations offset by a benefit realized from a reversal of
valuation allowances on U.S. Federal net operating losses.

      NET INCOME (LOSS) increased from ($1.6) million in 1996 to $2.7 million in
1997. The change in net income was due to a combination of the factors discussed
above.

                         LIQUIDITY AND CAPITAL RESOURCES

      Net cash provided by operating activities was $4.6 million and $6.6
million for the years ended December 31, 1997 and December 31, 1998,
respectively. The increase in net cash provided by operations in 1998 as
compared to 1997 was due primarily to increased level of revenues and the
resulting increased gross profits and earnings before depreciation and
amortization. In addition, the Company's working capital position was impacted
by an increase in accounts payable of $6.3 million and an increase in accrued
liabilities of $3.6 million, offset by an increase in accounts receivable of
$6.4 million.

      Net cash used in investing activities was ($1.8) million and ($17.7)
million for the years ended December 31, 1997 and December 31, 1998,
respectively. In 1998, the Company acquired MSN for $2.4 million, net of cash
acquired, and INTERLINK for $8.8 million, net of cash acquired. In addition, the
Company expended approximately $6.2 million in the year ended December 31, 1998,
in expanding its switching, transmission and processing platforms required to
provide its international wholesale and retail long distance services.

      Net cash provided by financing activities was $1.5 million and $16.0
million for the years ended December 31, 1997 and December 31, 1998,
respectively. In December 1997, the Company announced its intention to redeem
publicly traded warrants to purchase an aggregate of 525,000 shares of Common
Stock with a 30 day notice requirement. This announcement resulted in 475,535
warrants being exercised prior to the redemption date. The Company realized net
proceeds from these exercises of $3.7 million, of which $2.7 million was
received subsequent to year-end. The Company also raised $10.0 million from the
issuance of the Deere Park Convertible Debentures and the Gordon Brothers
Convertible Debentures and subsequently paid down $1.0 million of the Deere Park
Convertible Debentures. The Company also drew a net $1.7 million from its
Revolving Credit Facility (defined below). In addition, the Company realized
approximately $1.3 million (net of commissions and other offering costs) from
the sale of Common Stock under the Stock Purchase Commitment agreement (defined
below). Finally, the Company realized $2.3 million in proceeds from the exercise
of options and warrants.

      As of December 31, 1998, the Company had cash and cash equivalents of $9.6
million and negative working capital of $7.2 million. Included in working
capital is approximately $5.5 million in principal amount and accrued interest
related to the Gordon Brothers Convertible Debentures which mature on May 29,
1999 and approximately $3.5 million in accounts payable related to purchases of
equipment for the Company's network expansion which the Company has financed or
has commitments to finance through long term loans or lease financing
agreements.

      In 1998, the Company continued its strategic plans to significantly expand
the Company's switching, transmission and processing facilities related to its
wholesale and retail international long distance services. In 1998, the
Company's network related capital expenditures were approximately $6.2 million.
In addition, the Company also pursued its strategy of identifying and acquiring
strategic partners, including the acquisition of MSN in the first quarter of
1998 and INTERLINK in the second quarter of 1998. The Company's cash flows from
operations historically has not been sufficient to fund these network expansions
and strategic acquisitions resulting in the Company being required to raise
additional capital.

      On May 1, 1998, the Company issued $3,000,000 in 8% Convertible
Subordinated Debentures (the "Deere Park Convertible Debentures") maturing three
years from closing (the "First Draw") to Deere Park Capital Management, LLC, an
Illinois limited liability company ("Deere Park"). On May 28, 1998, the Company
issued an additional $1,000,000 of the Deere Park Convertible Debentures (the
"Second Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of
the Deere Park Convertible Debentures (the "Third Draw"). The Deere Park
Convertible Debentures were initially convertible by the holder into shares of
Common Stock at a price equal to $26 per share for the First Draw, $29 per share
for the Second Draw and $26 per share for the Third Draw, until November 1,
1998, and thereafter, at the lesser of (i) $26 per share for the First Draw, $29
per share for the Second Draw and $26 per share for the Third Draw or (ii) a
price equal to the average of the three highest of the five lowest closing
prices of the Common Stock for the 20 trading days preceding the conversion
date. If the Common Stock 

                                       27
<PAGE>
trades below $15 per share for the First Draw, $16.66 per shares for the Second
Draw and $15 for the Third Draw for three consecutive trading days, the Company
may redeem all or part of such Deere Park Convertible Debentures at 107% of face
value plus any accrued interest in the event the holder elects to convert. The
Company's obligation to make interest payments on the Deere Park Convertible
Debentures terminates if the price of Common Stock closes for twenty consecutive
trading days at or above $30 per shares for the First Draw, at or above $33.50
per share for the Second draw and at or above $30 per share for the Third Draw,
adjusted, without limitation, for any stock splits or combinations. In
connection with the Deere Park Convertible Debentures, Deere Park also received
warrants to purchase an aggregate of 8,952 shares of Common Stock at an exercise
price of $16.76 per share (subject to adjustment for stock splits and other
share adjustments) for the First Draw, warrants to purchase an aggregate of
2,427 shares of Common Stock at $20.60 per share (subject to adjustment for
stock splits and other share adjustments) for the Second Draw and warrants to
purchase an aggregate of 6,382 shares of Common Stock at $15.67 per share
(subject to adjustment for stock splits and other share adjustments) for the
Third Draw. The warrants have a term of three years from the effectiveness of a
registration statement covering the shares of Common Stock issuable upon the
conversion of such warrants.

      The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Deere Park Convertible Debentures
(the "Deere Park Exit Fee"). The Deere Park Exit Fee varies depending upon the
date of payment, and is equal to (i) 6.6% if the payment is made within 90 days
after the closing of each respective draw, (ii) 7.2% if payment is made after 90
days and up to 180 days after the closing of each respective draw, (iii) 8.8 %
if payment is made after 180 days and up to 270 days after the closing of each
respective draw and (iv) 10.0% if payment is made after 270 days after the
closing of each respective draw. The Deere Park Exit Fee is adjusted on a pro
rata basis to the extent that the prepayment is made between periods except that
a minimum Deere Park Exit Fee of 6.6% is required if the prepayment is made
prior to 90 days after closing.

      On May 29, 1998, the Company issued $5,000,000 in 8% Convertible
Debentures (the "Gordon Brothers Convertible Debentures") maturing one year from
closing to Gordon Brothers Capital, LLC a Delaware limited liability company
("Gordon Brothers"). The Gordon Brothers Convertible Debentures are convertible
by Gordon Brothers into shares of Common Stock at a price equal to $29.00 per
share until November 1, 1998, and thereafter, at the lesser of (i) $29.00 per
share or (ii) a price equal to the average of the three highest of the five
lowest closing prices of the Common Stock for the 20 trading days preceding the
conversion date. If the Common Stock trades below $16.66 for three consecutive
trading days, the Company may redeem all or part of such Gordon Brothers
Convertible Debentures at 107% of face value plus any accrued interest in the
event the holder elects to convert. The Company's obligation to make interest
payments on the Gordon Brothers Convertible Debentures terminates (i) in the
event the Common Stock closes, for twenty consecutive trading days, at or above
$33.50 per share, adjusted, without limitation, for any stock splits or
combinations, (ii) when a registration statement covering the share of common
stock that are issuable upon the conversion of the Gordon Brothers Convertible
Debentures is effective and (iii) if there exists no event of default under the
Gordon Brothers Convertible Debentures. The Gordon Brothers Convertible
Debentures are secured by a pledge of theCompany's stock in Telereunion and the
Company's preferred stock in INTERLINK. In addition, the Gordon Brothers
Convertible Debentures are guaranteed by INTERLINK and such guaranty is
collateralized by a security agreement covering all of INTERLINK's assets. In
connection with the Gordon Brothers Convertible Debentures, Gordon Brothers also
received warrants to purchase an aggregate of 12,136 shares of Common Stock at
an exercise price of $15.00 per share. The warrants have a term of three years
from the effectiveness of the registration statement covering the shares of
Common Stock that are issuable upon the conversion of such warrants. The Gordon
Brothers Convertible Debentures are senior secured indebtedness of the Company
to the extent of the assets securing such indebtedness.

      The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Gordon Brothers Convertible
Debentures (the "Gordon Brothers Exit Fee"). The Gordon Brothers Exit Fee varies
depending upon the date of payment, and is equal to (i) 6.5% if the payment is
made within 90 days after May 29, 1998, (ii) 13.0% if payment is made after 90
days and up to 180 days after May 29, 1998, (iii) 19.0% if payment is made after
180 days and up to 270 days after May 29, 1998 and (iv) 25.0% if payment is made
after 270 days and up to 365 days after May 29, 1998. The Gordon Brothers Exit
Fee with respect to any payment made after May 28, 1999 shall be equal to (a)
25.0% plus (b) 25.0% multiplied by the number of days elapsed from May 28, 1999
divided by 365. The Gordon Brothers Exit Fee is adjusted on a pro rata basis to
the extent that a prepayment is made between periods during the first twelve
months except that a minimum Gordon Brothers Exit Fee of 6.5% is required if the
prepayment is made prior to 90 days after closing.

      The proceeds from the Deere Park Convertible Debentures and the Gordon
Brothers Convertible Debentures were used to primarily to finance the
acquisition of INTERLINK and the remainder was utilized for capital investments
and general working capital purposes.


                                       28
<PAGE>
      On October 26, 1998, the Company entered into agreements with the holders
of the Gordon Brothers Convertible Debentures and the Deere Park Convertible
Debentures to restructure these debentures. Under the terms of the
restructuring, Gordon Brothers agreed to fix the conversion price at $15 per
share for the term of the debenture. In return, the Company agreed to reduce the
strike price on 12,136 warrants issued in connection with the original funding
from $20.60 to $15 per share. Deere Park agreed to fix the conversion price at
$15 per share until May 1, 1999. Beyond this date, the conversion price will
revert to a "floating" price for the term of the debentures unless it is further
restructured. In return, the Company agreed to issue an additional 8,000
warrants to Deere Park at an exercise price of $8.50. In addition, the Company
repaid $1,000,000 of the Deere Park Convertible Debentures at 107% plus accrued
interest.

      On March 12, 1998, the Company entered into a revolving credit facility
with a commercial bank ("Revolving Credit Facility"), which provided for
borrowings up to $1.3 million subject to adequate levels of eligible accounts
receivable. Borrowings accrue interest at floating rates of prime plus 1%. On
May 19, 1998, the Company renegotiated the terms of the Revolving Credit
Facility to provide for borrowings of up to $2.5 million and extended the terms
of the facility to June 30, 1999. As of March 15, 1999, the Company had drawn
$1.4 million on this facility.

      Telscape USA, Inc. and MSN have obtained a waiver under the Revolving
Credit Facility to waive the defaults under the minimum current ratio, minimum
tangible net worth and prohibition on quarterly loss covenants.

      In June 1998, the Company financed the purchase of $1.4 million of
equipment by entering into an equipment lease arrangement with a financing
company, which provides for monthly lease payments of $27,500, including
principal and interest, through May 31, 2003. The lease obligation is secured by
the financed equipment.

      On July 6, 1998, the Company financed the purchase of $972,000 of
equipment by entering into two equipment lease arrangements with a financing
company, which provide for monthly lease payments of $22,100, including
principal and interest through July 6, 2003. The lease obligations are secured
by the financed equipment.

      On July 4, 1998, the Company financed the purchase of $243,000 of
equipment by entering into an equipment lease arrangement with a financing
company, which provides for monthly lease payments of $6,600 including principal
and interest through July 14, 2002. The lease obligation is secured by the
financed equipment.

      In the fourth quarter of 1998, the Company signed a financing arrangement
with a finance company which provides for funding of equipment purchases of up
to $6.0 million through May 1999. The financing is structured as loans maturing
three years from funding at interest rates 550 basis points above the Federal
Reserve Treasury Constant Maturity Rate. The Company has drawn approximately
$2.0 million in the first quarter of 1999 under this facility.

      On January 11, 1999, the Company signed a financing arrangement with a
finance company which provides for funding of equipment purchases of up to $7.0
million dollars through December 31, 1999. The financing is structured as loans
maturing four years from funding at interest rates 500 basis points above the 5
year Federal Reserve Treasury Constant Maturity Rate. The Company has not drawn
any fundings under this facility.

      In the fourth quarter of 1998, the Company entered into a stock purchase
agreement with third parties (the "Stock Purchase Commitment"), which allows the
Company to sell at the Company's option (subject to certain conditions
precedent), up to $5.0 million of the Company's Common Stock. The sale price of
the Common Stock is equal to the average of the previous 5 days closing prices
less a 20% discount. The Company sold 250,000 shares of Common Stock realizing
approximately $1.3 million (net commissions) in the fourth quarter of 1998.
These shares were sold on December 18, 1998, and may not be re-sold by the
purchasers for nine months from such date. In the first quarter of 1999, the
Company sold an additional 296,296 shares of Common Stock, realizing
approximately $1.9 million (net of commissions). These shares were sold on March
15, 1999, and may not be re-sold by the purchasers until July 31, 1999.

      The Company has selected Lucent to engineer, furnish and install the
Mexican Network. In addition, the Company received a commitment from Lucent to
provide the Company with up to $40 million of long term financing, which
includes $34 million towards the purchase of Lucent products and services
(including construction of the Mexican Network) and $6 million for repayment of
the Company's current obligations.

      The Company's debt at December 31, 1998 totaled $13.1 million resulting in
a debt to capital ratio of 38% as compared to $3.2 million and 14%,
respectively, as of December 31, 1997. The new commitment from Lucent will
result in long term financing arrangements, which will significantly increase
the Company's already highly 

                                       29
<PAGE>
leveraged capital structure. The Company will need to continue to generate
substantial cash flow from operations to satisfy its principal and interest
obligations under these financing arrangements. If the Company does not generate
the cash flow from operations to meet its principal and interest obligations
under these financing arrangements, then the Company's business and results of
operations could be materially adversely affected.

      The Company estimates that there are an additional $4.5 million in
expenditures related to the Mexican Network which will not be funded through the
Lucent Facility and are expected to be funded over the course of the
installation of the Mexican Network. The Company also anticipates an additional
$11.5 million in capital expenditures to expand its network facilities during
the fiscal 1999 year. In addition, the Gordon Brothers Convertible Debentures
mature on May 29, 1999, requiring a payment of $5.0 million in principal and
approximately $1.25 million in exit fees. The Lucent Facility provides for
funding of up to $6 million for repayment of debt obligations. The Company will
incur commissions, commitment fees and other costs in connection with this
facility. The Company does not expect that cash flow from operations will be
sufficient to meet these capital expenditure and debt repayment requirements
when they are due.

      The Company intends to finance its growth, principal and interest
obligations under existing debt obligations, and additional capital investments
required for its planned facility expansion through cash flow from operations,
vendor financing and the sale of debt or equity securities (or a combination of
both). There can be no assurance that the cash generated from operations will be
sufficient to fund such expenditures or that the Company will be able to obtain
additional financing on commercially reasonable terms, if at all. If necessary
funds are not available, the Company's business and results of operations and
the future expansion of its business could be materially adversely affected.

                              FOREIGN CURRENCY RISK

      The general economic conditions of Mexico are greatly affected by the
fluctuations in exchange rates and inflation. The Company's foreign currency
risk is mitigated in Mexico due to the fact that many of the Company's customers
are multinational firms that pay in United States dollars. In addition, most of
the Company's customers that pay in pesos pay at the spot exchange rate in
effect at the time of payment as opposed to the exchange rate at the time the
receivable is created. The Company's functional currency in Mexico is the United
States dollar because the majority of its transactions are in such currency.
However, from time to time the Company transacts in local currency and thus
faces foreign currency risk with respect to these transactions. United
States-originated calls will be paid in United States dollars; however, the
Company also expects to derive a certain portion of its revenues from calls
originated outside of the United States, 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.

      The Company does not currently hedge against the risk of foreign exchange
rate fluctuations. See further discussion in Item 7A - Quantitative and
Qualitative Disclosures about Market Risk - Foreign Currency Exchange Risk.

                              YEAR 2000 COMPLIANCE

      A significant percentage of the software that runs most of the computers
in the United States relies on two-digit, rather than four-digit, date codes to
define the applicable year, resulting in date-sensitive software having the
potential inability to interpret date codes properly, misreading "00" for the
year 1900 instead of the year 2000.

      This could result in a system failure or miscalculations causing
disruptions of operations, including, without limitation, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities, which could have material adverse operational and financial
consequences.

STATE OF READINESS

      Telscape has initiated a comprehensive program to identify, evaluate and
address issues associated with the ability of its information and
non-information technology systems (collectively, "Systems") to properly
recognize the Year 2000 (the "Year 2000 Readiness Program") in order to avoid
interruption of the operation of these Systems and a material adverse effect on
Telscape's business, financial position and results of operation as a result of
the century change. Telscape has empowered a "Y2K Committee" to manage the Year
2000 Readiness Program. The Y2K Committee shall also review the Year 2000
compliance efforts of Telscape's key vendors and customers and shall regularly
report to and be controlled by the Board of Directors.

                                       30
<PAGE>
      Each of the information technology software programs that Telscape
currently uses has either been certified by its respective vendor as Year 2000
compliant or will be replaced with software that is so certified prior to
September 1, 1999. Telscape intends to conduct comprehensive tests of all of its
software programs for Year 2000 compliance as part of its Year 2000 Readiness
Program. An integral part of Telscape's non-information technology systems, its
telecommunications switches, however, may not currently be Year 2000 compliant.
The respective vendors of Telscape's switches are in the process of reviewing
their switches for Year 2000 readiness. However, there can be no assurance that
such switches are Year 2000 compliant and that Telscape will not experience
switch related problems in Year 2000. In addition to other reasons, the
production of accurate and timely customer invoices depends upon the generation
of accurate and timely underlying data by Telscape's switches. Telscape does not
believe that its other non-information technology systems will be affected by
the Year 2000, but will not know definitively until Telscape tests and evaluates
such equipment during the first half of 1999. The Company believes that all Year
2000 compliance initial testing and any necessary conversions will be completed
by July 1999.

      Telscape's computer systems interface with the computers and technology of
many different domestic and international telecommunications companies on a
daily basis. If one of these telecommunication companies should fail or suffer
an adverse effect from a Year 2000 problem, the Company's customers could
experience impairment of services. Telscape considers the Year 2000 readiness of
its international customers and vendors of particular importance given the
general concern that the computer systems abroad may not be as prepared as those
in domestic operations to handle the century change. As part of its Year 2000
Readiness Program, Telscape intends to contact its key vendors and customers to
ascertain whether the systems used by such third parties are Year 2000
compliant.

COSTS

      Telscape has not incurred any costs to date to reprogram, replace and test
its Systems for Year 2000 compliance. Telscape believes that the costs
associated with its Year 2000 compliance efforts will be incurred during 1999.
Telscape is still estimating the costs of the efforts but doesn't expect that
these costs will be significant over the life of the project; though such
expenditures may increase materially following testing of non-information
technology systems and evaluation of the Year 2000 compliance status of integral
third party vendors and customers. Costs incurred in connection with Telscape's
Year 2000 compliance efforts will be expensed as incurred, unless new systems
are purchased that should be capitalized in accordance with generally accepted
accounting principals.

      Telscape currently anticipates that its Systems will be Year 2000
compliant before January 1, 2000, though no assurances can be given that
Telscape's compliance testing will not detect unanticipated Year 2000 compliance
problems that prevent such Year 2000 compliance. Furthermore, a system failure
by any of Telscape's significant customers or vendors could have a material
adverse effect on Telscape's operations. Because Telscape does not yet know the
Year 2000 compliance status of integral third parties, it is currently unable to
assess the likelihood or the risk to Telscape of third party system failures.

RISKS

      Telscape believes that a disruption in the operation of its networks,
billing system and financial and accounting systems and/or an inability to
access interconnections with other telecommunications carriers, are the major
risks associated with the inability of its Systems to process Year 2000 data
correctly. The failure of Telscape to correct a material Year 2000 problem could
cause an interruption or failure of certain of the Company's normal business
functions or operations and could have a material adverse effect on the
Company's business, financial position and results of operations. In addition,
there could also be a material adverse effect on the Company's business,
financial position and results of operations if the systems of other companies
on whose services the Company depends, or with whom the Company's Systems
interface, are not Year 2000 compliant.

      Based upon risk assessment work conducted thus far, the Company believes
that the most reasonably likely worst case scenario of the failure by the
Company, or any integral third party, to resolve Year 2000 issues would be an
inability by the Company (i) to provide telecommunications services to the
Company's customers, (ii) to route and deliver telephone calls originating from
or terminating with other telecommunications carriers for an indeterminable
period of time and (iii) to timely and accurately bill customers. Such worst
case scenario could have a material adverse affect on Telscape's business,
results of operations and liquidity. These failures could also result in a loss
of customers due to service interruptions and billing errors, substantial claims
by customers and increased expenses associated with Year 2000 litigation,
stabilization of operations and executing mitigation and contingency plans.
While the Company believes that it is taking appropriate measures to mitigate
these risks, there can be no assurance that such measures will be successful.

                                       31
<PAGE>
CONTINGENCY PLAN

      At this time, Telscape does not have a contingency plan. Telscape intends
to develop contingency plans to handle Year 2000 system failures experienced by
its Systems and to handle any necessary interactions with the computers and
technology of any integral non-complying third party. This plan is expected to
be completed by September 1, 1999.

                        RECENT ACCOUNTING PRONOUNCEMENTS

      SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.

      Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material effect
on its financial statements.

      SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. The Company believes that the adoption of SOP
98-5 will not have a material effect on its financial statements.

      SFAS No. 135, "RESCISSION OF FINANCIAL ACCOUNTING STANDARDS BOARD NO. 75
("SFAS NO. 75") AND TECHNICAL CORRECTIONS," rescinds SFAS No. 75 and amends
Statement of Financial Accounting Standards Board No. 35. SFAS No. 135 also
amends other existing authoritative literature to make various technical
corrections, clarify meanings, or describe applicability under changed
conditions. SFAS No. 135 is effective for financial statements issued for fiscal
years ending after February 15, 1999. The Company believes that the adoption of
SFAS No. 135 will not have a material effect on its financial statements.

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

      The Company is subject to financial market risks, including interest rate
risk and foreign currency exchange risk.

                               INTEREST RATE RISK

      As of December 31, 1998, the Company's debt obligations were mainly fixed
or non-interest bearing. All of the Company's debt obligations are denominated
in U.S. dollars. The Company's variable rate debt are as follows:

      The Company has a Revolving Credit Facility with a commercial bank which
allows for borrowings up to $2,500,000 and bears interest at prime plus 1%.
Borrowings outstanding under this revolving credit facility as of December 31,
1998 were $1,688,000.

      The Company had signed a equipment financing arrangement with a financing
company which provides for borrowings up to $6,000,000 through May, 1999. The
financing provides for interest at 550 basis points above the Federal Reserve
Treasury Constant Maturity Rate at the date of each funding. There were no
advances as of December 31, 1998. The Company has drawn approximately $2.0
million in the first quarter of 1999 under this facility.

      In addition, the Company had signed a equipment financing arrangement with
a financing company which provides for borrowings up to $7,000,000 through
December, 1999. The financing provides for interest at 450 basis points above
the Federal Reserve Treasury Constant Maturity Rate at the date of each funding.
There were no advances as of December 31, 1998.

      The table set forth below summarizes the fair values and payment terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1998.

                                       32
<PAGE>
<TABLE>
<CAPTION>
                                                                                            FAIR VALUE AT
        DEBT .....        1999       2000         2001      2002      2003         TOTAL      12/31/98
------------------   ---------    -------    ---------    ------    ------    ----------    ----------
<S>                    <C>        <C>           <C>       <C>       <C>          <C>           <C>    
Non-Interest
Bearing or Fixed
Rate .............     151,000    107,000       65,000    38,000    10,000       371,000       371,000
Wtd. Avg. Interest
Rate .............        8.00%      9.00%       12.00%    11.00%     9.00%         9.00%         --


Variable .........   1,688,000       --           --        --        --       1,688,000     1,688,000
Wtd. Avg. Interest
Rate .............        8.75%      --           --        --        --            8.75%         --

Convertible
Notes ............   4,996,000       --      3,935,000      --        --       8,931,000     8,931,000
Wtd. Avg. Interest
Rate .............        8.00%      --           8.00%     --        --            8.00%         --

                     ---------    -------    ---------    ------    ------    ----------    ----------
Total ............   6,835,000    107,000    4,000,000    38,000    10,000    10,990,000    10,990,000
                     =========    =======    =========    ======    ======    ==========    ==========

</TABLE>

      Due to the short term nature of this obligation, the Company utilized the
interest rate payable for this obligation for the month of March to estimate the
interest rate payable at maturity.

As the Company does not have a significant amount of variable interest rate
obligations, it has not entered into derivative transactions to hedge their
risk.

                         FOREIGN CURRENCY EXCHANGE RISK

      The Company conducts a significant amount of its operations in countries
outside the United States. The Company's foreign currency exchange risk includes
the following:

      In the past years, the Mexican economy has had periods of exchange rate
instability and peso devaluation. The Company's value-added services business is
conducted in Mexico. The majority of the Company's revenues in the value-added
services business are contracted in dollars or in pesos indexed to the dollar at
the time of settlement. The products and services the Company sells in the
value-added services business line are generally imported from the U.S. or other
countries and are payable in dollars. The Company's remaining operating costs in
this segment are generally paid in pesos. The Company's major outsourcing
contracts with the U.S. Embassy and the Ministry of Foreign Affairs generate
revenues which are collected in pesos and costs which are paid in pesos.

      In the satellite teleport services business segment, the Company generally
collects its revenues in U.S. dollars and pays for its costs to provide these
services in U.S. dollars

      In the international long distance business segment, the Company sells it
services to customers in the U.S. and thus its revenues are collected in U.S.
dollars. The Company's costs of providing these services are paid to vendors
both in the U.S. and in Mexico or other Latin American countries. A significant
portion of its costs to provide these services are structured under operating
agreements with carriers in Mexico under which the costs historically have been
settled in pesos. The Company has entered into new, additional agreements with
carriers in Mexico which will provide it with additional termination capacity in
Mexico in 1999. These new arrangements provide for settlement in U.S. dollars.
In periods in which the peso devaluates, this results in a cost reduction to the
Company as it generally extends short credit terms to its customers and has
received extended credit terms from its vendors. In periods when the peso
appreciates, this results in a cost increase to the Company. Over the last
several years, the peso has experienced devaluations in the exchange rates to
the U.S. dollar. As a consequence, the Company's policy has been to no hedge its
peso costs. In the future as the Company's operations in Mexico increase, the
Company's peso denominated transactions may increase causing the Company to
enter into hedging activities.


                                       33
<PAGE>
ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      Index to Consolidated Financial Statements:

                                                                        PAGE
Report of Independent Certified Public Accountants                       35

Consolidated Balance Sheets - As of December 31, 1997 and 1998           36

Consolidated Statements of Operations  - For the years ended
December 31, 1996, 1997 and 1998                                         37

Consolidated Statements of Stockholders' Equity - For the years ended
December 31, 1996, 1997 and 1998                                         38

Consolidated Statements of Cash Flows - For the years ended
December 31, 1996, 1997 and 1998                                         39

Notes to Consolidated Financial Statements                               41


                                       34
<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Telscape International, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Telscape
International, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the three year period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telscape
International, Inc. and subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.



                                                  BDO SEIDMAN, LLP

Houston, Texas
February 22, 1999

                                       35
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                     ASSETS
                                                                                                            December 31,
                                                                                                   ----------------------------

                                                                                                        1997            1998
                                                                                                   ------------    ------------
<S>                                                                                                <C>             <C>         
CURRENT ASSETS:
  Cash and cash equivalents ....................................................................   $  4,734,000    $  9,631,000
  Accounts receivable, less allowance for doubtful accounts of
    $200,000 and $275,000, respectively ........................................................      6,276,000      14,387,000
  Inventories ..................................................................................      4,305,000       4,581,000
  Prepaid expenses and other ...................................................................      2,674,000       3,519,000
  Deferred income taxes ........................................................................        517,000         628,000
                                                                                                   ------------    ------------
      Total current assets .....................................................................     18,506,000      32,746,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation ........................................      2,679,000      14,576,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated amortization ................................     17,674,000      31,416,000
OTHER ASSETS ...................................................................................        776,000       1,593,000
                                                                                                   ------------    ------------
                                                                                                   ============    ============
              Total assets .....................................................................   $ 39,635,000    $ 80,331,000
                                                                                                   ============    ============

                                     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable .............................................................................   $ 10,756,000    $ 22,090,000
  Accrued expenses .............................................................................      3,303,000      10,182,000
  Current portion of notes payable and capital lease obligations ...............................        508,000       2,714,000
  Convertible debentures .......................................................................           --         4,996,000
  Deferred income taxes ........................................................................        270,000            --
                                                                                                   ------------    ------------
      Total current liabilities ................................................................     14,837,000      39,982,000
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion ............................      2,676,000       1,488,000
CONVERTIBLE SUBORDINATED DEBENTURES ............................................................           --         3,935,000
MINORITY INTERESTS .............................................................................         34,000            --
COMMITMENTS AND CONTINGENCIES ..................................................................           --              --
SERIES B NON-VOTING PREFERRED STOCK, $.001 par value,  380,000 and 0 shares, respectively, authorized
issued and outstanding,  mandatorily redeemed as certain performance measures were achieved ....           --              --
STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value, 5,000,000 shares authorized;  without defined
  preference rights ............................................................................           --              --
  Series A preferred stock, $.001 par value, 1,000,000 shares authorized .......................           --              --
  Common stock, $.001 par value, 25,000,000 shares authorized;
  4,104,027 and  6,048,909 issued, respectively ................................................          4,000           6,000
  Additional paid-in capital ...................................................................     25,232,000      39,398,000
  Accumulated deficit ..........................................................................     (2,851,000)     (3,881,000)
  Treasury stock ...............................................................................       (297,000)       (480,000)
  Capital subscriptions receivable .............................................................           --          (117,000)
                                                                                                   ------------    ------------
              Total stockholders' equity .......................................................     22,088,000      34,926,000
                                                                                                   ------------    ------------
              Total liabilities and stockholders' equity .......................................   $ 39,635,000    $ 80,331,000
                                                                                                   ============    ============
</TABLE>


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

                                       36
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                                                                                    

                                                                          1996           1997             1998
                                                                      -----------    ------------    -------------
<S>                                                                   <C>            <C>             <C>          
REVENUES ..........................................................   $ 5,705,000    $ 36,154,000    $ 132,179,000
COST OF REVENUES ..................................................     3,041,000      24,396,000      111,892,000
                                                                      -----------    ------------    -------------
GROSS PROFIT ......................................................     2,664,000      11,758,000       20,287,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......................     4,159,000       8,154,000       13,774,000
DEPRECIATION AND AMORTIZATION .....................................       264,000         622,000        3,316,000
                                                                      -----------    ------------    -------------
OPERATING INCOME (LOSS) BEFORE IMPAIRMENT LOSS ....................    (1,759,000)      2,982,000        3,197,000
IMPAIRMENT LOSS ON LONG-LIVED ASSETS ..............................          --              --         (1,026,000)
                                                                      -----------    ------------    -------------


OPERATING INCOME (LOSS) ...........................................    (1,759,000)      2,982,000        2,171,000

OTHER INCOME (EXPENSE):
  Interest income .................................................       143,000         171,000          195,000
  Interest expense ................................................      (128,000)       (266,000)      (1,796,000)
  Foreign exchange gain (loss) ....................................       161,000        (126,000)        (639,000)
  Other, net ......................................................       (62,000)        (11,000)        (173,000)
                                                                      -----------    ------------    -------------
            Total other income (expense), net .....................       114,000        (232,000)      (2,413,000)
                                                                      -----------    ------------    -------------


INCOME (LOSS) BEFORE INCOME TAXES AND  MINORITY INTERESTS .........    (1,645,000)      2,750,000         (242,000)
INCOME TAX BENEFIT (EXPENSE) ......................................        53,000         (84,000)        (822,000)
                                                                      -----------    ------------    -------------
INCOME  (LOSS) BEFORE MINORITY INTERESTS ..........................    (1,592,000)      2,666,000       (1,064,000)
MINORITY INTERESTS IN SUBSIDIARIES ................................        (6,000)          6,000           34,000
                                                                      ===========    ============    =============
NET INCOME (LOSS) .................................................   $(1,598,000)   $  2,672,000    $  (1,030,000)
                                                                      ===========    ============    =============

EARNINGS (LOSS) PER SHARE:
 Basic ............................................................   $     (0.52)   $       0.68    $       (0.20)
 Diluted (1) ......................................................   $       N/A    $       0.53    $         N/A

WEIGHTED AVERAGE SHARES OUTSTANDING:
 Basic ............................................................     3,046,594       3,903,470        5,052,096
 Diluted (1) ......................................................           N/A       5,152,211              N/A
</TABLE>



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


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


                                       37
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
                                                     COMMON STOCK                                  CAPITAL      
                                                  ------------------   ADDITIONAL  SUBSCRIPTIONS ACCUMULATED    
                                                    SHARES    AMOUNT PAID-IN-CAPITAL RECEIVABLE     DEFICIT     
                                                  ---------   ------   -----------   ---------    -----------   
<S>                                               <C>         <C>      <C>           <C>          <C>           
Balance, December 31, 1995 ...................... 1,890,442   $2,000   $ 8,113,000   $(600,000)   $(3,925,000)  

Issuance of stock in acquisition of  subsidiary . 1,605,000    1,000     2,856,000        --             --     

Issuance of stock in connection with merger .....   400,000    1,000       525,000        --             --     
Issuance of stock in connection with stock
   options exercised ............................    40,527     --          38,000        --             --     
Compensation related to warrants granted ........      --       --         352,000        --             --     
Net loss ........................................      --       --            --          --       (1,598,000)  
                                                  ---------   ------   -----------   ---------    -----------   
Balance, December 31, 1996 ...................... 3,935,969    4,000    11,884,000    (600,000)    (5,523,000)  
Issuance of stock in connection with warrants
   and options exercised ........................   148,058     --       1,004,000        --             --     
Compensation related to common stock and
   warrants granted .............................    20,000     --         188,000        --             --     
Repurchase of treasury shares ...................      --       --            --          --             --     
Release of stock in escrow ......................      --       --            --       600,000           --     
Additional consideration recognized upon
   vesting of warrants ..........................      --       --      12,156,000        --             --     
Net income ......................................      --       --            --          --        2,672,000   
                                                  ---------   ------   -----------   ---------    -----------   
Balance, December 31, 1997 ...................... 4,104,027    4,000    25,232,000        --       (2,851,000)  
Issuance of stock in connection with warrants
   and options exercised ........................ 1,242,151    2,000     5,052,000        --             --     
Issuance of stock and warrants  in connection
   with acquisition .............................   100,000     --         980,000        --             --     
Issuance of stock in connection with  debt
   conversion ...................................   333,000     --         888,000        --             --     
Additional consideration recognized upon
   vesting of  warrants .........................      --       --       5,479,000        --             --     
Issuance of warrants with convertible debt
   placement ....................................      --       --         479,000        --             --     
Sale of common stock ............................   269,731     --       1,288,000    (117,000)          --     
Repurchase of treasury shares ...................      --       --            --          --             --     
Net loss ........................................      --       --            --          --       (1,030,000)  
                                                  ---------   ------   -----------   ---------    -----------   
Balance, December 31, 1998 ...................... 6,048,909   $6,000   $39,398,000   $(117,000)   $(3,881,000)  
                                                  =========   ======   ===========   =========    ===========   

<CAPTION>
                                                                   TOTAL 
                                                  TREASURY    STOCKHOLDERS'
                                                    STOCK         EQUITY
                                                  ---------    ------------

Balance, December 31, 1995 ......................      --      $  3,590,000

Issuance of stock in acquisition of  subsidiary .      --         2,857,000

Issuance of stock in connection with merger .....      --           526,000
Issuance of stock in connection with stock
   options exercised ............................      --            38,000
Compensation related to warrants granted ........      --           352,000
Net loss ........................................      --        (1,598,000)
                                                  ---------    ------------
Balance, December 31, 1996 ......................      --         5,765,000
Issuance of stock in connection with warrants
   and options exercised ........................      --         1,004,000
Compensation related to common stock and
   warrants granted .............................      --           188,000
Repurchase of treasury shares ...................  (297,000)       (297,000)
Release of stock in escrow ......................      --           600,000
Additional consideration recognized upon
   vesting of warrants ..........................      --        12,156,000
Net income ......................................      --         2,672,000
                                                  ---------    ------------
Balance, December 31, 1997 ......................  (297,000)     22,088,000
Issuance of stock in connection with warrants
   and options exercised ........................      --         5,054,000
Issuance of stock and warrants  in connection
   with acquisition .............................      --           980,000
Issuance of stock in connection with  debt
   conversion ...................................      --           888,000
Additional consideration recognized upon
   vesting of  warrants .........................      --         5,479,000
Issuance of warrants with convertible debt
   placement ....................................      --           479,000
Sale of common stock ............................   107,000       1,278,000
Repurchase of treasury shares ...................  (290,000)       (290,000)
Net loss ........................................      --        (1,030,000)
                                                  ---------    ------------
Balance, December 31, 1998 ...................... $(480,000)   $ 34,926,000
                                                  =========    ============
</TABLE>
The accompanying notes are integral part of these financial statements.


                                       38
<PAGE>
40



                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                1996           1997            1998
                                                                            -----------    -----------    ------------
<S>                                                                         <C>            <C>            <C>          
    CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) .....................................................   $(1,598,000)   $ 2,672,000    $ (1,030,000)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
  Provision for doubtful accounts .......................................         9,000        277,000         560,000
  Depreciation and amortization .........................................       264,000        622,000       3,316,000
  Write-off of investment in operating venture ..........................          --          196,000            --
  Deferred income tax benefit ...........................................      (112,000)    (1,566,000)       (339,000)
  Impairment loss on long-lived assets ..................................          --             --         1,026,000
  Interest accrued on non-interest bearing notes and amortization of debt
      offering costs ....................................................          --          136,000         270,000
  Minority interest in subsidiaries' income (loss) ......................         6,000         (6,000)        (34,000)
  Equity in income from unconsolidated subsidiary .......................          --             --           198,000
  Decrease in minority interests for credits utilized ...................        53,000           --              --
  Changes in assets and liabilities:
    Accounts receivable .................................................      (952,000)    (1,623,000)     (6,404,000)
    Inventories .........................................................      (665,000)    (2,306,000)        515,000
    Prepaid and other assets ............................................        27,000     (2,634,000)     (1,345,000)
    Accounts payable ....................................................      (124,000)     6,954,000       6,296,000
    Accrued liabilities .................................................       361,000      1,866,000       3,582,000
                                                                            -----------    -----------    ------------
Net cash provided by (used in) operating activities .....................    (2,731,000)     4,588,000       6,611,000
                                                                            -----------    -----------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of short-term investments ....................................    (4,899,000)          --              --
  Redemption of short-term investments ..................................     8,378,000           --              --
  Purchases of property and equipment ...................................      (441,000)    (1,682,000)     (6,159,000)
  Acquisition of Telereunion, net of cash acquired ......................      (353,000)          --              --
  Acquisition of Integracion, net of cash acquired ......................          --          117,000            --
  Mandatory redemption of preferred stock ...............................          --             --          (380,000)
  Acquisition of N.S.I., net of cash acquired ...........................          --          (49,000)           --
  Acquisition of MSN, net of cash acquired ..............................          --             --        (2,353,000)
  Acquisition of INTERLINK, net of cash acquired ........................          --             --        (8,805,000)
  Investment in BCH Holdings ............................................          --         (185,000)           --
  Investment in joint venture ...........................................      (196,000)          --              --
                                                                            -----------    -----------    ------------
Net cash provided by (used in) investing activities .....................     2,489,000     (1,799,000)    (17,697,000)
                                                                            -----------    -----------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on capital lease obligations .................................          --         (104,000)        (66,000)
  Payments on notes payable .............................................          --          (50,000)       (681,000)
  Proceeds from capital subscriptions ...................................          --          600,000            --
  Purchase of treasury shares ...........................................          --             --          (290,000)
  Issuance of common stock ..............................................       564,000           --              --
  Borrowings on line of credit ..........................................          --             --         1,948,000
  Payments on line of credit ............................................          --             --          (260,000)
  Proceeds from warrants and options exercised ..........................          --        1,004,000       5,054,000
  Proceeds from issuance of convertible debts ...........................          --             --        10,000,000
  Payments on convertible debts .........................................          --             --        (1,000,000)
  Proceeds from sale of common stock ....................................          --             --         1,278,000
                                                                            -----------    -----------    ------------
Net cash provided by financing activities ...............................       564,000      1,450,000      15,983,000
                                                                            -----------    -----------    ------------
Net increase in cash and cash equivalents ...............................       322,000      4,239,000       4,897,000
                                                                            -----------    -----------    ------------
Cash and cash equivalents at beginning of period ........................       173,000        495,000       4,734,000
                                                                            -----------    -----------    ------------
Cash and cash equivalents at end of period ..............................   $   495,000    $ 4,734,000    $  9,631,000
                                                                            ===========    ===========    ============
</TABLE>

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

                                       39
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                    Year Ended December 31,
                                                                                          -----------------------------------------
                                                                                                 1996            1997          1998
                                                                                          -----------    ------------    ----------
<S>                                                                                       <C>            <C>             <C>       
     SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
       Interest paid ..................................................................   $   176,000    $    121,000    $  855,000
       Income taxes paid ..............................................................        80,000         505,000     1,657,000

     NON-CASH TRANSACTIONS:

     Property and equipment acquired by execution of capital lease obligation .........          --           329,000        45,000

     Issuance of common stock, warrants and promissory notes in connection with
     acquisition of MSN:
           Promissory notes ...........................................................          --              --         672,000
           Common stock and warrants ..................................................          --              --         980,000

     Issuance of notes and acquisition of treasury shares in litigation
settlement :
            Litigation settlement .....................................................          --            (3,000)         --
            Treasury stock ............................................................          --          (297,000)         --
            Notes payable .............................................................          --           300,000          --

     Issuance common stock in exchange for shares of common stock in connection
     with reverse triangle merger:
            Excess of cost over net assets acquired ...................................     2,857,000            --            --
            Common stock ..............................................................        (2,000)           --            --
            Additional paid-in capital ................................................    (2,855,000)           --            --

     Issuance of common stock and warrants in exchange for services provided in
     connection with severance agreement ..............................................       352,000         188,000          --


     Issuance of promissory notes in connection with the acquisition of Integracion ...          --         2,555,000          --


     Reduction of subsidiary stock subscription receivable in exchange for credits on
     equipment ........................................................................        53,000            --            --

     Additional contingent consideration recorded:

     2,175,000 in 1997 and 500,000 in 1998 warrants issued in connection with
     Telereunion and Integracion acquisitions vesting upon achievement of
     certain operating performance
     measures .........................................................................          --        12,156,000     5,479,000


     Accrual of redemption of 380,000 shares of Series B preferred stock to be redeemed based
     upon achievement of certain operating performance measures .......................          --           380,000          --


     Issuance of warrants in connection with issuance of convertible debentures .......          --              --         479,000


     Issuance of common stock in connection with conversion of notes ..................          --              --         888,000


     Equipment purchases during 1998 which are to be financed through long term loans 
     or lease finance arrangements in 1999 ............................................          --              --       3,500,000
</TABLE>


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

                                       40
<PAGE>
                  TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

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

      Through its Telscape USA, Inc. ("Telscape USA") and TSCP International
subsidiaries, the Company is a facilities-based long distance telecommunications
services company providing international long distance services for calls
originating in the United States and terminating in other countries, primarily
in Latin America. Through its newly-acquired subsidiary, MSN Communications,
Inc. ("MSN"), the Company is engaged in the distribution and sale of prepaid
phone cards across the United States, targeted mainly at the Hispanic community.

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

      Through its newly-acquired subsidiary, INTERLINK Communications, Inc.
("INTERLINK"), the Company provides satellite teleport services including voice,
video and data transport services to customers in the U.S., Latin American and
other parts of the world.

      In June 1998, Telereunion S.A. de C.V. ("Telereunion S.A."), an affiliate
of the Company, received a 30-year, facilities-based carrier license from the
Mexican government allowing it to construct and operate a network over which the
Company plans to carry long distance traffic in Mexico (the "Mexican
Concession"). The Company owns approximately 65% of the economic interests and
49% of the voting interests of Telereunion S.A. In addition, three directors of
the Company own an additional 18% of the voting interests and 2% of the economic
interests of Telereunion S.A., resulting in the Company and such directors
together controlling 67% of the economic interests and voting interests of
Telereunion S.A. Under Mexican law, foreign investors may own more than a
majority of the economic interests in a concessionaire but may not own more than
49% of the voting ownership of any concessionaire. The Company did not have
significant operations from Telereunion, S.A. in 1998.

SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

RECLASSIFICATIONS

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

MANAGEMENT'S ESTIMATES AND ASSUMPTIONS

      The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant 

                                       41
<PAGE>
estimates affecting the financial statements on a recurring basis and records
the effect of any necessary adjustments prior to their issuance. The actual
results could differ from those estimates.

REVENUE RECOGNITION

      The Company recognizes revenue from long distance telecommunications
services at the time of customer usage. Revenue from sales of equipment are
recognized at time of shipment. Revenue from data and network integration
value-added services are recognized when services are performed. In certain
cases, the Company had entered into arrangements with third parties whereby
these parties provide long distance telecommunication services for prepaid phone
cards sold at a fixed cost. As the earnings process is complete at time of
shipment under those arrangements, the Company recognized revenues (and cost of
revenues) from the sale of cards at the time of shipment of its cards. The
Company discontinued these types of arrangements in the second quarter of 1998.
In other cases, the Company has entered into arrangements with third parties
whereby these parties provide certain of the long distance telecommunications
services for prepaid phone cards and bills the Company for these services as the
cards are utilized. As the earnings process is complete when the cards are
utilized under these arrangements, the Company defers revenues at time of
shipment and recognizes revenues (and cost of revenues) from the sale of cards
at the time the cards are utilized and the costs measured. Under both
arrangements, there are no rights of return once cards are sold.

RECEIVABLES

      The Company maintains an allowance for doubtful accounts based on the
expected collectibility of all consolidated trade accounts receivable. The
allowance for doubtful accounts as of December 31, 1997 and December 31, 1998
was $200,000 and $275,000, respectively. The Company historically has not had
significant writeoffs of receivables with the exception of 1998 when it wrote
off $541,000 in receivables from a customer which filed for bankruptcy.

CASH AND CASH EQUIVALENTS

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

FINANCIAL INSTRUMENTS

      The Company assesses and discloses the fair value of its financial
instruments; however, this information does not represent the aggregate net fair
value of the Company. Some of the information used to determine fair value is
subjective and judgmental in nature; therefore, fair value estimates, especially
for less marketable securities may vary. The amounts actually realized or paid
upon settlement or maturity could be significantly different.

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

INVENTORIES

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

PROPERTY AND EQUIPMENT

      Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in the Consolidated Statement of
Operations. In 1998, the Company recognized an impairment loss of $1.0 million
as it determined that the carrying value of certain equipment and long-lived
assets deployed under certain operating arrangements in Latin America were
impaired. Depreciation of property and equipment for financial reporting
purposes is computed using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements and capital leases are amortized
over the lesser of the life of the lease or the useful life of the asset.

                                       42
<PAGE>
For income tax purposes, accelerated methods of depreciation are used. The
following is a summary of the Company's property and equipment and their
estimated useful lives:

<TABLE>
<CAPTION>
                                                    AS OF DECEMBER 31,         ESTIMATED  
                                               -----------------------------  USEFUL LIVES
                                                    1997            1998       (YEARS)
                                               ------------    ------------  ---------------
<S>                                            <C>             <C>              <C>
Computer equipment and software ...............$    569,000    $  2,419,000     3
Telecommunications equipment ..................   1,184,000       9,918,000    5-10
Furniture and Fixtures ........................     380,000         932,000    5-10
Leasehold improvements ........................     230,000       1,085,000    3-20
Transportation equipment ......................     295,000         371,000     4
Teleport equipment ............................        --         3,947,000    5-15
Call center equipment .........................     705,000          47,000     3
                                               ------------    ------------
     Subtotal  property and equipment .........$  3,363,000    $ 18,719,000
Less, accumulated depreciation ................    (684,000)     (4,143,000)
                                               ============    ============
                                               $  2,679,000    $ 14,576,000
                                               ============    ============

<CAPTION>
GOODWILL AND INTANGIBLES

      The major classes of intangible assets are summarized below:

                                                                                                                                    
                                                          As of December 31,        Amortization
                                                    ----------------------------      Period    
                                                         1997           1998          (Years)
                                                    ------------    ------------    -----------
       Goodwill .................................   $ 18,037,000    $ 33,760,000        15
       Organization costs .......................         73,000          73,000         5
       Less, accumulated amortization ...........       (436,000)     (2,417,000)
                                                    ===========   ==============
                                                     $17,674,000    $ 31,416,000
</TABLE>
                                                                                

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

      Goodwill is recognized for the excess of the purchase price of the various
business combinations over the estimated fair value of the identifiable net
tangible and intangible assets acquired. In connection with certain of the
Company's acquisitions, the Company issued performance-based warrants. The
Company records such contingent consideration at the time the contingency is
resolved and the consideration becomes issuable or when the outcome of the
contingency is determinable beyond a reasonable doubt. During the year ended
December 31, 1997, 2,095,000 warrants, issued in connection with the Telereunion
acquisition, vested as a result of certain operating performance measures being
achieved. In addition, 380,000 shares of preferred stock were mandatorily
redeemable at December 31, 1997 at $1.00 per share based upon the Company
meeting certain operating performance measures. The preferred shares were
redeemed in the first quarter of 1998. As a result, the Company recorded
$12,114,000 in additional consideration in connection with the Telereunion
acquisition during 1997. During the year ended December 31, 1998, the remaining
500,000 warrants issued in connection with the Telereunion acquisition vested
resulting in the Company recording $5,479,000 in additional consideration with
this acquisition. During the year ended December 31, 1997, 80,000 warrants,
issued in connection with the Integracion acquisition, vested as a result of
certain operating performance measures being achieved. As a result, the Company
recorded $422,000 in additional consideration in connection with the Integracion
acquisition. See Note 2 for further discussion regarding the Company's
acquisitions. Realization of long-lived assets, including goodwill, is
periodically assessed by the management of the Company. Accordingly, in the
event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary. In
management's opinion, there is no impairment of such assets at December 31,
1998.

WARRANTY RESERVES

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

                                       43
<PAGE>
PREPAID EXPENSES AND OTHER CURRENT ASSETS:

      Prepaid expenses and other current assets include the following:


                                                        AS OF DECEMBER 31,
                                                    -----------------------
                                                        1997         1998
                                                    ----------   ----------

             Value-added taxes receivable .......   $1,749,000   $1,748,000
             Deposits ...........................      448,000      322,000
             Prepaid insurance and other expenses      197,000      963,000
             Other ..............................      280,000      486,000
                                                    ==========   ==========
                                                    $2,674,000   $3,519,000
                                                    ==========   ==========

ACCRUED EXPENSES:

      Accrued expenses include the following:


                                                           AS OF DECEMBER 31,
                                                   -----------------------------
                                                       1997              1998
                                                   -----------       -----------

Customer prepayments .......................       $   799,000       $ 1,369,000
Deferred Revenues ..........................              --           5,497,000
Accrued carrier costs ......................           560,000              --
Accrued wages ..............................           579,000         1,041,000
Taxes payable ..............................           509,000           745,000
Preferred stock redemption payable .........           380,000              --
Other ......................................           476,000         1,530,000
                                                   ===========       ===========
                                                   $ 3,303,000       $10,182,000
                                                   ===========       ===========


FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

      The Company has determined that the U.S. dollar is the functional currency
for its operations outside the U.S. As such, gains and losses resulting from the
translation of financial statements of such operations are included in the
Consolidated Statements of Operations. The Company recognized a foreign exchange
gain (loss) of $161,000, ($126,000) and ($639,000) for the years ended December
31, 1996, 1997 and 1998, respectively.

INCOME TAXES

      Income taxes are calculated using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
differences are expected to reverse. A valuation allowance is used to reduce
deferred tax assets to the amount that is more likely than not to be realized.

EARNINGS (LOSS) PER SHARE

      Earnings (loss) per share is calculated as follows:


                                             FOR THE YEAR ENDED DECEMBER 31,
                                        ----------------------------------------
                                               1996          1997          1998
                                        -----------    ----------   -----------
Basic
Net income (loss) as reported .......   $(1,598,000)   $2,672,000   $(1,030,000)
Weighted average common shares
       Outstanding ..................     3,046,594     3,903,470     5,052,096
Basic earnings (loss) per share .....   $     (0.52)   $     0.68   $     (0.20)

(TABLE CONTINUED ON FOLLOWING PAGE)
                                       44
<PAGE>
<TABLE>
<CAPTION>
                                                                   FOR THE YEAR ENDED DECEMBER 31,
                                                             ---------------------------------------
                                                                1996           1997         1998
                                                             -----------    ----------   -----------
<S>                                                          <C>            <C>          <C>         
Diluted
Net income (loss) as reported ............................   $(1,598,000)   $2,672,000   $(1,030,000)
Interest expense on convertible debt .....................          --          42,000          --
                                                             -----------    ----------   -----------

Net income (loss) applicable to common stockholders ......   $(1,598,000)   $2,714,000   $(1,030,000)
Weighted average common shares
      Outstanding ........................................     3,046,594     3,903,470     5,052,096
Options ..................................................        74,775       430,969       891,211
Warrants .................................................        39,867       651,272     1,945,848
Convertible debt .........................................          --         166,500          --
                                                             -----------    ----------   -----------
Total weighted  average  dilutive  potential common shares
      outstanding ........................................       114,642     1,248,741     2,837,059
Weighted  average  common and  dilutive  potential  common
      shares outstanding .................................     3,161,236     5,152,211     7,889,155
Diluted net income (loss) per share ......................   $     (0.51)   $     0.53   $     (0.13)
</TABLE>

      Diluted EPS for the years ended December 31, 1996 and 1998, was not
disclosed on the Consolidated Statement of Operations as the effect is
anti-dilutive. Certain performance based warrants vested at December 31, 1997
and during the year ended December 31, 1998 upon the achievement of certain
operating performance measures (See Note 2). These contingently issuable shares
were included in the calculation of diluted EPS when all the necessary
conditions were met. If all the necessary conditions have not been satisfied by
the end of the period, the number of contingently issuable shares that would
have been issued if the reporting period was the end of the contingency period
are included in the calculation as if those shares were issued at the beginning
of that period. For year to date calculations, contingent shares are weighted
for the interim periods in which they are included in the computation of diluted
EPS. Accordingly, 1,000,000 warrants were included in the calculation of diluted
EPS for the year ended December 31, 1997 as if those shares were issued on July
1, 1997 and 1,175,000 warrants were included as if those shares were issued on
October 1, 1997. In addition, 500,000 warrants are included in the calculation
of diluted EPS for the year ended December 31, 1998 as if those shares were
issued July 1, 1998. At December 31, 1996, 1997 and 1998, there were 2,695,000,
500,000 and 0 performance based warrants, respectively, which had not vested
which were not included in the calculation of diluted EPS. Additionally,
525,000, 666,270 and 95,619 options and warrants outstanding at December 31,
1996, 1997 and 1998, respectively, were not included in the calculation of
diluted EPS as their exercise prices were greater than the average market price
of the Company's Common Stock during the period and inclusion of these
securities in the calculation would result in an anti-dilutive effect.

NEW ACCOUNTING PRONOUNCEMENTS

      SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Historically, the Company has not
entered into derivatives contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of the
new standard to have a material effect on its financial statements.

      SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. The Company believes that the adoption of SOP
98-5 will not have a material effect on its financial statements.

      SFAS No. 135, "RESCISSION OF FINANCIAL ACCOUNTING STANDARDS BOARD NO. 75
("SFAS NO. 75") AND TECHNICAL CORRECTIONS," rescinds SFAS No. 75 and amends
Statement of Financial Accounting Standards Board No. 35. SFAS No. 135 also
amends other existing authoritative literature to make various technical
corrections, clarify meanings, or describe applicability under changed
conditions. SFAS No. 135 is effective for financial statements 

                                       45
<PAGE>
issued for fiscal years ending after February 15, 1999. The Company believes
that the adoption of SFAS No. 135 will not have a material effect on its
financial statements.

2.  MERGERS AND ACQUISITIONS

TELEREUNION ACQUISITION

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

      Under the terms of the acquisition, the Company issued to the shareholders
of Telereunion 1,605,000 shares of Common Stock of the Company, 380,000 shares
of non-voting, non-participatory Series B preferred stock and warrants to
purchase up to 2,595,000 additional shares of Common Stock at $2.19 per share.
The warrants vest and become exercisable upon Vextro meeting certain operating
performance measures and expire seven years after closing. The preferred stock
was mandatorily redeemable at $380,000 in the aggregate upon the Company meeting
certain operating performance measures. In addition, the Company converted and
amended certain non-qualified options outstanding under the Telereunion 1995
Stock Option and Appreciation Rights Plan to provide for the right to acquire an
aggregate of 216,618 shares of Common Stock of the Company at an exercise price
of $1.35 per share. The acquisition was accounted for under the purchase method
of accounting. The operations of Telereunion and Vextro have been included in
the Company's financial statements since the date of acquisition.

      The consideration paid for Telereunion measured at the acquisition date
was $3,210,000, net of cash received of approximately $132,000, and consisted of
Common Stock valued at $2,722,000, 216,618 stock options valued at $135,000 and
transaction costs of $485,000. The purchase price was allocated to the acquired
company's assets and liabilities based upon an estimate of fair values at the
date of acquisition and resulted in $3,312,000 of goodwill, which is being
amortized over 15 years. During the year ended December 31, 1997, certain of the
operating performance measures were met resulting in 2,095,000 warrants vesting
and the 380,000 preferred shares being mandatorily redeemable at $1.00 per
share. The preferred shares were redeemed in the first quarter of 1998. As a
result, $12,114,000 in additional contingent consideration and the related
goodwill was recognized relating to the acquisition of Telereunion at December
31, 1997. During the year ended December 31, 1998, the remaining 500,000
warrants vested resulting in an additional $5,479,000 additional contingent
consideration and the related goodwill being recognized.

ORION MERGER

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

INTEGRACION ACQUISITION

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

      Under the terms of the transaction, the Company paid the following to the
selling shareholders of Integracion: i) the sum of $130,000 in cash, ii) an
aggregate of $2,201,000 in non-interest bearing promissory notes maturing at
various dates through January 1, 2001, iii) an aggregate of $999,000 in
non-interest bearing convertible notes maturing on September 1, 1999, which are
convertible into 333,000 shares of Common Stock of the Company at a price of
$3.00 per share, representing the quoted market price of the Company's Common
Stock on the date of the transaction, iv) warrants for the purchase of up to
100,000 shares of Common Stock of the Company based on 

                                       46
<PAGE>
Integracion meeting certain performance requirements and v) a covenant by the
Purchasers to pay $280,000 in the event that Integracion meets certain
performance requirements over the cumulative periods beginning January 1, 1997
and ending December 31, 2000. The acquisition was accounted for under the
purchase method of accounting. The financial position and results of operations
of Integracion have been included in the Company's consolidated financial
statements since the effective date of the acquisition.

      The consideration paid for Integracion measured at the acquisition date
was $2,745,000 and consisted of cash of $130,000, promissory notes with a
discounted value of $2,555,000 and transaction costs of $60,000. The purchase
price was allocated to the acquired company's assets and liabilities based upon
an estimate of fair values at the date of acquisition and resulted in $1,756,000
of goodwill, which is being amortized over 15 years. The purchase price of the
acquisition has been allocated as follows:

                                                                          FAIR
                                                                         VALUE
                                                                    -----------
Cash ......................................................         $   130,000
Promissory Notes  (discounted value) ......................           1,759,000
Convertible Notes  (discounted value) .....................             796,000
Transaction Costs .........................................              60,000
                                                                    -----------
Total consideration .......................................           2,745,000
Cash ......................................................             307,000
Accounts receivable .......................................           1,996,000
Inventories ...............................................             330,000
Other assets ..............................................             165,000
Accounts payable and accrued liabilities ..................          (1,686,000)
Other liabilities .........................................            (123,000)
                                                                    -----------
Fair value of net assets acquired .........................             989,000
                                                                    ===========
Goodwill ..................................................         $ 1,756,000
                                                                    ===========

      During the year ended December 31, 1997, certain of the operating
performance measures were met resulting in 80,000 warrants vesting. The
remaining 20,000 warrants were forfeited. As a result, $422,000 in additional
contingent consideration and the related goodwill was recognized on the
acquisition of Integracion at December 31, 1997.

N.S.I. ACQUISITION

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

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

MSN ACQUISITION

      Effective January 1, 1998, the Company acquired all of the outstanding
common stock of MSN. MSN, through its TELEFIESTA(R) brand, markets prepaid
telephone calling cards across the United States primarily to the Hispanic
community. Under the terms of the transaction, the Company paid the following to
the shareholders of MSN: i) the sum of $3,250,000 in cash, ii) $750,000 in
non-interest bearing promissory notes payable in eight equal quarterly
installments, and iii) 100,000 shares of the Company's Common Stock. In
addition, the two selling shareholders were each granted 50,000 options to
purchase the Company's Common Stock at $7.50 per share. The acquisition was
accounted for under the purchase method of accounting. The financial position
and results of operations of MSN are included in the Company's financial
statements from the effective date of the acquisition.

      The consideration paid for MSN measured at the acquisition date was
$4,880,000 and consisted of cash of $3,250,000, non-interest bearing promissory
notes with a discounted value of $672,000, Common Stock and warrants valued at
$980,000 and transaction costs of $80,000. 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 

                                       47
<PAGE>
$6,193,000 of goodwill, which is being amortized over 15 years. The purchase
price of the acquisition has been allocated as follows:

                                                                         FAIR
                                                                        VALUE
                                                                    -----------
Cash .........................................................      $ 3,250,000
Promissory Notes (discounted value) ..........................          672,000
Common Stock .................................................          980,000
Transaction Costs ............................................           80,000
                                                                    -----------
Purchase consideration .......................................        4,982,000
Cash .........................................................          977,000
Accounts receivable ..........................................        1,042,000
Other assets .................................................           90,000
Accounts payable and accrued liabilities .....................       (1,323,000)
Deferred revenue .............................................       (1,997,000)
                                                                    -----------
Excess of liabilities assumed over fair value of net
      assets acquired ........................................       (1,211,000)
                                                                    ===========
Goodwill .....................................................      $ 6,193,000
                                                                    ===========

INTERLINK ACQUISITION

      Effective June 1, 1998, pursuant to an asset purchase agreement, the
Company acquired substantially all of the assets and certain of the liabilities
of California Microwave Services Division, Inc. ("CMSD"), a subsidiary of
California Microwave, Inc., for approximately $8.8 million in cash. As part of
the acquisition, the Company formed INTERLINK Communications, Inc.
("INTERLINK"), to acquire CMSD. The primary asset of INTERLINK is a satellite
teleport facility in Mountain View, California.

      The purchase price was allocated to the acquired assets and liabilities
based upon an estimate of fair values at the date of acquisition resulting in
$3.6 million in goodwill, which is being amortized over 15 years. In addition, a
covenant not to compete of $250,000 was recognized which is being amortized over
5 years. The acquisition was accounted for under the purchase method of
accounting. The financial results and operations of INTERLINK have been included
in the Company's consolidated financial statements since the effective date of
acquisition. The purchase price of the acquisition of the acquisition has been
allocated as follows:

                                                                         FAIR
                                                                        VALUE
                                                                    -----------
Cash ......................................................         $ 8,612,000
Transaction Costs .........................................             262,000
                                                                    -----------
Purchase Consideration ....................................           8,874,000
Cash ......................................................              69,000
Accounts Receivable .......................................           1,438,000
Property and Equipment ....................................           4,542,000
Other assets ..............................................             896,000
Accounts payable and accrued liabilities ..................          (1,423,000)
Deferred revenue ..........................................            (471,000)
                                                                    -----------
Fair value of net assets acquired .........................           5,051,000
                                                                    ===========
Goodwill ..................................................         $ 3,573,000
                                                                    ===========
Covenant not to compete ...................................         $   250,000
                                                                    ===========

      The following presents the unaudited pro forma results of operations of
the Company for the year ended December 31, 1997 and 1998, as if the
acquisitions of Integracion, N.S.I., MSN and INTERLINK had occurred on January
1, 1997:

<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDED DECEMBER 31,
                                                    ----------------------------
                                                        1997           1998
                                                    -----------   --------------
                                                           (Unaudited)
<S>                                                 <C>           <C>          
Pro forma revenues ..............................   $78,730,000   $ 135,415,000
Pro forma operating income ......................     1,755,000         971,000
Pro forma net income (loss) .....................     1,010,000      (2,407,000)
Pro forma basic net income (loss)  per share ....   $      0.25   $       (0.48)
Pro forma diluted net income (loss) per share(1)    $      0.20             N/A
</TABLE>

                                       48
<PAGE>
(1)   Inclusion of additional shares under a diluted analysis for 1998 is
      inappropriate due to the anti-dilutive effect.

      The information is not necessarily indicative of the results of operations
and financial position of the Company as they may be in the future or as they
might have been had the business combinations been consummated as of January 1,
1997.

      The balances included in the Consolidated Balance Sheets related to the
current year acquisitions are based on preliminary information and are subject
to change when additional information concerning final asset and liability
valuations are obtained. Management does not expect that such adjustments will
be material.

BCH

      Digital Communications Systems/Zaklady Wytworcze Urzadzen Telefonicznych
("DTS/ZWUT"), a Polish limited liability company, was a 90%-owned subsidiary of
the Company. DTS/ZWUT manufactures and markets telephone switching equipment in
Poland. On December 12, 1997, the Company exchanged its 90% interest in DTS/ZWUT
for a 31% interest in BCH Holding Company, Inc. ("BCH"), a Nevada corporation
with a full service telecommunications operation based in Warsaw, Poland. As a
result of this transaction, the Company's investment in BCH will be accounted
for under the equity method. The Company recorded its investment in BCH at the
Company's estimate of its fair value at the time of the exchange with no gain or
loss recognized on the exchange.

      During January 1999, BCH approved the issuance to an investor of 20% of
its outstanding shares for $1.2 million, and warrants for another 20% of its
common stock with an exercise price equal to the same price per share as the
stock issuance. In addition, BCH can borrow an additional $2.5 million under a
13% senior secured convertible note with the investor. Under the terms of the
senior secured convertible note, Telscape has pledged all of its common stock in
BCH to the investor. The Company's carrying amount of this investment at
December 31, 1998 is not material.

3. CONCENTRATION OF RISK

CONCENTRATION OF RISK - MEXICO

      The devaluation of the Mexican peso in late 1994 caused Mexico to
experience an economic crisis characterized by exchange rate instability,
increased inflation, high domestic interest rates, reduced consumer purchasing
power and high unemployment. Consequently, the Mexican government has exercised,
and continues to exercise, significant influence over the Mexican economy.
Accordingly, Mexican governmental actions could have a significant effect on
Mexican companies, including the Company's customers, and overall market
conditions. For the years ended December 31, 1996, 1997 and 1998, the peso
experienced devaluations in exchange rates versus the dollar of 2.2%, 2.9% and
22.1%, respectively.

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

SIGNIFICANT CUSTOMERS AND RECEIVABLES

      The Company's credit risks primarily consist of accounts receivable from
its customers, many of which are located in Mexico. Management performs ongoing
credit valuations of its customers and provides allowances for credit losses
when necessary. The Company maintains an allowance for doubtful accounts based
on the expected collectibility of all consolidated trade accounts receivable.
The allowance for doubtful accounts as of December 31, 1997 and December 31,
1998 was $200,000 and $275,000, respectively. The Company historically has not
had significant writeoffs of receivables with the exception of 1998 when it
wrote off $541,000 in receivables from a customer which filed for bankruptcy.

      Major customers are those that individually account for more than 10% of
the Company's total revenues. For the year ended December 31, 1997, one customer
accounted for 28% of the Company's total revenues and 56% of the Company's long
distance services revenues. For the years ended December 31, 1998 and 1996, no
customer represented greater than 10% of revenues.

                                       49
<PAGE>
4.  NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

      The Company's notes payable and capital lease obligations consist of the
following:
<TABLE>
<CAPTION>
                                                                                     AS OF DECEMBER 31,
                                                                                  ------------------------
                                                                                      1997          1998
                                                                                  ----------   -----------
<S>                                                                               <C>          <C>        
Deere Park Convertible Subordinated Debentures, bearing interest at 8%,
unamortized discount of $65,000, convertible into Common Stock, maturing three
years from closing (see discussion below) .....................................   $     --     $ 3,935,000


Gordon Brothers Convertible Debentures, bearing interest at 8%, unamortized
discount of $4,000, convertible into Common Stock, maturing on May 29, 1999
(see discussion below) ........................................................         --       4,996,000

Non-interest bearing promissory notes, imputed interest at 10%, unamortized
discount of $348,000 and $228,000, respectively, issued in connection with
Integracion acquisition, maturing at various dates through January 1, 2001 ....    1,853,000     1,713,000

Non-interest bearing promissory note, imputed interest at 10%, unamortized
discount of $141,000 and $ 0, respectively, issued in connection with
Integracion acquisition, converted into 333,000 shares of Common Stock
in July 1998 ..................................................................      839,000          --

Promissory note issued to repurchase Common Stock, payable in six semi-annual
installments through May 20,
2000, and bearing interest at 6% ..............................................      250,000       150,000

Capital lease obligation payable in monthly installments of $5,413 including
principal and interest maturing June 30, 2002 .................................      242,000       177,000

Capital lease obligation payable in monthly installments of $867 including
principal and interest maturing December 1, 2003 ..............................         --          44,000


Non-interest bearing promissory note, imputed interest at 10%, unamortized
discount of $49,000, issued in connection with MSN acquisition, payable in
eight equal quarterly installments beginning April, 1998 ......................         --         430,000

Revolving Credit Facility maturing July 31, 1999 bearing interest at prime plus
1%, secured by accounts
receivable ....................................................................         --       1,688,000

                                                                                  ----------   -----------
Total notes payable and capital leases ........................................   $3,184,000   $13,133,000

Current portion ...............................................................      508,000     7,710,000
                                                                                  ----------   -----------

Long term portion .............................................................   $2,676,000   $ 5,423,000
                                                                                  ==========   ===========
</TABLE>
      The annual maturities of the debt indicated above for the five years
following December 31, 1998, are $7,710,000 in 1999, $619,000 in 2000,
$4,756,000 in 2001, $38,000 in 2002 and $10,000 in 2003.

      In May 1998, the Company issued $3,000,000 in 8% Convertible Subordinated
Debentures (the "Deere Park Convertible Debentures") maturing three years from
closing (the "First Draw") to Deere Park Capital Management, LLC, an Illinois
limited liability company ("Deere Park"). On May 28, 1998, the Company issued an
additional $1,000,000 of the Deere Park Convertible Debentures (the "Second
Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of the
Deere Park Convertible Debentures (the "Third Draw"). The Deere Park Convertible
Debentures are convertible by the holder into shares of Common Stock at a price
equal to $26 per share for the First Draw, $29 per share for the Second Draw and
$26 per share for the Third Draw, until November 1, 1998, and thereafter, at the
lesser of (i) $26 per share for the First Draw, $29 per share for the Second
Draw and $26 per share for the Third Draw or (ii) a price equal to the average
of the three highest of the five lowest closing prices of the Common Stock for
the 20 trading days preceding the conversion date. If the Common Stock trades
below $15 per share for the First Draw, $16.66 per share for the Second Draw and
$15 for the Third Draw for three consecutive trading days, the Company may
redeem all or part of such Deere Park Convertible Debentures at 107% of face
value plus any accrued interest. The Company's obligation to make interest
payments on the Deere Park Convertible Debentures terminates if the price of
Common Stock closes for twenty consecutive trading days at or above $30 per
share for the First Draw, at or above $33.50 per share for the Second Draw and
at or above $30 per share for the Third Draw, adjusted, without limitation, for
any stock splits or combinations. In connection with the Deere Park Convertible
Debentures, Deere Park also received warrants to purchase an aggregate of 8,952
shares of Common 

                                       50
<PAGE>
Stock at an exercise price of $16.76 per share (subject to adjustment for stock
splits and other share adjustments) for the First Draw, warrants to purchase an
aggregate of 2,427 shares of Common Stock at $20.60 per share (subject to
adjustment for stock splits and other share adjustments) for the Second Draw and
warrants to purchase an aggregate of 6,382 shares of Common Stock at $15.67 per
share (subject to adjustment for stock splits and other share adjustments) for
the Third Draw. The warrants have a term of three years from the effectiveness
of a registration statement covering such warrants.

      The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Deere Park Convertible Debentures
(the "Deere Park Exit Fee"). The Deere Park Exit Fee varies depending upon the
date of payment, and is equal to (i) 6.6% if the payment is made within 90 days
after the closing of each respective draw, (ii) 7.2% if payment is made after 90
days and up to 180 days after the closing of each respective draw, (iii) 8.8% if
payment is made after 180 days and up to 270 days after the closing of each
respective draw and (iv) 10.0% if payment is made after 270 days after the
closing of each respective draw. The Deere Park Exit Fee is adjusted on a pro
rata basis to the extent that the prepayment is made between periods except that
a minimum Deere Park Exit Fee of 6.6% is required if the prepayment is made
prior to 90 days after closing.

      In May 1998, the Company issued $5,000,000 in 8% Convertible Debentures
(the "Gordon Brothers Convertible Debentures") maturing one year from closing to
Gordon Brothers Capital, LLC, a Delaware limited liability company ("Gordon
Brothers"). The Gordon Brothers Convertible Debentures are convertible by Gordon
Brothers into shares of Common Stock at a price equal to $29.00 per share until
November 1, 1998, and thereafter, at the lesser of (i) $29.00 per share or (ii)
a price equal to the average of the three highest of the five lowest closing
prices of the Common Stock for the 20 trading days preceding the conversion
date. If the Common Stock trades below $16.66 for three consecutive trading
days, the Company may redeem all or part of such Gordon Brothers Convertible
Debentures at 107% of face value plus any accrued interest. The Company's
obligation to make interest payments on the Gordon Brothers Convertible
Debentures terminates (i) in the event the Common Stock closes, for twenty
consecutive trading days, at or above $33.50 per share, adjusted, without
limitation, for any stock splits or combinations, (ii) when a registration
statement covering the Gordon Brothers Convertible Debentures is effective and
(iii) if there exists no event of default under the Gordon Brothers Convertible
Debentures. The Gordon Brothers Convertible Debentures are secured by a pledge
of the Company's stock in Telereunion and the Company's preferred stock in
INTERLINK. In addition, the Gordon Brothers Convertible Debentures are
guaranteed by INTERLINK and such guaranty is collateralized by a security
agreement covering all of INTERLINK's assets. In connection with the Gordon
Brothers Convertible Debentures, Gordon Brothers also received warrants to
purchase an aggregate of 12,136 shares of Common Stock at an exercise price of
$15.00 per share. The warrants have a term of three years from the effectiveness
of the registration statement covering such warrants. The Gordon Brothers
Convertible Debentures are senior secured indebtedness of the Company to the
extent of the assets securing such indebtedness.

      The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Gordon Brothers Convertible
Debentures (the "Gordon Brothers Exit Fee"). The Gordon Brothers Exit Fee varies
depending upon the date of payment, and is equal to (i) 6.5% if the payment is
made within 90 days after May 29, 1998, (ii) 13.0% if payment is made after 90
days and up to 180 days after May 29, 1998, (iii) 19.0% if payment is made after
180 days and up to 270 days after May 29, 1998 and (iv) 25.0% if payment is made
after 270 days and up to 365 days after May 29, 1998. The Gordon Brothers Exit
Fee with respect to any payment made after May 28, 1999 shall be equal to (a)
25.0% plus (b) 25.0% multiplied by the number of days elapsed from May 28, 1999
divided by 365. The Gordon Brothers Exit Fee is adjusted on a pro rata basis to
the extent that a prepayment is made between periods during the first twelve
months except that a minimum Gordon Brothers Exit Fee of 6.5% is required if the
prepayment is made prior to 90 days after closing.

      A portion of the proceeds from the Deere Park Convertible Debentures and
the Gordon Brothers Convertible Debentures were allocated to the warrants issued
to the holders of such debentures. The Company estimated the fair value of the
warrants by utilizing the Black-Scholes option pricing model with the following
assumptions: dividend yield of 0%, expected volatility of 50%, risk free
interest rate of 5%, and expected lives of an average of 2 years. The resulting
discount of approximately $180,000 for the Deere Park Convertible Debentures and
the Gordon Brothers Convertible Debentures will be amortized as interest expense
over the life of the debentures.

      In connection with the issuance of the Deere Park Convertible Debentures
and the Gordon Brothers Convertible Debentures, the Company issued to the
placement agent warrants to purchase 59,340 shares of Common Stock with exercise
prices ranging from $16.76 to $20.60 per share, respectively. The warrants have
a term of two years.

      The proceeds from the Deere Park Convertible Debentures and the Gordon
Brothers Convertible Debentures were used primarily to finance the INTERLINK
Acquisition and the remainder was utilized for capital investments and general
working capital purposes.

                                       51
<PAGE>
      On October 26, 1998, the Company entered into agreements with the holders
of the Gordon Brothers Convertible Debentures and the Deere Park Convertible
Debentures to restructure these debentures. Under the terms of the
restructuring, Gordon Brothers agreed to fix the conversion price at $15 per
share for the term of the debenture. In return, the Company agreed to reduce the
strike price on 12,136 warrants issued in connection with the original funding
from $20.60 to $15 per share. Deere Park agreed to fix the conversion price at
$15 per share until May 1, 1999. Beyond this date, the conversion price will
revert to a "floating" price for the term of the debentures unless it is further
restructured. In return, the Company agreed to issue an additional 8,000
warrants to Deere Park at current market prices. In addition, the Company repaid
$1,000,000 of the Deere Park Convertible Debentures at 107% plus accrued
interest.

      The Company estimated the fair value of the warrants utilizing the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 50%, risk free interest rate of 5%, and an
expected life of 2 years. The fair value of the warrants of approximately
$390,000 is being accounted for as deferred offering costs and amortized over
the life of the Notes.

      The Company renegotiated the terms of the Revolving Credit Facility to
provide for borrowings of up to $2.5 million and extended the term of the
facility to July 31, 1999. As of December 31, 1998, the Company had drawn $1.7
million on this facility.

      In July 1998, holders of the non-interest bearing convertible notes issued
in connection with the Integracion acquisition converted these notes into
333,000 shares of Common Stock.

      In the fourth quarter of 1998, the Company signed a financing arrangement
with a finance company which provides for funding of equipment purchases of up
to $6.0 million through May 1999. The financing is structured as loans maturing
three years from funding at interest rates 550 basis points above the Federal
Reserve Treasury Constant Maturity Rate. The Company has drawn approximately
$2.0 million in the first quarter of 1999 under this facility.

      On January 11, 1999, the Company signed a financing arrangement with a
finance company which provides for funding of equipment purchases of up to $7.0
million dollars through December 31, 1999. The financing is structured as loans
maturing four years from funding at interest rates 500 basis points above the 5
year Federal Reserve Treasury Constant Maturity Rate. The Company has not drawn
any fundings under this facility.

The Company has selected Lucent to engineer, furnish and install the Mexican
Network. In addition, the Company received a commitment from Lucent to provide
the Company with up to $40 million of long term financing, which includes $34
million towards the purchase of Lucent products and services (including
construction of the Mexican Network) and $6 million for repayment of the
Company's current obligations. The Company will incur commissions, commitment
fees and other costs in connection with this facility.

5.  INCOME TAXES

      Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A significant difference
relates to the treatment of inventories under the Mexican Tax Law. Under this
law, the cost of sales for financial statement purposes is not deductible for
income tax purposes. Instead, inventory purchases are deductible for income tax
purposes in the year the purchases are made.

      Significant components of the Company's deferred tax liabilities and
assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
                                                 1997                    1998
                                     -----------------------   -----------------------

Current:                             UNITED STATES  FOREIGN    UNITED STATES  FOREIGN
                                     -----------   ---------   ------------- ---------
<S>                                    <C>         <C>          <C>         <C>      
Operating loss carryforwards and tax
      credits ......................   $ 189,000   $ 152,000    $ 417,000   $ 311,000
Accrued interest ...................        --          --        159,000        --
Accrued carrier costs ..............     191,000        --           --          --
Accrued wages ......................      52,000        --           --          --
Other accrued liabilities ..........      34,000        --           --          --

Allowance for doubtful accounts ....      51,000      10,000       26,000      74,000
Inventories ........................        --      (704,000)      14,000    (812,000)
Customer prepayments ...............        --       272,000         --       439,000
                                       ---------   ---------    ---------   ---------
Net current deferred tax asset
      (liability) ..................   $ 517,000   $(270,000)   $ 616,000   $  12,000
Long-term:
Basis differences in assets ........   $   6,000   $  58,000    $   4,000   $  14,000
Accrued employee benefits ..........        --        13,000         --        17,000
                                       ---------   ---------    ---------   ---------

Net long term deferred tax asset ...   $   6,000   $  71,000    $   4,000   $  31,000
                                       ---------   ---------    ---------   ---------
</TABLE>

                                       52
<PAGE>
      The Company records valuation allowances based upon judgments as to the
future realization of deferred tax benefits supported by demonstrated trends in
the Company's operating results. At December 31, 1997and 1998, no valuation
allowance was recorded.

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

                                            FOR THE YEAR ENDED DECEMBER 31,
                                    -------------------------------------------

                                        1996            1997            1998
                                    -----------     -----------     -----------
Current:
Federal ........................    $      --       $ 1,146,000     $      --
Foreign ........................         59,000         504,000       1,161,000
                                    -----------     -----------     -----------
Total current ..................    $    59,000     $ 1,650,000     $ 1,161,000
Deferred:
Federal ........................           --        (1,545,000)        (97,000)
Foreign ........................       (112,000)        (21,000)       (242,000)
                                    -----------     -----------     -----------
Total deferred .................    $  (112,000)    $(1,566,000)    $  (339,000)
                                    -----------     -----------     -----------

Total provision (benefit) ......    $   (53,000)    $    84,000     $   822,000
                                    -----------     -----------     -----------


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

<TABLE>
<CAPTION>
                                                      FOR THE YEAR ENDED DECEMBER 31,
                                                        ------------------------

                                                        1996     1997     1998
                                                        ----     ----     ----
<S>                                                      <C>       <C>     <C>  
Provision for income taxes at U.S. statutory rate ...    (34)%     34%     (34)%

Non-deductible amortization of intangible assets ....      3        7      252
Non-deductible litigation loss ......................     --        2       --
Other items, net ....................................     (3)       4      108

Effect of utilization of net operating loss
      carryforwards, tax credits and reversal of
      valuation allowance ...........................     31      (44)      14
                                                        ----     ----     ----
Income tax provision (benefit) ......................     (3)%      3%     340%
                                                        ----     ----     ----
</TABLE>

      At December 31, 1998, the Company had available for US federal income tax
purposes unused net operating loss carryforwards of approximately $1,057,000
which may provide future tax benefits and which will expire in years 2005
through 2018. Additionally, as of December 31, 1998, the Company had
approximately $58,000 in alternative minimum tax credits which can be utilized
to offset future tax liabilities.

      In accordance with Mexican Tax Law, companies may carryforward an income
tax loss for ten years. Also, in accordance with Mexican Tax Law, a company is
subject to income taxes based upon the greater of 34% of taxable income and 1.8%
of net assets, as defined in the tax law. Any tax on assets paid is recoverable
and can be carried forward for ten years in the event a company begins paying
taxes on income. At December 31, 1998, the Company had available for Mexican
income tax purposes operating loss carryforwards of approximately $772,000 which
expire in 2008 and net asset taxes credits of approximately $159,000 which
expire in 2008.

                                       53
<PAGE>
6.  STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

1993 STOCK OPTION PLAN

      Under the terms of its 1993 Stock Option Plan, the Company may grant
incentive and non-qualified stock options to purchase up to 218,145 shares of
its Common Stock to the Company's employees, directors or consultants. Options
must be granted at not less than the fair market value of the Company's Common
Stock at the date of grant as determined by the Company's Board of Directors
(110% of fair market value for stockholders owning 10% or more of the Company's
Common Stock) for incentive stock options, or not less than 85% of the fair
market value for non-qualified stock options. Options granted under this plan
may be for a term of up to 10 years (5 years for incentive stock options granted
to stockholders owning 10% or more of the Company's Common Stock) and are
exercisable as determined by the Board of Directors.

1994 DIRECTORS STOCK OPTION PLAN

      Effective June 1, 1994, the Company adopted the 1994 Directors Stock
Option Plan, which provides that the Company may grant non-qualified options to
directors of the Company or any majority-owned subsidiary who are not salaried
employees to purchase up to 31,163 shares of its Common Stock. Options must be
granted by June 1, 2004, at prices not less than the fair market value of the
Company's Common Stock at the date of grant and must be exercised within ten
years of the date of grant. Upon a change of control of the Company, all granted
but unvested options under the plan will vest immediately.

TELEREUNION 1995 STOCK OPTION PLAN

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

1996 STOCK OPTION AND APPRECIATION RIGHTS PLAN

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

1998 STOCK OPTION AND APPRECIATION PLAN

      During June 1998, the Company adopted the "1998 Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 800,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 250,000 shares.
Incentive stock 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). 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 or within five years from the
date of grant for options granted to stockholders owning 10% or more of the
Company's 

                                       54
<PAGE>
Common Stock. Unexercised vested and unvested options terminate immediately if
the employment or service of an option holder is terminated for cause. Unvested
options terminate if the employment or service of an option holder is terminated
without cause or for disability. The Company may also grant SARs in connection
with any option, which permits cashless exercises of the options. SARs allow an
option holder to surrender an option and to receive the difference between the
exercise price of the option and the then fair market value of the Common Stock.
The Company may also make loans to any option holder in order in order to permit
the option holder to pay the purchase price upon exercise of the option.

1998 MSN STOCK OPTION AND APPRECIATION RIGHTS PLAN

      During June 1998, the Company adopted the "1998 MSN Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 MSN Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 100,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 50,000 shares. 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 or
within five years from the date of grant for options granted to stockholders
owning 10% or more of the Company's Common Stock. Unexercised vested and
unvested options terminate immediately if the employment or service of an option
holder is terminated for cause. Unvested options terminate if the employment or
service of an option holder is terminated without cause or for disability. The
Company may also grant SARs in connection with any option, which permits
cashless exercises of the options. SARs allow an option holder to surrender an
option and to receive the difference between the exercise price of the option
and the then fair market value of the Common Stock. The Company may also make
loans to any option holder in order to permit the option holder to pay the
purchase price upon exercise of the option.

      A summary of the Company's fixed option plans as of December 31, 1996,
1997 and 1998 is presented below:

<TABLE>
<CAPTION>
                                                                                         MSN                               WTD. AVG.
                                    1993         1994          1995        1996         1998        1998         TOTAL       EXER.  
                                    PLAN         PLAN          PLAN        PLAN         PLAN        PLAN       ALL PLANS     PRICE
                                  ---------  ----------     --------    ----------   ---------   ---------    ----------   --------
<S>                                <C>          <C>                                                              <C>           <C> 
Options outstanding at December
   31 ,1995 ...................... 118,440      30,000          --            --          --          --         148,440       1.61
Max. shares exercisable .......... 118,440      30,000          --            --          --          --         148,440       1.61
Options granted ..................    --        10,000       216,618     1,120,000        --          --       1,346,618       3.96
Options exercised ................    --          --            --            --          --          --            --      --
Options cancelled ................ (32,408)    (30,000)      (70,809)         --          --          --        (133,217)      1.40
                                  ---------  ----------     --------    ----------   ---------   ---------    ----------   --------
Options outstanding at December
   31,1996 .......................  86,032      10,000       145,809     1,120,000        --          --       1,361,841       3.95
Max. shares exercisable ..........  86,032      10,000       145,809       225,000        --          --         466,841       3.16
Options granted .................. 115,500        --            --         440,000        --          --         555,500       5.74
Options exercised ................ (15,828)       --            --         (25,000)       --          --         (40,828)      1.87
Options cancelled ................  (9,700)       --            --        (420,000)       --          --        (429,700)      4.50
                                  ---------  ----------     --------    ----------   ---------   ---------    ----------   --------
Options outstanding at December
   31,1997 ....................... 176,004      10,000       145,809     1,115,000        --          --       1,446,813       4.51
Max. shares exercisable ..........  70,204      10,000       145,809       393,333        --          --         619,346       3.60
Options granted ..................    --        18,125          --          60,000     100,000   1,045,140     1,223,265      11.49
Options exercised ................ (50,204)       --            --        (140,554)       --          --        (190,758)      2.57
Options cancelled ................ (20,000)       --            --          (5,000)       --      (527,250)     (552,250)     16.48
                                  ---------  ----------     --------    ----------   ---------   ---------    ----------   --------
Options outstanding at December
   31,1998 ....................... 105,800      28,125       145,809     1,029,446     100,000     517,890     1,927,070       5.67
                                  =========  ==========     ========    ==========   =========   =========    ==========   ========
Max. shares exercisable ..........  35,267      10,000       145,809       725,988      27,77        5,000       949,840       4.43
</TABLE>

      SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) applicable to common stockholders and income (loss)
per share as if compensation cost for the Company's stock options granted had
been determined in accordance with the fair value based method prescribed in
that Statement. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996, 1997 and 1998: dividend
yield of 0% for all years; expected volatility ranging from 80% to 85%, 80% to
90% and 55% to 65%; risk-free interest rates ranging from 6.15% to 6.41%, 5.65%
to 5.80% and 5% to 5.15%; and expected lives averaging 8.5 years, 8.5 years and
5.0 years, respectively.

                                       55
<PAGE>
      Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) applicable to common stockholders and income (loss) per share would have
been revised to the pro forma amounts indicated below:


                                       For the Year Ended December 31,
                                -----------------------------------------------
                                      1996            1997            1998
                                --------------   -------------   --------------
Net income (loss):
      As reported ............. $  (1,598,000)   $   2,672,000   $  (1,030,000)
      Pro Forma ............... $  (3,096,000)   $   1,955,000   $  (2,698,000)
Net income (loss) per share:
  Basic
      As reported ............. $       (0.52)   $        0.68   $       (0.20)
      Pro Forma ............... $       (1.02)   $        0.50   $       (0.53)
  Diluted
      As reported .............           n/a    $        0.53             n/a
      Pro Forma ...............           n/a    $        0.38             n/a

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

WARRANTS

      Following is a description of the Company's warrants outstanding at
December 31, 1998:


<TABLE>
<CAPTION>
                    DESCRIPTION OF WARRANTS:                                          # OUTSTANDING
                    ------------------------                                          -------------
<S>      <C> <C>            <C>                                                           <C>      
Series A Warrants (unregistered) issued in connection with the Company's
acquisition of Telereunion on May 17, 1996, exercisable at $2.19 at stated
percentages only upon the Company achieving certain operating performance
measures or fully vesting upon the Company maintaining a $12 share price for 90
consecutive trading days; expiration date of May 16, 2003, 2,000,000 of which
vested at December 31, 1997 and 500,000 of which vested during the year ended
December 31, 1998 (See Note 2) .........................................................  2,086,943


Series B Warrants (unregistered) issued in connection with the Company's
acquisition of Telereunion on May 17, 1996, currently exercisable at $2.19 as
certain operating performance measures were achieved during the year ended
December 31, 1997, expiration date May 16, 2003 (See Note 2) ...........................     84,000


Warrants (unregistered) issued to IPO underwriters exercisable at any time at
$8.10 prior to expiration on August 10, 1999 ...........................................     25,000


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 ........................................................     72,000

Warrants (unregistered) issued in connection with the Company's acquisition of
Telereunion on May 17, 1996, exercisable at any time at $2.19 prior to
expiration on May 16, 2001 .............................................................     49,179


Registered warrants (NASDAQ) issued to debenture holders and placement agent in
connection with issuance of Deere Park Convertible Debentures and Gordon
Brothers Convertible Debentures exercisable at any time at $8.50 - $20.60 per
share, with two to three year terms (See Note 4)  ......................................     97,237
                                                                                          ---------

                        Total warrants .................................................  2,414,359
                                                                                          =========
</TABLE>
      The IPO warrants were redeemable at the Company's option at any time with
30 days written notice at a redemption price of $0.20 per share. During the
fourth quarter 1997, the Company exercised its redemption privileges. As a
result, 475,535 warrants were exercised, including 131,230 warrants as of
December 31, 1997, resulting in net proceeds to the Company of approximately
$3,804,000, of which $989,000 was received prior to December 31, 1997.

                                       56
<PAGE>
7.  STOCK ISSUANCE

      In the fourth quarter of 1998, the Company entered into a stock purchase
agreement with third parties (the "Stock Purchase Commitment"), which allows the
Company to sell at the Company's option (subject to certain conditions
precedent), up to $5.0 million of the Company's Common Stock. The sale price of
the Common Stock is equal to the average of the previous 5 days closing prices
less a 20% discount. The Company sold 250,000 shares of Common Stock realizing
approximately $1.3 million (net commissions) in the fourth quarter of 1998.
These shares were sold on December 18, 1998, and may not be re-sold by the
purchasers for nine months from such date. In the first quarter of 1999, the
Company sold an additional 296,296 shares of Common Stock, realizing
approximately $1.9 million (net of commissions). These shares were sold on March
15, 1999, and may not be re-sold by the purchasers until July 31, 1999.

8.  COMMITMENTS AND CONTINGENCIES

COMMITMENTS

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

                                                 AMOUNT
                                               ----------
                         1999                  $2,418,000
                         2000                   1,404,000
                         2001                   1,328,000
                         2002                   1,235,000
                         2003                     559,000
                                               ==========
                                               $6,944,000
                                               ==========

      Total rent expense under leases was $131,000, $229,000 and $914,000,
respectively, for the years ended December 31, 1996, 1997 and 1998.

      At December 31, 1998, the Company has employment agreements with twelve
officers, which expire in 2001. Future minimum commitments under these
agreements, excluding incentive bonuses or stock options, as of December 31,
1998, are as follows:

                                       AMOUNT
                                      ----------
                               1999   $1,107,000
                               2000      557,000
                               2001      266,000
                                      ==========
                                      $1,930,000
                                      ==========

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

      The Company has signed a contract with a third party for the third party
vendor to provide telecommunications services to the Company including the
origination of inbound 800 dialed phone calls for its prepaid phone cards, and
the termination of U.S. domestic long distance and international long distance.
The contract term is through June 1, 2001, and provides for a minimum monthly
purchase commitment of $360,000 and a total purchase commitment of $12,660,000.
The Company can cancel the minimum monthly purchase commitment with 30 days
notice upon meeting its total minimum purchase commitment. The Company estimates
that total purchases from this third party exceeded $6.5 million as of March 31,
1999.

      In March 1999, the Company signed a purchase order for $3.25 million for
equipment purchases.

9.  SEGMENT INFORMATION

      The Company has three reportable segments: international long distance,
value-added services and satellite teleport services. The Company provides
international long distance services to customers in the United States.
Satellite teleport services are provided to customers in the United States and
Latin America. Value-added services are performed in Mexico and Poland. The
Company measures segment profit as earnings before interest, depreciation,
amortization of intangibles, other income and taxes (EBITDA).

                                       57
<PAGE>
      Revenues, operating information and identifiable assets by business
segment and location are as follows:

<TABLE>
<CAPTION>
                                                                                FOR THE YEAR ENDED DECEMBER 31,
                                                                      --------------------------------------------------------------
                                                                               1996             1997             1998
                                                                      -------------    -------------    -------------
<S>                                                                   <C>              <C>              <C>          
Revenues
     Long distance services .......................................   $   1,213,000    $  17,390,000    $  93,156,000
     Value-added services .........................................       4,492,000       18,764,000       32,965,000
     Satellite teleport services ..................................            --               --          6,058,000
                                                                      -------------    -------------    -------------
Total revenues ....................................................   $   5,705,000    $  36,154,000    $ 132,179,000
                                                                      -------------    -------------    -------------

Operating income(loss) before interest, depreciation and
      amortization

     Long distance services, including impairment loss ............   $    (882,000)   $   4,828,000    $   3,655,000
     Value-added services .........................................         297,000         (107,000)       3,232,000
     Satellite teleport services ..................................            --               --            229,000
     Corporate and other ..........................................        (910,000)      (1,117,000)      (1,629,000)
                                                                      -------------    -------------    -------------
Total operating  income (loss) before  interest,  depreciation  and
      amortization ................................................   $  (1,495,000)   $   3,604,000    $   5,487,000
     Depreciation .................................................         126,000          321,000        1,329,000
     Amortization of intangibles ..................................         138,000          301,000        1,987,000
                                                                      -------------    -------------    -------------

Operating income (loss) as reported on Statement of Operations ....   $  (1,759,000)   $   2,982,000    $   2,171,000
                                                                      -------------    -------------    -------------

Capital expenditures
     Long distance services .......................................   $      23,000    $     383,000    $   4,183,000
     Value-added services .........................................         418,000        1,299,000        1,664,000
     Satellite teleport services ..................................            --               --            264,000
     Corporate and other ..........................................            --               --             48,000
                                                                      -------------    -------------    -------------
Total capital expenditures ........................................   $     441,000    $   1,682,000    $   6,159,000
                                                                      -------------    -------------    -------------

Identifiable assets
     Long distance services .......................................   $   3,003,000    $   5,978,000    $  21,819,000
     Value-added services .........................................       5,235,000       17,682,000       26,426,000
     Satellite teleport services ..................................            --               --         10,617,000
     Corporate and other ..........................................       1,133,000       15,975,000       21,469,000
                                                                      -------------    -------------    -------------
Total identifiable assets .........................................   $   9,371,000    $  39,635,000    $  80,331,000
                                                                      -------------    -------------    -------------

<CAPTION>
      Information concerning principal geographic areas is as follows:

                                                                                FOR THE YEAR ENDED DECEMBER 31,
                                                                      -----------------------------------------------
                                                                               1996             1997             1998
                                                                      -------------    -------------    -------------
Revenues
     United States ................................................   $     642,000    $  17,390,000    $  97,644,000
     Mexico .......................................................       3,921,000       18,031,000       32,965,000
     Latin America ................................................            --               --          1,570,000
     Poland .......................................................       1,142,000          733,000             --
                                                                      -------------    -------------    -------------
Total revenues ....................................................   $   5,705,000    $  36,154,000    $ 132,179,000
                                                                      -------------    -------------    -------------

Fixed assets,  net of accumulated depreciation
     United States ................................................   $      22,000    $     692,000    $   7,297,000
     Mexico .......................................................         830,000        1,987,000        5,174,000
     Latin America ................................................            --               --          2,105,000
     Poland .......................................................         131,000             --               --
                                                                      -------------    -------------    -------------
Total fixed assets ................................................   $     983,000    $   2,679,000    $  14,576,000
                                                                      -------------    -------------    -------------
</TABLE>


                                       58
<PAGE>
12.  QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
         
                                                      FIRST           SECOND           THIRD          FOURTH               YEAR
                                                      -----           ------           -----          ------               ----
               1996
<S>                                            <C>              <C>              <C>              <C>              <C>          
Revenues ..................................... $     509,000    $     841,000    $   1,474,000    $   2,881,000    $   5,705,000
Operating loss ...............................      (210,000)        (265,000)        (362,000)        (921,000)      (1,759,000)
Income (loss) before taxes and minority
   interests .................................      (174,000)        (186,000)        (287,000)        (998,000)      (1,645,000)
Net loss .....................................      (181,000)        (207,000)        (299,000)        (911,000)      (1,598,000)
Basic EPS .................................... $       (0.10)   $       (0.07)   $       (0.08)   $       (0.23)   $       (0.52)

                                                      FIRST           SECOND           THIRD          FOURTH               YEAR
                                                      -----           ------           -----          ------               ----
              1997
Revenues ..................................... $   3,771,000    $   6,170,000    $  12,193,000    $  14,020,000    $  36,154,000
Operating income (loss) ......................      (386,000)         696,000        1,169,000        1,503,000        2,982,000
Income (loss) before taxes and minority
   interests .................................      (359,000)         402,000        1,110,000        1,597,000        2,750,000
Net income (loss) ............................      (324,000)         538,000        1,202,000        1,256,000        2,672,000
Basic EPS .................................... $       (0.08)   $        0.14    $        0.31    $        0.32    $        0.68
Diluted EPS (1) ..............................           N/A    $        0.13    $        0.22    $        0.18    $        0.53

                                                      FIRST           SECOND           THIRD          FOURTH               YEAR
                                                      -----           ------           -----          ------               ----
              1998
Revenues ..................................... $  33,399,000    $  32,378,000    $  36,529,000       29,873,000      132,179,000
Operating income (loss) ......................     2,219,000         (461,000)       2,182,000       (1,769,000)       2,171,000
Income (loss) before taxes and minority
   interests .................................     2,089,000         (672,000)       1,507,000       (3,166,000)        (242,000)
Net income (loss) ............................     1,114,000         (622,000)         869,000       (2,391,000)      (1,030,000)
Basic EPS .................................... $        0.25    $       (0.13)   $        0.16    $       (0.42)   $       (0.20)
Diluted EPS (1) .............................. $        0.15              N/A    $        0.11              N/A              N/A

</TABLE>


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



                                       59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

      None.

PART III

      Information required under Part III (Items 10,11,12 and 13) have been
omitted from this Report in that the Registrant will file its definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on June 21, 1999,
pursuant to Regulation 14A of the Securities and Exchange Act of 1934 (the
"Proxy Statement"), not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included in the Proxy Statement
is incorporated herein by reference.

PART IV

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

      (a)   Exhibits. See Index to Exhibits on page 63. Each of the following
            exhibits described on the index to exhibits is a management contract
            or compensatory plan or arrangement: 10.1, 10.2, 10.11, 10.12,
            10.13, 10.15 and 10.16.

      (b)   Financial Statement Schedules: None.

      (c)   Reports on Form 8-K: None.


                                       60
<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, 1999                           /s/ E. SCOTT CRIST
                                         ------------------
                                         E. Scott Crist
                                         CEO and Principal Executive Officer


March 31 , 1999                          /s/ TODD M. BINET
                                         -----------------
                                         Todd M. Binet
                                         President, CFO and 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, 1999
E. Scott Crist

/s/ MANUEL LANDA                 Director                March 31, 1999
Manuel Landa

/s/ OSCAR GARCIA                 Director                March 31, 1999
Oscar Garcia

/s/ RICARDO OREA                 Director                March 31, 1999
Ricardo Orea

/s/ TODD M. BINET                Director                March 31, 1999
Todd M. Binet

/s/ DARREL O. KIRKLAND           Director                March 31, 1999
Darrel O. Kirkland

/s/ JACK M. FIELDS               Director                March 31, 1999
Jack M. Fields


                                       61
<PAGE>
                                INDEX OF EXHIBITS

EXHIBIT NO.                                       DESCRIPTION
-----------                                       -----------
       1.1    Form of Underwriting Agreement between the Company, BT Alex. Brown
              Incorporated and Lehman Brother Inc. (Incorporated herein by
              reference to Exhibit 1.1 to the Company's Registration Statement
              No. 333-60271)

       3.1    Articles of Incorporation of the Registrant, as amended (filed as
              Exhibit 3.1 to the Company's Registration Statement No. 33-80542-D
              and incorporated herein by reference)

       3.2    Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the
              Company's Registration Statement No. 33-80542-D and incorporated
              herein by reference)

       3.3    Articles of Incorporation of Polish Microwave, Inc. (filed as
              Exhibit 3.3 to the Company's Registration Statement No. 33-80542-D
              and incorporated herein by reference)

       3.4    Bylaws of Polish Microwave, Inc. (filed as Exhibit 3.4 to the
              Company's Registration Statement No. 33-80542-D and incorporated
              herein by reference)

       3.5    Contract of Limited Liability Company of DTS/ZWUT (filed as
              Exhibit 3.5 to the Company's Registration Statement No. 33-80542-D
              and incorporated herein by reference)

       4.1    Form of Certificate evidencing Common Stock (filed as Exhibit 4.1
              to the Company's Registration Statement No. 33-80542-D and
              incorporated herein by reference)

       4.2    Form of Warrant Agreement between American Stock Transfer & Trust
              Company and the Company (filed as Exhibit 4.2 to the Company's
              Registration Statement No. 33-80542-D and incorporated herein by
              reference)

       4.3    Form of Warrant Certificate evidencing the Warrants (filed as
              Exhibit 4.3 to the Company's Registration Statement No. 33-80542-D
              and incorporated herein by reference)

       4.4    Form of Statement of the establishment of the Series B non-voting,
              nonparticipating Preferred Stock (filed as Exhibit 4.1 to the
              Company's Report on Form 10-QSB for the quarter ended March 31,
              1996 and incorporated herein by reference)

       10.1   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)

       10.2   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)

       10.3   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)

       10.4   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)

       10.5   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)

       10.6   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)

       10.7   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)

       10.8   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)

       10.9   Employment agreement for Todd Binet (filed as Exhibit 10.29 to the
              Company's Report on Form 10-KSB for the year ended December 31,
              1996 and incorporated herein by reference)

       10.10  Form of Promissory Note dated July 1, 1997, between Telereunion
              and Jose Luis Apan Wong, Raul de la Parra Zavala and Alejandro
              Apan Wong (filed as Exhibit 10.4 to the Company's Current Report
              on Form 8-K dated August 5, 1997 and incorporated herein by
              reference)


                 62
<PAGE>
       10.11  Form of Common Stock Warrant dated July 1, 1997, between the
              Company and Jose Luis Apan Wong, Raul de la Parra Zavala and
              Alejandro Apan Wong (filed as Exhibit 10.4 to the Company's
              Current Report on Form 8-K dated August 5, 1997 and incorporated
              herein by reference)

       10.12  Stock Purchase Agreement dated July 1, 1997, by and among the
              Company, Telscape USA, Inc., Telereunion and Jose Luis Apan Wong,
              Raul de la Parra Zavala and Alejandro Apan Wong (filed as Exhibit
              10.4 to the Company's Current Report on Form 8-K dated August 5,
              1997 and incorporated herein by reference)

       10.13  Stock Purchase Agreement dated October 1, 1997, by and among
              Telscape USA, Inc., Telereunion, Inc. and Jose Martin Pena Nunez,
              Carlos Joaquin De Lara Y Campos, Jorge Pena Nunez, Martha Teresita
              Martin Del Campo Gutierrez (filed as Exhibit 10.1 to the Company's
              Current Report on Form 8-K dated October 15, 1997 and incorporated
              herein by reference)

       10.14  Stock Purchase Agreement dated January 22, 1998, by and among the
              Company; MSN Communications, Inc.; Stuart Newman and Michael
              Newman, together with Form of Promissory Note dated January 23,
              1998 in the principal amount of $375,000 payable to Stuart Newman
              attached as Exhibit B-1 and Form of Promissory Note dated January
              23, 1998 in the principal amount of $375,000 payable to Michael
              Newman attached as Exhibit B-2 (filed as Exhibit 10.1 to the
              Company's Current Report on Form 8-K dated February 6, 1998 and
              incorporated herein by reference)

       10.15  Stock Purchase Agreement dated May 18, 1998, by and among Telscape
              International, Inc., California Microwave, Inc. and California
              Microwave Services Divisions, Inc. together with a Form of Supply
              Agreement between California Microwave, Inc. and California
              Microwave Services Division, Inc. as Exhibit B (Incorporated
              herein by reference to Exhibit 10.1 to the Company's Current
              Report on Form 8-K dated June 9, 1998)

       10.16  Securities Purchase Agreement between Deere Park Capital
              Management, LLC and Telscape International, Inc. dated as of May
              1, 1998; Registration Rights Agreement dated as of May 1, 1998
              between Telscape International, Inc. and Deere Park Capital
              Management, LLC; Form of Convertible Debenture for $3,000,000
              dated May 1, 1998; Form of Stock Purchase Warrant to Purchase
              8,952 shares of Common Stock of Telscape International, Inc. dated
              May 12, 1998 (all filed as Exhibit 4.4 to the Company's Report on
              Form 10Q for the quarter ended March 31, 1998 and incorporated
              herein by reference)

       10.17  Form of Convertible Debenture in the principal amount of
              $1,000,000 between Deere Park Capital Management, LLC and Telscape
              International, Inc. dated as of May 28, 1998 and a form of Stock
              Purchase Warrant to Purchase 2,427 shares of Common Stock of
              Telscape International, Inc. dated May 28, 1998 (Incorporated
              herein by reference to Exhibit 10.3 to the Company's Current
              Report on Form 8-K dated June 9, 1998)

       10.18  Securities Purchase Agreement dated May 29, 1998 by and between
              Telscape International, Inc. and Gordon Brothers Capital, LLC;
              together with a Form of Convertible Debenture in the principal
              amount of $5,000,000 payable to Gordon Brothers Capital, LLC
              attached as Exhibit A; a Form of Stock Purchase Warrant for Gordon
              Brothers, LLC for 12,136 shares of Common Stock of Telscape
              International, Inc. attached as Exhibit B; and a Registration
              Rights Agreement by and between Gordon Brothers Capital, LLC and
              Telscape International, Inc. attached as Exhibit C (Incorporated
              herein by reference to Exhibit 10.4 to the Company's Current
              Report on Form 8-K dated June 9, 1998)

       10.19  Equity Purchase Agreement by and between INTERLINK Communications
              Holding Co., Inc. and each of Telscape International, Inc., E.
              Russell Hardy, Stephen Strohman, Monty J. Moore, and Salvador
              Giblas dated as of May 19, 1998 (Incorporated herein by reference
              to Exhibit 10.5 to the Company's Current Report on Form 8-K dated
              June 9, 1998)

       10.20  Form of Employment Agreement by and between California Microwave
              Services Division, Inc. and E. Russell Hardy dated as of May 18,
              1998 (Incorporated herein by reference to Exhibit 10.6 to the
              Company's Current Report on Form 8-K dated June 9, 1998)

       10.21  Form of Employment Agreement by and between California Microwave
              Services Division, Inc. and Stephen Strohman dated as of May 18,
              1998 (Incorporated herein by reference to Exhibit 10.7 to the
              Company's Current Report on Form 8-K dated June 9, 1998)

                                       63
<PAGE>
       10.22  Form of Employment Agreement by and between California Microwave
              Services Division, Inc. and Monty J. Moore dated as of May 18,
              1998 (Incorporated herein by reference to Exhibit 10.8 to the
              Company's Current Report on Form 8-K dated June 9, 1998)

       10.23  Form of Consulting Agreement by and between California Microwave
              Services Division, Inc. and Salvador Giblas dated as of May 18,
              1998 (Incorporated herein by reference to Exhibit 10.9 to the
              Company's Current Report on Form 8-K dated June 9, 1998)

       10.24  Loan Agreement between Telscape USA, Inc. and MSN Communications,
              Inc. and Southwest Bank of Texas dated May 19, 1998 (Incorporated
              herein by reference to Exhibit 10.24 to the Company's Registration
              Statement No. 333-60271)

       10.25  Outside Directors Stock Option Plan of the Polish Telephones and
              Microwave Corporation (Incorporated herein by reference to Exhibit
              10.24 to the Company's Registration Statement No. 333-60271)

       *10.26 Form of Financing Agreement by and between the Company and
              Newbridge Financial Services Networks dated as of December 7,
              1998.

       *10.27 Form of Financing Agreement by and between the Company and NTFC
              Capital Corporation dated as of January 11, 1999.

       *10.28 Form of Securities Purchase Agreement by and between the Company
              and Kendu Partners and MDNH Partners, L.P. dated as of December
              18, 1998, and Exhibit B to this agreement representing the Form of
              Registration Rights Agreement.

       *21.1  Subsidiaries of the registrant

       *23.1  Consent of Independent Public Accountants

       *27.1  Financial Data Schedule 1998

----------------
 * Filed herewith


                                       67